Forest Labs Lumbers On
Forest Laboratories (FRX: NYSE)
By Credit Suisse First Boston ($42.33, March 22, 2006)
WE ARE DOWNGRADING our rating on Forest to Underperform from Neutral. Our target price has been adjusted down modestly to $47 from $48.
We see the stock remaining in a $37-to-$47-trading range established since August 2004.
Although we believe Forest will prevail in the pending Lexapro patent challenge, decision-risk overhang will likely keep relative stock performance contained. This week marked the start of the Teva/Ivax patent challenge to the $1.9 billion Lexapro antidepression line. While we believe Forest will prevail in defending Lexapro, an apparent decision not to seek settlement, coupled with an anticipated extended processing time for a final ruling, represents a key overhang on relative share-price performance for the balance of this year.
[Ivax is challenging a patent that Forest holds on Lexapro. Ivax filed an initial lawsuit in 2003, and the case went to court March 15. Ivax was acquired by Teva Pharmaceutical Industries in January 2006.]
Forest shares have not responded to recent strengthening in [IMS Health] antidepression-prescription activity. [IMS Health is a company that provides pharmaceutical and health data.] Although we believe market conditions have improved incrementally on the back of Medicare Part D, we have also observed signs of economic substitution trends favoring generic selective serotonin reuptake inhibitor (SSRI) product offerings. The potential for further economic-substitution effects will likely magnify, as the category's largest product, Pfizer's Zoloft, goes generic at midyear.
Forest has been moving to aggressively in-license incremental new product flow to provide new product support particularly for the 2010 to 2011 period. We do not believe that consensus forecasts have adequately adjusted for higher anticipated research-and-development spending initiatives, with our fiscal 2007 and 2008 earnings [per share] forecasts tracking about 10 to 20 cents below consensus forecasts.
We believe Lexapro patent-decision uncertainties, depression-market displacements and possible earnings risks from heavy R&D demands will keep Forest [shares] range-bound this year, suggesting underperformance relative to other stocks across the specialty pharmaceutical sector.
-- Ken Kulju |
