It's difficult to make that move from biotech or specialty pharma to "regular" pharmaceutical company, and many companies never quite make the transition. At present, it seems like Forest Labs (NYSE: FRX) is at an important crossroads in that process.
Although Forest has done a masterful job of exploiting in-licensed compounds like Celexa and Lexapro, its internal-development efforts have been more muted. Consequently, the conversion of Celexa to generic status, coupled with disappointments at the Food and Drug Administration regarding some drug approvals, has left Forest tremendously dependent on Lexapro and, to a lesser extent, Namenda.
For its fiscal fourth quarter, sales dropped about 15% as gains in Lexapro and Namenda could not completely recoup the nearly $240 million in lost sales of Celexa. To its credit, though, management did a commendable job of tightening up expenses, and earnings per share, once you strip out a one-time charge, actually rose slightly to $0.40, from $0.38 a year ago.
Looking ahead, management actually thinks it can slightly increase net revenue for the coming fiscal year. In addition to expectations for growth in the Lexapro and Namenda franchises, management is looking for higher contributions from Benicar (co-promoted with Japan's Sankyo Pharma) and two recently launched drugs -- Campral, for alcohol abuse, and Combunox, for pain management.
Although I think that management's assumptions for Lexapro are a bit on the aggressive side, I also don't think the business is in danger of imminent collapse. That said, investors must also keep an eye on the Lexapro patent infringement case that's set for May 9. Although the odds of Forest's losing patent protection on Lexapro aren't all that high, a loss would be enormously bad for the company and its shareholders.
A key aspect to Forest's operating philosophy -- in-licensing compounds from other companies -- adds a little uncertainty to the pipeline, since you never know when a deal may be announced. But Forest has done well with this approach in the past. What's more, the company does have interesting and potentially lucrative drugs in early stages of development.
Though the next couple of years could be a little hairier than what most pharma investors are normally accustomed to, Forest has a clean balance sheet, a good pipeline, and the flexibility to make additional deals to add even more candidates to the preclinical roster. Top that off with a demonstrated record of success in selling these in-licensed compounds, and you have a company that should be in position to weather its transitional period.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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