This American pharmaceutical business is based in New York and develops both generic and branded drugs. Like many peers, this firm is facing the twin challenges of seeing key drugs coming off patent and then having to invest more in research and development at a time when healthcare regulators are insisting on greater safety and efficacy tests.
Forest Laboratories (NYSE:FRX)
Forest Laboratories’ major products include Lexapro, an antidepressant (60% of sales); Namenda (20%), a treatment for Alzheimer’s; and Benicar, a beta-blocker for relieving hypertension.
As for drugs coming off patent there is particular concern over Lexapro and Namenda. They account for around 80% of turnover and are due to lose patent protection in 2012 and 2013 respectively.
Hence Wall Street has sharply marked down the shares. Too sharply in my view. Forest is now one of the cheapest mid-tier pharmas in the world. Analysts are forecasting 2008 sales and underlying earnings per share of $4.0bn and $3.26, rising to $4.4bn and $3.68 in 2009 – thus putting the stock on attractive p/e multiples of only 10.5 and 9.4 for the next two years. And the firm has plenty of fire-power (over $2bn of net cash) with which to replenish its pipeline over the next four years – the trick is to invest the funds wisely.
Forest’s existing development projects aren’t as dire as the valuation suggests. It has just received regulatory approval from the US FDA for its next generation beta-blocker, Bystolic. Plus there are four more medicines in phase three clinical trials and another five progressing through stage two testing. With a hefty war chest and respected 3,000-person salesforce, I believe it is also well positioned to win new in-licensing deals with smaller/ foreign healthcare firms who need marketing presence in the US.
And the dangers? Well, there are the usual risks posed from generics, disappointing clinical trials and even potential litigation (eg, withdrawal of Merck’s painkiller Vioxx in 2004) in the event that things go badly wrong. All the same, with the demographic trends of ageing populations set to continue, Forest appears to be an excellent long-term investment – assuming it successfully develops novel treatments over the next four to five years.
Recommendation: BUY at $34.50 (market capitalisation $10.8bn)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments