Here's How Forest Laboratories, Inc. is Surviving in the Post Lexapro World

In anticipation of the patent expiration for its best selling anti-depression drug Lexapro, investors knocked 30% off Forest Labs  (NYSE: FRX  ) market value in the final six months of 2011.  Investor concern was understandable given that Lexapro accounted for $2 billion in annual sales, representing more than half of Forest's total revenue. However, as a vivid reminder of why you should take the long view when it comes to investing, shares are now trading at their highest levels in a decade, suggesting investors should have been optimistic about the company's future instead. What has been behind Forest's rally? 

A solid start to recovery
Forest's financials took a big hit after Lexapro lost patent protection, falling from more than $4.5 billion in fiscal 2012 to it's current $3.5 billion a year pace.   But while making up for that lost revenue won't be easy, new drugs and a savvy acquisition appear to have Forest on track to win back market share this year. Sales growth for new drugs, including Daliresp and Tudorza for COPD, and Viibryd for depression, suggest the tide is turning for the company.   These products lifted Forest's quarterly sales 23% year-over-year to $878 million.

While the company's COPD treatments had a larger impact on Forest last year, Forest may find its psychiatry product lineup has a bigger impact in 2014. Sales of Viibryd, which got the green light from the FDA in 2011, climbed 30% to $53 million last quarter as prescriptions increased 16%. That momentum should carry over into this year and the company's latest anti-depression drug Fetzima, which won approval last fall and launched in December, should start contributing meaningfully too.

Fetzima joins Viibryd in a competitive, yet ineffectively treated market affecting almost 16 million adults in the U.S. each year. More than a third of those receiving treatment for depression are considered to be receiving minimally adequate care, according to The National Institute of Mental Health.

That suggests plenty of opportunity for Forest to carve out sales for Fetzima, a drug belonging to a class of drugs known as SNRI's. SNRI's, including  Eli Lilly's  (NYSE: LLY  )  Cymbalta, are designed to slow the reuptake of serotonin and norepinephrine in the central nervous system. Because SNRI's also target norepinephrine, they serve as a valuable alternative to SSRI's like Viibryd that only target serotonin. Thanks to their differing pharmacology, Forest anticipates its sales team can effectively position the two drugs for different patient populations, pitting Fetzima up against Lilly's Cymbalta, which faces generic competition for the first time this year.

If Fetzima wins scripts away from Cymbalta, sales could prove significant given Cymbalta brought in $4 billion in 2012. That means investors should track quarter-over-quarter sales to see if Fetzima is winning converts. Investors should also keep an eye on Saphris. Forest acquired the schizophrenia and acute bipolar mania drug from Merck  (NYSE: MRK  ) in December for $240 million. As part of that deal, Merck will continue to manufacture Saphris and will receive milestones if sales hit certain targets. Forest plans to leverage its existing sales team, which will now have three drugs to pitch to psychiatrists instead of one, to reach those targets.

Sales of Saphris totaled $150 million in the 12 months ending September, but Forrest thinks its team can significantly ramp that number by introducing it to more doctors.  The company estimates just 20% of the 4,000 psychiatrists in the U.S. have prescribed Saphris -- a number it believes it can double or triple.

Fool-worthy final thoughts
Forest's pipeline could yield a fourth psychiatry product, cariprazine for schizophrenia, too. Despite showing efficacy, the FDA opted against cariprazine in November, asking for additional safety data.

Forest expects to report data from a phase 2 study of cariprazine for depression in the first half of this year and will work with the FDA to address safety concerns. In the meantime, growth from Viibryd, Fetzima, and Saphris will help re-establish Forest as a leader in psychiatric treatment. Furthermore, if it's plan to co-market its psychiatry portfolio across one sales team boosts margins, investors may find there's upside to Forest's current $1.25 to $1.35 in expected earnings this year.

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