Forest Laboratories, Inc. (FRX) and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician's prescription. The Company's products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Its products include Lexapro, the Company's selective serotonium reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate and severe Alzheimer's disease; Bystolic, its beta-blocker for the treatment of hypertension, and Savella, a dual reuptake inhibitor for the treatment of fibromyalgia.
Highlights
The schedule below shows the year-end balance sheets for the years between March 31, 2005 and March 31, 2009 and for the twelve month period ending September 30, 2009. Short term investments comprise approximately 70 percent of the business’s current assets. Other current assets are primarily composed of accounts receivable (12 percent) and inventory (10 percent.)
Fixed assets include all of the company’s production machinery and equipment (Net Property, Plant & Equipment.) As of September 30, 2009, Net PP&E made up approximately 23 percent of FRX’s non-current assets. Other non-current assets include Long-term investments (37 percent) and Goodwill/Intangibles (34 percent.)
Overall, the company’s assets have increased by approximately 51 percent during the period March 31, 2005 to September 30, 2009. During the same period, sales increased approximately 28 percent.
Other current liabilities comprise the largest segment of current liabilities. Accounts payable make up the remainder of current liabilities.
As the business’s earnings steadily increased, so did its equity. The company increased booked equity during the period shown by approximately 70 percent.
Analysis of the Income Statement:
As part of my analysis of FRX, I have analyzed the business’s income statements for the years ended March 31, 2005 through March 31, 2009 and for the twelve month period ending September 30, 2009.
Revenues have increased steadily from $3,159.6 million to $4,035.5 million during this period. During this same period, the gross profit margin has remained stable, ranging from 78.2 percent to 79.2 percent. The result is a 29 percent increase in gross margin dollars for the twelve month period ending September 30, 2009 as compared with the year ending March 31, 2005.
During the period under consideration, operating expenses have ranged, as a percentage of sales, from 62.5 percent to 79.4 percent. Pretax income has declined by approximately 22 percent between year ending March 31, 2005 and the twelve month period ending September 30, 2009.
Industry Comparative Analysis:
The following schedule presents a comparative ratio analysis of FRX and the median company in the biotechnology and drug industry. Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare the operating results of FRX with that of the industry median.
Liquidity ratios give an indication of the company’s ability to meet its current obligations with the use of current assets. As indicated by the comparative ratio analysis, FRX’s liquidity ratios are significantly stronger than those of the industry median company. This indicates that FRX is in a much better position than the industry median company to meet its current obligations.
The debt management ratios indicate the extent to which the business’s assets are funded by debt. As shown in the schedule, FRX has no long term debt.
The profitability ratios measure management’s effectiveness in overseeing the company’s resources. Compared to the industry median, FRX is more effective than the industry in producing earnings from its assets.
Summary of Analysis:
Based on my analysis of FRX, the business appears to be in a strong financial position. Over the years, both revenues and earnings have increased significantly as well as its equity position. In addition, compared to the industry, FRX has more liquidity, less leverage, and operates more profitably. Based on the financial analysis FRX, the business has less risk than does the median company in the same industry.
Value Conclusion:
Based on my analysis, I am establishing a target price of $33.17.
Disclosure: The author is long FRX.
Ronald Sommer
http://measuredapproach.wordpress.com
Highlights
- Less debt equals less risk. FRX’s debt to equity ratio of 0.00% is exceptional.
- FRX spends an increasing amount on Research & Development to keep its pipeline full. The company has a Price to Research ratio of 10.7, about right for a company of its size.
- T measure growth rate persistence, we average the 3-year, 5-year and 7-year growth rates. Sales growth is 10.47% and the average EPS growth rate is 8.63%. This produces a current PEG of 1.38X.
- The company is showing promising results with their investigational drug linaclotide in two Phase 3 trials.
- FRX and their partner, Richter Gedeon Nyrt, will start Phase 3 trials for the schizophrenic drug cariprazine.
The schedule below shows the year-end balance sheets for the years between March 31, 2005 and March 31, 2009 and for the twelve month period ending September 30, 2009. Short term investments comprise approximately 70 percent of the business’s current assets. Other current assets are primarily composed of accounts receivable (12 percent) and inventory (10 percent.)
Fixed assets include all of the company’s production machinery and equipment (Net Property, Plant & Equipment.) As of September 30, 2009, Net PP&E made up approximately 23 percent of FRX’s non-current assets. Other non-current assets include Long-term investments (37 percent) and Goodwill/Intangibles (34 percent.)
Overall, the company’s assets have increased by approximately 51 percent during the period March 31, 2005 to September 30, 2009. During the same period, sales increased approximately 28 percent.
Other current liabilities comprise the largest segment of current liabilities. Accounts payable make up the remainder of current liabilities.
As the business’s earnings steadily increased, so did its equity. The company increased booked equity during the period shown by approximately 70 percent.
Analysis of the Income Statement:
As part of my analysis of FRX, I have analyzed the business’s income statements for the years ended March 31, 2005 through March 31, 2009 and for the twelve month period ending September 30, 2009.
Revenues have increased steadily from $3,159.6 million to $4,035.5 million during this period. During this same period, the gross profit margin has remained stable, ranging from 78.2 percent to 79.2 percent. The result is a 29 percent increase in gross margin dollars for the twelve month period ending September 30, 2009 as compared with the year ending March 31, 2005.
During the period under consideration, operating expenses have ranged, as a percentage of sales, from 62.5 percent to 79.4 percent. Pretax income has declined by approximately 22 percent between year ending March 31, 2005 and the twelve month period ending September 30, 2009.
Industry Comparative Analysis:
The following schedule presents a comparative ratio analysis of FRX and the median company in the biotechnology and drug industry. Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare the operating results of FRX with that of the industry median.
Liquidity ratios give an indication of the company’s ability to meet its current obligations with the use of current assets. As indicated by the comparative ratio analysis, FRX’s liquidity ratios are significantly stronger than those of the industry median company. This indicates that FRX is in a much better position than the industry median company to meet its current obligations.
The debt management ratios indicate the extent to which the business’s assets are funded by debt. As shown in the schedule, FRX has no long term debt.
The profitability ratios measure management’s effectiveness in overseeing the company’s resources. Compared to the industry median, FRX is more effective than the industry in producing earnings from its assets.
Summary of Analysis:
Based on my analysis of FRX, the business appears to be in a strong financial position. Over the years, both revenues and earnings have increased significantly as well as its equity position. In addition, compared to the industry, FRX has more liquidity, less leverage, and operates more profitably. Based on the financial analysis FRX, the business has less risk than does the median company in the same industry.
Value Conclusion:
Based on my analysis, I am establishing a target price of $33.17.
Disclosure: The author is long FRX.
Ronald Sommer
http://measuredapproach.wordpress.com
