Shareholder Activism Hands Forest A Quick Win

Dec. 3.13 | About: Forest Laboratories, (FRX)

Forest Laboratories' (NYSE:FRX) stock trailed the Dow Jones pharma and biotech index for most of this year, but has broken free at last now that Brent Saunders, the chief executive brought in basically to appease Carl Icahn, has revealed his hand. Chalk up a victory for shareholder activism.

Mr Saunders' strategic announcements have come like a breath of fresh air, deftly touching several hot industry topics. With Forest shares closing up 10% yesterday investors are pleased, and they will be hoping for more to come.

The move to slash an undisclosed number of jobs, for instance, speaks directly to Mr Icahn's long-aired criticism about Forest's bloated cost base. Relative to Forest's operating budget for next year, the new initiative will save an annual $500m by the end of 2016, $110m of which will be due to job cuts.

After a long battle Mr Icahn succeeded in capturing a seat on Forest's board over a year ago, but it was only in September that the group appointed Mr Saunders chief executive, replacing Howard Solomon, who had held the position for 36 years (After proxy battle Forest has questions to answer, August 17, 2012). Mr Solomon is to relinquish the chairman role next year.

Patent losses

Mr Icahn had slammed the company's apparent refusal to trim costs at a time when its revenue line is shrinking owing to the loss of the Lexapro patent and the upcoming genericisation of Namenda. Yesterday's announcement looks like a first step to narrowing this gap.

And there is more. A licensing deal with Merck & Co will bring Forest a modest-ranking schizophrenia drug, Saphris, for $240m plus milestones. This could almost be interpreted as a direct response to the US FDA's refusal to approve Forest's anti-psychotic project cariprazine, which had left the group with one less option to plug the patent expiry hole.

Cariprazine was forecast to become a $280m seller by 2018, and has now been delayed by at least two years. Saphris, meanwhile, is on track to be selling $314m that year, according to EvaluatePharma's consensus forecasts, based on which it carries an NPV of $650m.

This makes the $280m up-front payment look like a bargain for Forest. Merck said it divested Saphris to sharpen its commercial and R&D focus, and indeed the drug is probably too insignificant for a big pharma group; it could come in handy for a specialty player like Forest.

More to bolt on?

Analysts at Leerink Swann said the Saphris deal looked "like a winner" for Forest, and immediately said the company might look to other similarly sized bolt-on opportunities as big pharma exits cost-intensive specialty areas.

One such opportunity might be Merck's Asmanex/Dulera respiratory franchise, they suggested. Deal bankers will be pleased that Forest might be on an acquisition trail, and financing will be helped by yesterday's plan to raise $1bn of senior debt, though for now this will likely go towards a $1bn share repurchase program.

With zero indebtedness at the end of September and the availability of cheap debt to swap for expensive equity it makes perfect sense for Forest to gear up and shore up its stock price, and many might read the flurry of developments as window dressing for a takeover.

Mr Icahn has previously stated that he does not see Forest as an immediate acquisition target. Yesterday's strategy announcements will probably not have changed this view, but they might well have caused the odds of an eventual takeout to shorten.