Forest Slashing Lexapro Inventory

Denmark's H. Lundbeck says Forest is carrying only 10 months of supply.
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Forest Laboratories

(FRX)

saw its shares slip Tuesday as another sign emerged that its top-selling drug, the antidepressant Lexapro, is under pressure.

The latest indication comes from the drug's developer, Denmark's

H. Lundbeck

, which licenses Lexapro to Forest in the U.S. Lundbeck warned investors Tuesday that its 2006 earnings will be hurt by lower-than-expected Lexapro sales in the U.S.

Lundbeck said Forest is sharply reducing its Lexapro inventories, and that will cut into the Danish company's revenue and profit during its fiscal year 2006, which ends Dec. 31.

Forest has already eased its predictions for Lexapro during its current fiscal year ending March 31. At the beginning of the fiscal year, Forest said Lexapro could provide "slightly less" than $2 billion in sales.

Then last month it predicted "about $1.9 billion." Lexapro is expected to account for some 63% of Forest's corporate revenue for the year.

By midafternoon, Forest's stock was down $1.44, or 3%, to $46.49. Lundbeck doesn't trade on U.S. exchanges. Trading on the Copenhagen Stock Exchange, Lundbeck's shares dropped 8.3%.

"During the past two years Forest Laboratories ... has maintained

Lexapro inventory levels up to 16 months of projected Lexapro sales in order to assure continued commercial supply of the product," Lundbeck said. "Due to maturation in the underlying U.S antidepressant market and product sales of Lexapro in the U.S. during the past several quarters that were lower than initially forecast, Forest believes that maintaining

Lexapro inventory levels at 10 months of projected sales is adequate to ensure uninterrupted commercial supply."

A representative for Forest couldn't be reached for comment.

Lexapro has occupied a lot of Wall Street attention lately, most notably the March 15 trial in which Forest and Lundbeck are suing

Ivax

for infringing on the drug's patent. Ivax, which is challenging the patent's validity, recently was acquired by

Teva Pharmaceutical Industries

(TEVA) - Get Report

. If Forest wins the case, Lexapro could be protected for at least four years.

Many analysts predict Forest will settle the case,

just as it settled a similar Lexapro patent dispute with the Australian generic drug company

Alphapharm

in October.

"We believe the Lexapro patent litigation is still an overhang

on Forest's stock that continues to create a buying opportunity," says analyst Deborah A. Knobelman of Piper Jaffray in a Tuesday research report. She reaffirmed her outperform rating.

"We believe that the most likely outcome of this litigation is a settlement," said Knobelman. If the dispute isn't settled, "we still believe FRX will ultimately win patent litigation, which could also add 10%-plus upside." Knobelman doesn't own shares of Forest.

Tim Anderson of Prudential Equity Group also forecasts a settlement, which could raise the stock price 10% if a deal is struck before March 15. If there's no deal, the price could go down 10%, he believes. Anderson offered his comments in a Jan. 18 research report in which he dropped his rating to neutral from overweight.

Noting that the U.S. depression market "has generally been slowing," Anderson says Lexapro also will face pressure from generic versions of Celexa, an older cousin of Lexapro, and this coming June's U.S. patent expiration of

Pfizer's

(PFE) - Get Report

Zoloft.

By midyear, Lexapro "will essentially be the last brand standing in the SSRI category, something we don't think is an enviable position to be in," says Anderson. SSRI stands for selective serotonin reuptake inhibitor.

Last month, Kenneth E. Goodman, Forest's president and chief operating officer, said generic Celexa hadn't hurt Lexapro's sales. He predicted Lexapro could benefit when Zoloft loses patent protection.

Goodman said he doubted Lexapro would be affected by doctors switching patients to cheaper generics even if managed care companies encourage the practice, known as therapeutic substitution. Goodman says doctors don't like to switch a patient who has been stabilized with a particular drug, but he said patients receiving antidepressants for the first time could be encouraged to take generics.

"While Forest continues to downplay the impact from

generic Zoloft, we fear that the availability of yet another 'high-quality' generic SSRI will start to have an impact" on Lexapro during the next fiscal year, Anderson says. He forecast 2% sales growth for the fiscal year ending March 31, 2007, and no annual sales growth in succeeding years.

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