Forest Labs (FRX) is an interesting niche pharma stock with a strong drug pipeline. However, a cash-cow drug is leaving the fold for generic production, creating a bit of a vacuum for medium-term earnings, analysts warn.
Forest Laboratories is prescription drug-maker focused on central nervous system and cardiovascular medications and anti-infective and respiratory medicine.
The company is developing or marketing many drugs at once, but it notes in a recent filing that two drugs have dominated: Lexapro, an antidepressant, and Namenda, which treats moderate and severe Alzheimer’s disease.
Lexapro accounted for 55 percent of sales in fiscal 2011, while Namena was 30 percent, the company told investors in March of that year, the latest annual report.
In the most recent quarterly report, dated Dec. 31, the company notes that Lexapro’s patent expired in March, while Namenda’s patent ends in April 2015.
Forest Labs on April 13 completed its purchase of Clinical Data, for $1.3 billion, which the drug company financed with cash. Four day later FRX filed its latest earnings, reporting 72 cents per share, down from $1.12 per share the year before.
Part of the decline can be attributed to the expense of new launches, management said. “In just four years we have introduced a total of five new products — Bystolic, Savella, Teflaro, Daliresp and Viibryd — three of which launched during this past calendar year,” said Howard Solomon, chairman and CEO of Forest Labs.
Forest Labs is a $9.29 billion market cap stock in a sector, pharmaceuticals, where the average company size is $22.51 billion. Its trailing 12-month P/E ratio is 9.8, vs. an average of 16.85 for the sector.
Its projected earnings per share growth for the coming 12 months is 55.14 percent, compared to 9.86 percent for the sector.
Analysts are bullish on Forest Labs, offering up multiple buy calls amid several striking sells. In the buy or outperform camp are Caris & Co., Jeffries, Cantor Fitzgerald and JPMorgan.
However, Goldman Sachs and Standard & Poor’s call the stock a sell.
“While we believe FRX has achieved a notable measure of success with its strategy of purchasing and in-licensing new compounds, we think sales from new products are not likely to be sufficient to offset the impending patent expiration of Lexaparo (Forest's largest-selling drug, believed to account for over 60 percent of profits) in March 2012, and the loss of patent protection on Namenda in early calendar 2015,” S&P analysts wrote in early February.
Recent new launches as a result of the acquisition of Clinical Data will help, but S&P doesn’t see an impact on earnings until fiscal 2014.
Forest Labs next reports in mid-July.
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