Why Forest Laboratories Inc. Shares Soared

"Patent cliff? What patent cliff?" says Forest Labs following today's strategic purchase.

Sean Williams
Sean Williams
Jan 8, 2014 at 1:53PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Forest Laboratories (UNKNOWN:FRX.DL), a branded drug developer operating in the U.S. and Europe, galloped higher by as much as 17% after announcing the acquisition of privately held Aptalis for $2.9 billion in cash from TPG Capital.

So what: Normally, you don't see an acquiring company soar like this, but the cost savings and profit outlook given by Forest have investors excited. Aptalis, which is a gastrointestinal disorder and cystic fibrosis drug developer, will add $700 million in revenue by 2015, reduce synergistic costs by as much as $125 million in 2016, and should add an adjusted (non-GAAP) $0.78 to EPS by 2015. Forest will fund the transaction with $1 billion in cash on hand as well as $1.9 billion in debt. Pending regulatory approval, the deal will close in the first-half of this year.

Now what: Finally, something that Forest Labs shareholders can be excited about! The deal couldn't come at a better time because Forest Labs' best-selling drug, Alzheimer's disease treatment Namenda, is going to lose patent protection in 2015. But the revenue from this transaction, and EPS for that matter, should more than cancel out the loss of Namenda, even allowing Forest to potentially pay down some of its debt between the closing of this transaction and Namenda's patent exclusivity loss in 2015. Following Forest's more than doubling in share price I can't say I'm a personal fan of the company, but it no longer belongs on any of my "most perilous pipeline" lists.