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Charles Armstrong

Asset Prime

Forest Laboratories, Inc. (NYSE: FRX) makes branded and generic prescription drugs. Two drugs accounted for 90% of Forest's total sales and 82% of total revenue in fiscal 2008: Lexapro (66% of sales) a drug for the treatment of depression, and Namenda (24% of sales) a drug for the treatment of Alzheimer's disease.^[1][2][1] The patents for both drugs will expire by 2013.^[1], meaning FRX has only a few years to replace the revenue generated by these two products.

New products in Forest Laboratories' pipeline include ceftaroline, an injectable antibiotic acquired through the acquisition of Cerexa, Inc. in 2007; linaclotide, a product for the treatment of gastrointestinal disorders developed through a 50/50 co-development and marketing parntnership with Ironwood Pharmaceuticals, Inc.; and aclidinium, a drug for treating respiratory diseases to which Forest has acquired exclusive United States marketing rights through a collaborative agreement with Laboratorios Almirall SA of Spain.^[1]

Company Overview

Forest Laboratories' Revenue and Net Income Over Fiscal Years 2006, 2007, and 2008 with profit margin overlaid in yellow. (Click to enlarge.)

Forest Laboratories revenues come primarily from the sales of branded products Lexapro and Namenda, as well as various other branded and generic drugs and several over-the-counter products.^[1]

Business and Financial Metrics

Over the past three years, Forest Laboratories' revenues and net income have fluctuated. In 2006, Forest posted revenues of $2.96 billion (a 6% decline from their 2005 figure of $3.16 billion) and a net income of $709 million (a 16% decline from their 2005 net income of $839 million). While revenue grew significantly in 2007 – a 16% increase to a total of $3.44 billion – a one-time R&D charge of $476 million related to the acquisition of Cerexa, Inc. saw net income fall 36% to $454 million. Fiscal year 2008 saw the company's revenue growing 11.5% to $3.84 billion and net income improving 113% to $968 million.^[2][3]

Business Segments

Sales (91% of Revenue)

Virtually all of Forest Laboratories' revenue comes from the sales of their pharmaceutical products. In 2006, sales accounted for 94% of total revenues.^[2] Fiscal 2007 and 2008 saw that figure drop to 92.5% and 91%, respectively.^[2] This slight drop in revenue share was more the result of increased revenue from other sources, as raw sales figures steadily increased in both 2007 and 2008.^[2] In fiscal 2008, those sales broke down as follows:

• Lexapro (66% of sales, 60% of total revenues): Lexapro (escitalopram oxalate) is a selective serotonin reuptake inhibitor (SSRI) used to treat depression and anxiety that was approved by the FDA in 2002 (see Antidepressant Drug Market).^[1] It is derived from the same parent compound (citalopram) as Celexa, an older SSRI developed by Forest Laboratories, but is more potent, according to the company.^[1] The drug was responsible for 66% and 67% of total sales in 2007 and 2006, respectively. In fiscal 2008, sales of Lexapro accounted for $2.29 billion, or 60% of total revenues.^[1][2]
• Namenda (24% of sales, 22% of total revenues): Namenda (memantine HCl) is a blocker of NMDA glutamate receptors used in the treatment of Alzheimer's disease.^[1] The drug is the first approved by the FDA for the treatment of moderate-to-late stage Alzheimer's disease.^[1][4] The drug accounted for 21% and 18% of sales in 2007 and 2006, respectively. In fiscal 2008, sales of Namenda accounted for $830 million, or 22% of total revenues.^[1][2]
• Other (10% of sales, 9% of total revenues): The remaining 10% of Forest's sales come from their other pharmaceutical products including Campral (for the maintenance of abstinence from alcohol in patients with alcohol dependence) and Bystolic (for hypertension) in addition to their generic line of drugs and over-the-counter products.^[1]

Contract Revenue (6% of Revenue)

Forest's contract revenue comes primarily from a co-promotion agreement with Daiichi Sankyo (a Japanese pharmaceutical company) for the promotion of Benicar (a drug used in the treatment of high blood pressure) in the United States.^[1] Contract revenue accounted for 5% and 6% of total revenues in 2007 and 2006, respectively.^[2]

Interest Income and Other (3% of Revenue)

Fiscal 2008 saw 3% of Forest's revenue come from interest and other sources, as compared to 2.5% in 2007 and 3% in 2006.^[2]

Revenue Breakdown Graph

Forest Laboratories' Revenue by Source and a Breakdown of Sales for Fiscal 2008. (Click to enlarge.)

Key Trends and Forces

Forest Laboratories Gets 90% of its Sales From Only Two Drugs, the Patents for Both of Which Are Set to Expire Within Five Years

In the fiscal year ended March 31, 2008, 66% of Forest Laboratory's sales came from antidepressant drug Lexapro, while 24% of sales came from Alzheimer's treatment drug Namenda.^[1] The patents on both of these drugs are set to expire within the next five years; Lexapro in March, 2012 and Namenda in September, 2013. ^[1] If Forest is to remain successful going forward, they will need to develop or license one or more new blockbuster products to make up for the inevitable sales losses to be suffered from the introduction of generics.

Products in Forest Laboratories' pipeline include:

• Ceftaroline, an injectable antibiotic acquired through the aforementioned acquisition of Cerexa.^[1] Phase III studies of ceftaroline for complicated skin and skin structure infections began in February of 2007.^[1] In fiscal year 2008, these studies completed enrollment with results expected in the second half of calendar year 2008.^[1] Additionally in fiscal 2008, enrollment began for Phase III studies with patients suffering from community acquired pneumonia, with results expected in calendar year 2009.^[1]
• Linaclotide, a product for the treatment of gastrointestinal disorders developed through a 50/50 co-development and marketing parntnership with Ironwood Pharmaceuticals, Inc.^[1] In March of 2008, Forest announced positive top-line results from a series of Phase II(b) studies on linaclotide with patients suffering gastrointestinal disorders; the company anticipates initiating Phase III studies in the second half of calendar 2008.^[1]
• Aclidinium, a drug for treating respiratory diseases to which Forest has acquired exclusive United States marketing rights through a collaborative agreement with Laboratorios Almirall SA of Spain.^[1] Phase II studies for the drug were positive and an international Phase III study is currently being conducted jointly by Forest and Almirall with top-line results expected in the second-half of calendar 2008.^[1]

The Antidepressant Market is Populated with Numerous Products and Has Begun Slowing

Sales of Lexapro have grown steadily, increasing 9% from their last year's totals and, in fiscal 2008, accounting for 17.7% of total antidepressant prescriptions in the SSRI/SNRI (selective serotonin reuptake inhibitor/serotonin-norepinephrine reuptake inhibitor) category.^[5] However, the antidepressant market has slowed in the fiscal year that began April 1st 2008 while, concurrently, Lexapro has lost some market share to generics of (ironically enough) Forest Laboratory's own Celexa and other SSRI's.^[6]

The Maturation of the Alzheimer's Drug Market Will Slow The Rate of Namenda's Sales Growth

Sales of Forest's Alzheimer's treatment drug Namenda have grown significantly, with 30% and 26% growth in fiscals 2007 and 2008, respectively, giving the drug 33.8% of total prescriptions in the Alzheimer's market.^[5] This is due largely to its recent introduction (2003) and status as the first FDA approved drug for treatment of moderate-to-late stage Alzheimer's Disease.^[1][4] While Forest Laboratories predicts that sales will continue to grow for the next several years,^[5] analysts predict the maturation of the Alzheimer's drug market should continue to slow the rate of growth.^[6]

Competition

Forest's relatively small size within the pharmaceutical industry makes it particularly susceptible to competition, lacking the financial resources to develop and sell a wide array of products, relying instead on the success of a few key drugs.^[1] Some of Forest Laboratories' major competitors include:

• Teva Pharmaceutical Industries (TEVA): The world's largest producer of generic drugs^[7], Teva sells numerous generic versions of the branded drugs that Forest Laboratories produces and sells, most notably Cetalopram, the generic form of Forest's Celexa, a selective serotonin reuptake inhibitor and precursor to Lexapro.^[8][9]

• Pfizer (PFE): One of the worlds largest drug companies with a market cap more than ten times Forest Laboratories',^[10][3] Pfizer develops, produces, and distributes hundreds of pharmaceutical products. These include (most notably from Forest's point of view) three different types of antidepressants (including SSRI Zoloft)^[11] and Aricept, a drug for the treatment of Alzheimer's disease^[12]

• Eli Lilly and Company (LLY): Another major pharmaceutical company that develops, produces and distributes drugs including Prozac and Cymbalta for depression.^[13] Their status as a producer of central nervous system drugs makes them a direct competitor of Forest's.

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24} "Forest Laboratories Form 10-K For Fiscal Year 2008; Part I, Item 1 - Business"
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8} "Consolidated Income Statement From Forest Laboratories Form 10-K For Fiscal Year 2008"
3. ↑ ^{3.0 3.1} "Google Finance's Coverage of Forest Laboratories"
4. ↑ ^{4.0 4.1} Morningstar Analyst Report of Forest Laboratories, 7/2008
5. ↑ ^{5.0 5.1 5.2} "Forest Laboratories Form 10-K For Fiscal Year 2008; Part IV, Condition and Results of Operations"
6. ↑ ^{6.0 6.1} The Value Line's Custom Report of Forest Laboratories, 7/2008
7. ↑ "BioJerusalem entry on Teva Pharmaceutical Industries."
8. ↑ "Notes to Consolidated Financial Statements from Forest Laboratories Form 10-K, Section IV"
9. ↑ "Wikipedia entry on Celexa (citalopram)"
10. ↑ "Google Finance's Coverage of Pfizer"
11. ↑ "Pfizer's List of Products for the Treatment of Depression, August 2008"
12. ↑ "Pfizer's List of Products for the Treatment of Alzheimer's Disease, August 2008"
13. ↑ "Eli Lilly's Official Product List, August 2008"