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Timber! Clinical Data Falls.

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Sometimes when trees grow too fast without proper root structure, they end up toppling over.

Take drug-development sapling Clinical Data (Nasdaq: CLDA  ) , which shot up 67% in one day last month after the Food and Drug Administration approved the company's depression drug, Viibryd. Over the next month, the stock increased an additional 35% in anticipation of a buyout.

One came, but it wasn't exactly at the price the bulls were hoping for. Clinical Data announced today that it agreed to be purchased by Forest Labs (NYSE: FRX  ) for $30 per share, almost $4 less than the company closed for on Friday. The agreement also calls for contingent payments of up to $6 if Viibryd can hit certain milestones:

  • $1.00 if sales reach or exceed $800 million within the first five years
  • $2.00 if they hit $1.1 billion within the first six years
  • $3.00 if they hit $1.5 billion within the first seven years

Technically the total payout could be higher than Friday's close of $33.90, but investors don't see that happening; the extra payment is being valued around $1.00.

The problem is Viibryd has to compete with a ton of other antidepressants on the market. There's Forest's Lexapro and Eli Lilly's (NYSE: LLY  ) Cymbalta, as well as cheap generics like Pfizer's (NYSE: PFE  ) Zoloft and Lilly's Prozac. Viibryd hasn't been tested against any of them, so it's unclear whether it works better or has fewer side effects.

While Forest Labs' purchase is an endorsement of Viibryd's potential, the structure of the deal is clearly an indication that Forest realizes it has an uphill battle to gain traction in the crowded market. In fact, the company said the deal won't be accretive for at least three years.

Viibryd may turn into a blockbuster tree for Forest, but it's going to take a lot of nurturing to get it to grow up strong.

Alex Pape says this spring will be full of special situations to potentially profit from.

Pfizer is a Motley Fool Inside Value selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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Related Tickers

4/13/2011 4:00 PM
CLDA.DL $30.95 Down +0.00 +0.00%
Clinical Data, Inc… CAPS Rating: *
FRX.DL $0.00 Down +0.00 +0.00%
Forest Laboratorie… CAPS Rating: ****
LLY $77.57 Down -0.68 -0.87%
Eli Lilly and Co. CAPS Rating: ***
PFE $32.13 Down -0.05 -0.16%
Pfizer CAPS Rating: ****