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Forest Laboratories Is an Option for Wealthy Investors Who Could Afford to Pay a High Premium
Posted by: Victor Selva (IP Logged)
Date: April 23, 2014 02:46PM

Forest Laboratories Inc. (FRX) is one of the largest U.S.-based pharmaceutical companies in the area of developing, producing and selling central nervous system (CNS)-related prescription drugs. The company also focuses on the development and introduction of new products, including products developed in collaboration with licensing partners.

The company’s principal products include Namenda (memantineHCl) for Alzheimer´s disease, Savella (milnacipranHCl) for fibromyalgia, Bystolic for hypertension and Benicar (olmesartanmedoxomil) for high blood pressure.

In this article, let's take a look at this lab and try to explain to investors the reasons this is an apparently appealing investment opportunity.

Cost-Cutting Initiative

Forest Laboratories expects to make savings of $500 million by fiscal 2016 in R&D. The company said about $270 million of the savings will come from streamlining and realigning its research and development arm, while $150 million will result from cutting marketing expenses, with the remaining from reducing general, administrative and other expenses.

The cost-cutting effort could lead also to the elimination of 10% to 20% of its workforce on Long Island. These staffing cuts are part of Project Rejuvenate, a plan announced in December to reduce costs and streamline operations across the company's various locations.

A Deal to Buy Schizophrenia Drug Saphris

The lab agreed to acquire exclusive U.S. rights to Merck & Co. (MRK)'s sublingual tablets for adults with schizophrenia and bipolar disorder, paying $240 million for the drug while committing to a slate of unspecified sales milestones.

Forest´s Acquisition

In January 2014, Forest acquired Toronto-based Aptalis, a privately held U.S.-based specialty Gastrointestinal (GI) and Cystic Fibrosis Company, for $2.9 billion in cash from its shareholders, including TPG, the global private investment firm. The deal looks attractive especially keeping in mind the fact that Namenda will be facing generic competition from 2015. The acquisition will also give Forest the opportunity to build its presence in Europe and strengthen its GI and CF portfolios.

The Merger

In February 2014, Forest was itself acquired by Actavis, a speciality pharmaceuticals company based at Parsippany, N.J., in a deal worth about $25 billion. The deal will create a powerhouse biopharma company with an extensive generics business, branded drugs and ambitious R&D operations. “The combination of Forest with Actavis creates a specialty company with annual sales of approximately $15 billion, a diversified portfolio and a geographically balanced business," said CEO of Forest, Brent Saunders. In recent days, both companies received a request for additional information from the Federal Trade Commission in connection with Actavis' pending acquisition of Forest.

Relative Valuation, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 116x, trading at a premium compared to the industry mean. Due to its revenue growth, Earnings per share (EPS) have increased in a good way in the most recent quarter compared to the same quarter a year ago. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance was really good in the past year.

1398204039379.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

P/E

ROE (%)

FRX

FOREST LABORATORIES INC

116

2,69

AGN

ALLERGAN INC

32

16

ENDP

ENDO INTERNATIONAL PLC

47

-86

VRX

VALEANT PHARMACEUTICALS INTERNATIONAL

N/A

-20

CBST

CUBIST PHARMACEUTICALS INC

69

-1,6

ATLN.VX

ACTELION LTD-REG

20

29,2

Forest Laboratories has a current ratio of 2.69% which is higher than the ones registered by Endo International Plc (ENDP), Valeant Pharmaceuticals International (VRX) and Cubist Pharmaceuticals Inc. (CBST). For investors looking for a higher ROE, Allergan Inc. (AGN) and Actelion Ltd. (ATLN.VX) are good options.

Final Comment

As outlined in this article, we think Saphris should be a good fit in Forest´s central nervous system (CNS) franchise. Additionally, Forest´s acquisition of Aptalis looks attractive, especially taking into account that Namenda will be facing generic competition from 2015. The deal will give Forest the opportunity to build its presence in Europe and strengthen its position in the gastrointestinal (GI) market in the U.S. and Canada and the cystic fibrosis (CF) market in Europe.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Ray Dalio (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Dodge & Cox have taken long positions on it in that time frame.

Disclosure: Victor Selva holds no position in any stocks mentioned.




Guru Discussed: Dodge & Cox: Current Portfolio, Stock Picks
Jean-Marie Eveillard: Current Portfolio, Stock Picks
Stocks Discussed: FRX, AGN, ENDP, VRX, CBST, ATLN.VX,
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