Clinical Data: A Pretty Good Deal for Forest Labs

Includes: CLDA, FRX
by: VFC's Stock House

The recent rise of Clinical Data (NASDAQ:CLDA) shares since the announcement of the Vilibryd approval last month had been accompanied by heavy speculation of a buyout, and buyout news is what investors received on Tuesday morning when trading resumed after the long President's Day weekend.

While news of a buyout did not come as a surprise, the terms of deal did.

With names of big players, such as Merck (NYSE:MRK) and Pfizer (NYSE:PFE), being tossed around when discussions of the Clinical Data buyout were taking place, it ended up being Forest Laboratories (NYSE:FRX) that ended up consummating a deal, and for a fairly significant discount to where the stock was trading at the time of the announcement.

Forest Laboratories will see its own antidepressant drug Lexapro lose patent protection in 2012, so the acquisition of Vilibryd makes perfect sense for the company, but shareholders had to be shaking their heads that the $1.2 billion deal came with a 12% haircut from what their shares were worth at the time.

As a consolation prize, if you want to call it that, shareholders will get an additional $6 per share - on top of the $30/per buyout price - if Vilibryd ends up meeting certain sales milestones.

For what just about every analyst out there called a potential billion dollar drug, annually, it sure looks like Vilibryd went for far less than fair market value.

Sure enough, at the sign of any controversy, the vultures will come out of the woodwork.

Shortly after the word of the deal hit the wires, it was announced that at least one law firm would initiate legal action against Clinical Data for "breaches of fiduciary duty and other violations of law." I'm generally not a fan of class action suits in the investing world because there's always inherent risk with every investment that the buyer of stock needs to be responsible for, but when a buyout goes through for twelve percent less than the going price of a stock, you've got to expect to attract a lot of negative attention.

Especially when the deal is for a whole lot less than what the most enthusiastic predictions had Vilibryd pulling in on an annual basis.

For Forest Labs, this deal was a no-brainer. The company has the marketing and sales force already in place to shift rudders from Lexapro to Vilibryd, and while the company predicts that earnings will now be diluted for the next three years as a result of this purchase, by then Forest could recoup the entire price of the deal in just one year of sales.

Sounds like a pretty good deal, for Forest Laboratories.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.