Forest Labs Ups 2007 Estimates

Forest Laboratories (FRX) describes itself as "A Growing Pharmaceutical Company." It was founded in 1954, incorporated in 1956 and is headquartered in New York, NY.

The company has 5,050 employees globally, more than half of them in sales. It had revenues in fiscal 2006 of nearly $2.8 billion. Yesterday, the company announced third quarter income for 2007 of 78 cps, up from 57 cps a year ago. The number beat Reuters' estimate of 66 cps. Those numbers include $10 million in option expenses and a $20 million payment for a development milestone.

Estimates and Products

Forest upped its full FY2007 estimates based on stronger than projected performance of its branded drugs. New estimates are between $2.79 and $2.84 per share from earlier guidance at $2.60 to $2.65 per share. Forest Labs has a P/E of 24 (trailing 12 months), a significant discount to industry averages of 29.2 to 30.6 - depending on how one classifies the company. Forest is both a generic drug seller and a specialty pharma with branded products.

The company recently completed the acquisition of Cerexa, Inc., a privately held biopharmaceutical company in Alameda, CA, in a cash transaction valued at nearly $500 million. Cerexa is developing Ceftaroline, a next generation, broad-spectrum, injectable cephalosporin antibiotic. The product is about to enter Phase III trials. The FY07 revised guidance excludes the acquisition cost for Cerexa.

Forest Labs operates mainly in the cardiovascular and central nervous system markets. It also has products in endocrinology, ob/gyn, pediatrics, pain management and respiratory therapies. Its leading brands are Benicar for hypertension, Lexapro for depression, and Namenda for moderate to severe Alzheimer's Disease [AD].

Benicar is an angiotensin receptor blocker. Lexapro is a single isomer version of Celexa, a selective serotonin reuptake inhibitor [SSRI], and Namenda is an NMDA antagonist. All these are well-known drug classes.

Fiscal 06 sales for Benicar were $114.6 million. Lexapro, the company's blockbuster drug, came in at $1,892.3 million, while Namenda sold $508 million. Other well-known brands include Campral, for alcoholism, with sales of $22.4 million and Combunox for pain, with sales of $4.1 million. Combunox is a combination of oxycodone and ibuprofen. The company's other cardiovascular drug, a calcium channel blocker known as Tiazac, had sales of $64 million in FY06.

Forest has an active collaboration and in-licensing program, and is working with at least seven identified partners. The company also has a reasonably well stocked pipeline that includes four products in Phase III, two in Phase II, and two in phase I.

Sales and Patents

In FY06, Forest’s sales dropped in $2.7 billion from $3.0 billion in FY05. Net income also dropped from $930 million to $672 million. The drop was largely due to slower sales for Celexa that were not completely offset by increasing sales for Lexapro. This led to a decline in the share value of nearly 20% in the first half of CY06. After that, the stock rebounded, finishing 2006 with a net gain of 18%.

Forest recently received a patent extension for Lexapro until Sept 14, 2011. With the pediatric extension, the patent term will run until March 14, 2012. Lundbeck A/S is Forest's licensor for this product. The company has also announced a stock repurchase program, started in May of 2006. The new authorization is in addition to two previously announced and completed repurchase programs in 2004. Forest has 17.8 million shares left to purchase on an original authorization of 25 million.

In the call to analysts, Forest management did not say anything exciting enough to light a fire under the stock. Traditionally, Forest in-licenses compounds and then goes on to develop and market them. They have various types of arrangements. For some drugs they provide sales forces, and for some they don't. They are now trying to acquire compounds at an earlier stage of development. Forest will face a substantial hurdle as 2012 draws closer and the company faces the expiration of the Lexapro patent.

In the call, management made a big point of how they are gaining market share in all franchises. Sometimes, they seemed to be bending over backwards to make the point, and they referred to numbers that aren't exactly intuitive. Some of the difficulty may have come from the lack of slides. However, Lexapro is growing and growing in market share and that is probably the most important item for the next few years.

Forest is expecting news regarding a filing for Nebivolol for hypertension in Q1 of 2007. Given the attractive valuation and other recent events, we are cautiously optimistic over the near to midterm until the issue about Lexapro begins to make itself felt.

Disclosure: none.

FRX 1-yr chart