Forest Labs (FRX) Developing Drugs, and Potential Profits, for Investors - Barron's

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January 25, 2010 11:34 AM EST

Forest Laboratories (NYSE: FRX) will lose patent protection on two of its best drugs in 2012 and 2015, but that may set the company up for some strong growth with the introduction of new drugs, Barron's writes today.

The two drugs losing protection are Lexapro, a popular antidepressant, and Namanda, an Alzheimer's treatment. Lexapro will expire in 2012 and Namanda in 2015.

The two drugs provided about 80% of FY09 revenue. Estimates have sales of Lexapro and Namanda tapering off over the next several years as folks are looking to cheaper alternatives. This information isn't exactly news to investors, and has been priced into the stock.

However, there is a light at the end of the tunnel. FRX has a pipeline of 17 potential new drugs, several of which are currently in late-stage trials. Strong candidates for mainstream attention include an antibiotic, and constipation, schizophrenia and pulmonary disease treatments.

The story gets better. Forest has $3.6 billion in cash and marketable securities. This is a huge driving factor behind growth in the pharmaceutical industry. The stock is currently trading at 8.5x estimated FY10 EPS of $3.51. Excluding the $3.6 billion, the multiple drops to 5x.

Carl Icahn recently disclosed purchasing 1 million shares of the company, raising his stake in the company to 0.33%.

Forest also doesn't waste excess cash by housing research scientists to perform expensive work of discovering new molecules. Forest allows other, smaller biotechs to do that work, then they try or license the more promising candidates.

As mentioned, Forest labs best potential from the seven drugs in Phase III stages is the constipation drug Linaclotide. Barron's expects sales could reach $700 million annually. The antibiotic Ceftaroline may reach up to $400 million in sales in five years.

Forest just may be the remedy for ailing portfolios.