Stock sell-offs can seem a bit like tornadoes -- they sometimes appear out of nowhere, wreak havoc, then simply disappear. While it's premature to sound an "all clear" for Forest Labs (NYSE:FRX), it may finally have reached a pause in an almost 18-month correction that slashed the stock price by more than 50%.
Second-quarter results weren't great, but nobody really expected them to be. Net revenue dropped 10% as sales of the company's drugs fell by 14%. Although Lexapro sales rose 27% and Namenda sales doubled, it wasn't enough to offset a major decline in Celexa sales. Hammered by generic competition, Celexa sales fell from more than $261 million in last year's quarter to slightly more than $4.1 million this quarter.
Despite the lower revenue, Forest increased its SG&A expenditures while holding gross profits steady. Excluding a one-time tax reversal, net income fell 22% for the quarter, though ongoing share buybacks limited the EPS damage to a decline of about 9%. During the quarter, the company repurchased 8.5 million more shares, with a further 22.6 million remaining under the buyback authorization.
I realize this will be heresy to some, but I seriously question the wisdom of this aggressive buyback program. One of the problems facing Forest Labs is a relatively thin pipeline. The money spent on shares could have bought or licensed new compounds, or helped the company acquire another firm with late-stage compounds in its pipeline. Share repurchases may be popular with some stockholders, but they don't generate top-line growth -- something Forest could use more of these days.
Speaking of the pipeline, Forest recently announced that they are pushing ahead with the development of neramexane for Alzheimer's disease. Although a study completed about a year ago showed no real benefits, a different study has suggested statistically significant improvement in patients. While this is definitely good news in light of the company's efforts to build an Alzheimer's franchise, investors should remember that approval would still be many years away.
Forest has had a decent run off the bottom since I last spoke favorably about it. It may no longer be a screaming bargain, but it's still an attractive and interesting idea. Aside from my concerns about the company's use of cash, I still see potential with this company, whether it stands alone or is swallowed by a larger rival.
More pharmacological Foolishness:
- Rare Diseases Mean Solid Growth for Genzyme
- These Swiss Don't Miss
- Is Abbott's Ailment Serious?
- Another "No" for Lexapro
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
