Why Is Carl Icahn Buying Large Blocks Of Forest Laboratories?

| About: Forest Laboratories, (FRX)
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Forest Laboratories (FRX) is a $9 billion diversified pharmaceutical company that is heavily owned by investment managers. The company has been providing steady revenue growth for years and has an ever-expanding R&D budget, and has been attracting attention from the strength of the company's financial data. The most notable interest is coming from the famous and extremely successful business magnate Carl Icahn, who has recently been snatching up large blocks of FRX on a frequent basis.

Their most recent quarterly report (the first quarterly report of their fiscal 2013), which was released before the bell on July 17 revealed the beginning of the weaker financial data caused by the expiration of Lexapro (escitalopram oxalate). Lexapro was a very successful SSRI (selective serotonin reuptake inhibitor) for the treatment of MDD (Major Depressive Disorder). In its height, Lexapro reached about $600 million/quarter in sales (or $2.4 billion in annual sales).

Patent exclusivity for excitalopram oxalate ended on March 14, 2012 which left us with enough time to see just how diminished sales revenue will be going forward. Q1 2013 reported $110 million, which implies about $440 million in annual sales going forward from just Lexapro. This is only about 15% of the company's sales revenue right now, so models that will try to revalue FRX will place much less emphasis on Lexapro and more on the company's new ideas.

The company's strategy seems to be focused on developing a very broad portfolio that will bring more reliable revenue over the next few years. CEO Howard Solomon pointed out that many of the company's new projects, like Bystolic, are achieving rapid growth (about 38% year-on-year) that may be enough to fix some of the gap that Lexapro has left the company with, although many analysts seem to be projecting peak sales that can be described as "uninspiring at best". There is also a replacement MDD drug named levomilnacipran, which is finishing phase III trials and is expected to have its NDA submitted by Forest quite soon, although it will not match Lexapro's sales figures.

Going back to the Carl Icahn situation, things get much more complicated. CEO Howard Solomon and Carl Icahn are in a prolonged legal struggle over the control of Forest itself, and it's now become one of the most intense legal debates in the financial world due to the names involved. Icahn has accused the management of Forest Laboratories of mismanagement, and looks to release company documents concerning the retirement of 84 year old CEO Howard Solomon which may or may not prove mistreatment of shareholders or immunity from a hostile takeover.

The company remains secretive on its side about what the plans are, although this does answer one important question. Carl Icahn is buying FRX so he can appoint board members, not because FRX is a particularly attractive stock for now. It is important to note that Carl Icahn's interest in Forest Laboratories signifies that he has long-term interest in developing this company into something better too. Icahn bought ~3.6 million shares in August, bringing his total stake in Forest Laboratories to about 30.2 million shares by the end of the month. This adds up to about 11% of the company.

Whether or not you think Forest can make up for the lost revenue from Lexapro's expiration or not (plus the impending expiration of Namenda), Icahn's attempt to take over the company share by share should be watched carefully as it unfolds if not just for the entertainment. Don't rush into the stock expecting an immediate buyout, and take into account extremely low short interest in the stock and the huge growth that the company's new drugs need in order to continue Forest's revenue-growth streak in coming years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.