Looking at the Trees in Forest Laboratories

 |  About: Forest Laboratories, Inc. (FRX)
by: Market Shadows

Forest Laboratories, Inc. (NYSE:FRX) makes branded and generic prescription drugs. Two drugs account for the majority of Forest's total sales: Lexapro, a drug for the treatment of depression (SSRI) ($2.15B projected sales for 2010), and Namenda, a drug for the treatment of Alzheimer's disease ($900M projected sales for 2010). The patents for both drugs will expire by 2013, thus FRX has only a few years to replace the revenue generated by these two flagship products (total revenue is projected to be $4.2B in 2010).

The SSRI market is growing crowded with generics, with the likes of Paxil, Zoloft and Celexa generic. This generic competition will erode into Lexapro's next few years of sales. Lexapro (escitalopram) is the S-stereoisomer of the earlier Lundbeck drug Celexa (citalopram). (Stereoisomers are a mixture of enantiomers (R & S), which are a fancy way to say mirror images of one another - in other words if the left hand is held up in the mirror, it looks like the right hand).

Forest saw a glimpse of its future in 2005 as Celexa’s genericization prompted a contraction in sales (chart below). However, while it had a follow-on product, Lexapro (as well as the Alzheimer’s drug Namenda) to restore its positive growth rate in 2006, there are no products in its current pipeline capable of replacing Lexapro when it becomes the last of the company’s currently marketed products to lose patent protection in 2012.

Now, Sabrient likes FRX because of their attractive balance sheet (little debt), but going forward is going to be challenging (much like the outline on LLY at the beginning of the year). When revenues are dependent upon a few products, and knowing that generic erosion will eat 90% of revenue right away, it is hard to get behind a stock that has little in the pipeline.

Table 1. Revenue from WikiInvest. Click here.

Table 2. Revenues by Product. Click here.

New products in Forest Laboratories' pipeline include:

  • Daxas, which was rejected by the FDA.
  • ceftaroline, an injectable antibiotic acquired through the acquisition of Cerexa, Inc. in 2007. The efficacy and safety of ceftaroline fosamil was to be compared with vancomycin and aztreonam in two double-blind, randomized, active-control, parallel assignment phase III clinical trials in patients. Data are not yet available, but ceftaroline fosamil is a broad-spectrum antibiotic, which promises efficacy in the treatment of MRSA infections. Phase II data indicate the potential of ceftaroline fosamil as monotherapy, and in vitro studies suggest bactericidal activity superior to both the gold standard vancomycin and linezolid. Now, this will have some competition with Trius (the last write up), so it will be a race!!!
  • linaclotide, a product for the treatment of gastrointestinal disorders developed through a 50/50 co-development and marketing parntnership with Ironwood Pharmaceuticals, Inc.. Linaclotide is a oral guanylate cyclase-C agonist (peptide) in clinical trials for use in treating abdominal pain in patients with irritable bowel syndrome (IBS) accompanied by constipation. Data look promising, but investing in Ironwood is more palatable than FRX, but with limited data and lubiprostone on the market for the same indications, a direct comparison between linaclotide and lubiprostone will need to be seen.
  • aclidinium, a drug for treating respiratory diseases (COPD) to which Forest has acquired exclusive United States marketing rights through a collaborative agreement with Laboratorios Almirall SA of Spain. Aclidinium is a muscarinic M3 antagonists and is an interesting drug. In short, it works well for breathing (called FEV1 in clinical trials), however partially disappointing efficacy results of the ACCLAIM/COPD clinical trials raise questions. Both trials met their primary endpoints (improved FEV1 values compared to placebo), but one trial did not have a significant impact on health-related quality of life (QOL) endpoints, and the other trial did not show a significant change in delaying the time to disease exacerbation (when the next coughing, etc happened). On the contrary, the time to first exacerbation was significantly longer in patients receiving tiotropium bromide (Spiriva) when compared with placebo! These data would suggest that FRX will have to do a direct comparison trial of aclindinium and tiotropium bromide, hence a delay for its potential launch.
  • cariprazine, a drug fore the treatment of bipolar, schizophrenia with Gedeon/Tanabe. The drug is a D2/D3 receptor antagonist, and will compete with Abilify (NYSE:BMS) - although the mechanisms of action are a bit different between the two. In Phase2b trials for Bipolar and Schizophrenia, the drug worked better than placebo, but the side effects and drop out rates could be a limiting factor. Things will be teased out in the Phase III trials, but I am skeptical that this drug will make it to market. For depression, it is a no go.

Table 3. Forest Pipeline (from Forest website).

Click to enlargeDisclosure: Author short FRX