Forest Looks for a Spark

The drug company's shares were on fire for years, but now it needs rekindling.
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Call it a tale of two drug companies.

From early 1988 to early 2004, it was the best of times for

Forest Laboratories

(FRX)

, whose stock price rose nearly 80-fold on a split-adjusted basis.

Since then, the times haven't been so good, as Forest's stock has lost about 43% of its value.

"At this point in time, Forest desperately needs a new drug to get investors excited," says Tim Anderson of Prudential Equity Group in a Thursday research report.

New York-based Forest relies heavily on licensing agreements and marketing deals with other drugmakers.

During the boom years, drugs such as the antidepressant Celexa propelled the stock. However, during the last two years, Forest has had mixed results. It has a big hit with Lexapro, a cousin of Celexa, but the latter's revenue has shriveled because of generic competition. Both are licensed from a Danish company.

Meanwhile, the painkiller Combunox is a disappointment, and clinical trials for an experimental Alzheimer's disease drug have failed so far. Attempts to secure government approval for expanded uses of Lexapro and Namenda, an Alzheimer's treatment, have been rebuffed. Namenda and the experimental compound are licensed from a German company.

The scariest item for investors and analysts is the upcoming March trial in which a generic company is trying to break Lexapro's U.S. patent. If Forest loses, its stock would be crushed. Lexapro achieved sales of $467.4 million for the quarter ended Sept. 30, or 63% of Forest's corporate revenue.

Anderson and other analysts say some good news may be on the way. Late Wednesday, Forest said it would license an experimental blood pressure drug, nebivolol, from

Mylan Laboratories

(MYL) - Get Report

.

Nebivolol received

conditional approval from the FDA in May, but it's unclear how long it will take the companies to answer the agency's questions. Mylan says it will ask the FDA to approve nebivolol for treating congestive heart failure in the second half of this year.

The drug won't have any impact this year and probably won't have much of an effect in 2007. Still, it gives Forest's executives something to cheer about on Jan. 17 when they present financial results for the third quarter of the company's fiscal year.

Analysts polled by Thomson First Call predict earnings of 62 cents a share and revenue of $767 million for the three months ended Dec. 31. For the same period in 2004, Forest earned 70 cents a share on revenue of $832 million.

Although most of Forest's sales come from central nervous system drugs, the company has experience with cardiovascular medications. It helps Japan's

Sankyo

sell Benicar and Benicar HCT for high-blood pressure. Forest also sells Tiazac, made by a Canadian company, for hypertension and chest pains associated with heart disease.

Nebivolol "could help fill a gap in Forest's pipeline, which for the most part has been disappointing," says Timothy Chiang of Natexis Bleichroeder, in a research report written last week. Chiang, whose firm doesn't issue stock ratings, has a 12-month fair value price of $36.50 on the stock.

He doesn't own shares, and his firm doesn't have an investment-banking relationship.

Prudential's Anderson is more optimistic. He has an overweight rating on the stock and a $44 price target. The key to success is whether nebivolol is approved for congestive heart failure, a market that has fewer patients but less competition than the crowded high-blood pressure market.

"Easier money can probably be made in heart failure," says Anderson, who doesn't own shares and whose firm doesn't have an investment-banking relationship. Coreg from

GlaxoSmithKline

(GSK) - Get Report

"has a near monopoly" in the heart failure market, suggesting there is room for nebivolol, he says.

While Benicar and Benicar HCT produced only $31.2 million in sales for the quarter ended Sept. 30, Anderson says they are successful. Benicar is the seventh product in its drug class in the U.S., but its performance "is a testament to Forest's ability to sell products that are minimally differentiated," Anderson says. "Could the company pull a repeat performance with nebivolol?"

Analysts point out that nebivolol is a well-known product outside the U.S. Italy's

Menarini Group

sells the drug in four continents. Both Menarini and Mylan, which bought the U.S. and Canada marketing rights in 2001, licensed nebivolol from a subsidiary of

Johnson & Johnson

(JNJ) - Get Report

. The J&J unit approved the Mylan-Forest deal.