Forest Labs On the Rebound: How Long Will These Strong Profits Last?

Forest Laboratories, Inc. (FRX) develops and manufactures name-brand as well as generic prescription and over-the-counter pharmaceutical products. The company's central nervous system pharmaceutical line includes antidepressants Celexa and Lexapro, as well as Namenda, which treats Alzheimer's disease. Other products include treatments for irritable bowel syndrome, hypertension, and pain. Forest Laboratories, which has subsidiaries in the UK and Ireland, markets directly to doctors, drugstore chains, managed care organizations, and distributors through its own sales force.

FRX seems to be on the rebound, at least in its earnings. The three main horses pulling this wagon are Lexapro (for depression), Namenda (for Alzheimers) and Benicar (for high blood pressure). Other drugs are Aerobid and Tiazac (for hypertension). Lexapro and Namenda account for 85% of current revenues ($2.75 billion out of $3.2 billion expected for 2007).

Earnings for the full year (fiscal year ended March 31) should be $2.85 for 2006. Look for $3.10 this year, and $3.45 next year. Revenues have also been ramping, up from $2.8 billion in 2005 with 2006 forecasted to finish with $3.2 billion, then $3.45 billion in 2007. Of course, those numbers will continue only so long.

Ther reason: Lexapro loses patent protection in 2012, and Namenda will face generic competition in the following year. Most drug companies always have research and development working on new drugs to replace old ones. Unfortunately, FRX's R&D department has suffered several setbacks, and nothing exciting is currently visible. Analysts suspect the new drugs that will be introduced in the next five years won't replace the loss of revenues that are almost certain in Lexapro and Namenda when they go off patent protection, let alone generate new growth. There's still time to come up with a breakthrough medicine, but nothing is imminent.

While the company seems to be well positioned for earnings growth over the next 2 or 3 years, as that 2012 deadline approaches, it will need to introduce a new drug or several new ones to keep investors' appetites strong. If you're a trader, this stock may be of interest. But investors may find this one goes up a little while longer, based on current earnings only. Then they'll be looking to see when the slowdown occurs. In the meantime, if there are any more disappointments out of R&D, investors and traders won't be sticking around.

FRX looks good for the next few years. After that, it's a tough call.

The Good: Earnings are improving. Valuation is attractive.
The Bad: Generics are gaining market share.
The Ugly: New drug pipeline unexciting. Major patent expiring in 2012.

FRX 1-yr chart

Disclosure: none

Comments

[CrossProfit:]

There is no mention of the Cerexa acquisition in your article. This is a possible bright spot in the pipeline.

See www.crossprofit.com/vi... and www.crossprofit.com/ar... for more details. CrossProfit EOL (08/2007) is at $54.00.

CrossProfit

2007 Apr 27 05:56 AM