It's been a tough year for Forest Labs (NYSE:FRX). It lost hundreds of millions of dollars' worth of Celexa sales; its Lexapro is facing a patent challenge; and it's had a recent record of clinical trial setbacks. While Tuesday's announcement of an expanded licensing relationship with Hungary's Gedeon Richter won't change any of that in the near term, it should give investors some hope for the future.
Under the terms of the new agreement, the companies will jointly develop two compounds targeted at central nervous system disorders. The more advanced platform is RGH-896, a compound initially targeted at chronic pain. The two companies hope to begin a phase 2b study in late '06, and Forest will have exclusive marketing rights for the U.S. and Canada. Though I wouldn't expect to see a launch before 2010, chronic pain is widely considered to be a market in excess of $2 billion a year, with a crying need for effective new therapies.
The second platform is mGLUR1/5, which holds promise for depression, anxiety, and other related conditions. Forest will have North American rights here as well, but any clinic studies for this platform seem at least two or three years away.
Investors familiar with Forest Labs will recognize this deal as part and parcel of the company's strategy. It has a lot of cash and a good record of successfully commercializing other companies' compounds. Unlike other pharmaceutical companies such as Merck (NYSE:MRK), Wyeth (NYSE:WYE), or GlaxoSmithKline (NYSE:GSK), Forest Labs lacks any enormous internal drug discovery efforts. I'm not going to say that one approach is intrinsically better than the other -- each has advantages and drawbacks.
The deal with Gideon Richter may prove promising, but the compounds in question are early stage and inherently risky, and any benefits from the deal will take years to materialize. In other words, the deal doesn't help the company's current situation at all. Of course, I don't think knowledgeable investors are really expecting the cavalry to arrive on Forest's doorstep; reversing current revenue declines will take some time.
With no debt, a solid reputation, and a good record, I'd argue that the company still deserves the benefit of the doubt. Patient investors may yet find this Forest worth some due diligence.
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Merck and GlaxoSmithKline are Motley Fool Income Investor recommendations.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
