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Real M&A: Forest Labs Seen Needing Deal Amid Patent Loss

Posted on 09 July 2012

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Forest Laboratories needs M&A deal to counter a projected 80 percent drop in profit this year as patents on its top-selling drugs start to expire.

About three-quarters of the company’s more than $4.5 billion of sales last year were generated by the antidepressant Lexapro, which lost exclusivity in March, and Namenda, an Alzheimer’s treatment facing the end of its patent protection in 2015. Net income at New York-based Forest, where costs have risen faster than sales over the last five years, is projected to tumble the most in at least 16 years, according to analysts’estimates compiled by Bloomberg.

With more net cash relative to its $9.5 billion market value than every other similar-sized specialty drugmaker in the U.S., Forest should use its $3.2 billion in cash and marketable securities to fund a M&A that will give it new drugs to replace lost sales, according to Robert W. Baird & Co. and Piper Jaffray Cos. Forest, which is embroiled in a proxy fight with Carl Icahn, may find Salix Pharmaceuticals Ltd. (SLXP), the $3.2 billion maker of a treatment for travelers’ diarrhea, to be an attractive target, said Susquehanna International Group LLP.

“The pipeline, as currently constituted, is not nearly enough to replace the lost revenue from losing Lexapro and Namenda to generics,” David Amsellem, an analyst with Piper Jaffray in New York, said in a telephone interview. “I think that if they were to be more aggressive on M&A and not just look at one-off pipeline assets, but rather look at commercial-stage assets as well, and were more aggressive in using their balance sheet, that they can definitely get themselves out of the hole.”

‘Strongest Pipelines’

“Forest already has developed one of the strongest pipelines in biopharma today, which we believe will more than offset the patent expirations of Lexapro and Namenda over time,” Forest said in an e-mailed statement. “We maintain an extremely active and disciplined business development program, enabling us to identify promising new product license and acquisition opportunities that will enhance our pipeline and portfolio even further.”

Forest last month cut its forecast for fiscal 2013, which ends in March, because Lexapro sales are being reduced by Teva Pharmaceutical Industries Ltd. (TEVA)’s generic version.

As a result, analysts are projecting Forest’s revenue this year will tumble 28 percent to $3.3 billion, the lowest  annual level since 2006. The company will post net income of about $191 million, an 80 percent drop from fiscal 2012, estimates compiled by Bloomberg show.

Generic Competition

Generic versions of Namenda, its other top-seller, can enter the U.S. market starting in 2015.

“The patent expirations put them in a position of weakness,” Jay Singhania, a money manager at Dallas-based Westwood Holdings Group Inc., which oversees $13.9 billion, said in a phone interview. “They’re overleveraged to two products. They’re in a tougher spot than companies that have another base of earnings.”

Lexapro had $2.1 billion of sales (FRX) last year, 46 percent of Forest’s total revenue. Namenda accounted for $1.4 billion, or about 31 percent, data compiled by Bloomberg show.

Of 104 drugs with U.S. patent protection expiring between 2012 and 2016, 44 percent will lose exclusivity this year and next, according to data compiled by Bloomberg. Companies from AstraZeneca Plc (AZN) to Bristol-Myers Squibb Co. (BMY) are now using their cash for takeovers to help replace the lost revenue.

Drug Takeovers

AstraZeneca, which will lose exclusive rights to two of its best-selling medicines by 2014, last month completed the $1.12 billion acquisition of Ardea Biosciences Inc. Bristol-Myers, which faces patent expirations for three of its top four drugs within three years, agreed last week to buy Amylin Pharmaceuticals Inc. (AMLN) for $6.5 billion, after earlier this year paying $2 billion for Inhibitex Inc.

Forest’s $3.2 billion in cash (FRX) and marketable securities --along with no debt -- is equal to about a third of its market value, a higher ratio than all 13 other specialty pharmaceutical companies greater than $1 billion in the U.S., data compiled by Bloomberg show.

“At some point, you’re going to see them use that balance sheet,” Gary Nachman, an analyst with Susquehanna in New York, said in a phone interview. “I don’t think what they have in their pipeline is enough.”

Salix, the maker of gastrointestinal treatments, may be one attractive target for Forest because its drugs could be marketed by the same sales force that will sell the irritable bowel syndrome medication that Forest is developing, he said.

Read the full article at Bloomberg (link no longer available)



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