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Forest Labs' antidepressant drug Celexa has left other pharmaceutical companies in a funk. Sales of the drug have increased so fast that Forest's net income nearly doubled in the quarter ended Dec. 31, to $174 million -- making Forest (FRX
) the fastest-growing company in the business and No. 1 on the 2003 BW 50 list of top performers.
Forest's clinical trial data suggest Celexa may be a faster-acting drug with fewer side effects than its major rivals -- Prozac from Eli Lilly (LLY
), Effexor from Wyeth (WYE
), Zoloft from Pfizer (PFE
), and Paxil from GlaxoSmithKline (GSK
). Forest has ridden on the rapid success of Celexa, posting industry-leading earnings growth for three years straight.
The best may be yet to come. This year Forest took the unusual step of abandoning Celexa while it had two years of patent protection. Its 2,300 sales reps will no longer promote the drug to doctors or patients. Instead, the company is placing a bigger bet on Celexa's chemical cousin Lexapro, approved by the Food & Drug Administration last summer.
STILL CLIMBING. In its first six months, Lexapro has grabbed 10% of an $8 billion-plus antidepressant market that has been growing 15% annually. The sudden popularity for Lexapro stems from Forest's studies, which suggest it may be slightly superior to Celexa, even though the two compounds have nearly identical chemical composition. "While the seven largest U.S. drug companies are expected to grow on average 13% a year, we expect Forest's profits to increase 30% annually for at least the next few years," says Andrew Forman, analyst for the investment bank Friedman, Billings, & Ramsey, in Arlington, Va.
Forman believes the stock can climb as high as $60 over the next year, from around $52 as of Mar. 18. (The shares, which split 2-for-1 in January, are up 21% from a year ago.) Lexapro's strong showing gives Forest as close to guaranteed profit growth as any company could hope for. Analysts expect Celexa and Lexapro together to generate more than $2 billion in sales by 2005, up from $1.1 billion in fiscal 2002.
Yet the stock isn't without risks. While the major U.S. pharma companies have an average price-earnings ratio of 17, Forest has a p-e of 33. Moreover, Forest's success has been built on a strategy that larger drugmakers with more resources are beginning to emulate. For investors seeking a stock with reliably strong profit growth in the short term, Forest might still be a wise bet. But for those with a longer-term outlook, it's a riskier wager at its current price.
SHOPPING AROUND. Analysts seem to bear out that view. While it's hard to find one with anything but glowing remarks on Forest, nine of 22 analysts rate the stock a hold due to its valuation. Six rate it a strong buy, and seven rate it a buy.
Beyond valuation, one risk with Forest involves its unique drug development model. Forest doesn't discover many medicines. Instead, it spots drugs outside the U.S. that may have significant potential. Then it acquires the U.S. rights. Both Celexa and Lexapro -- along with the bulk of Forest's not-yet-approved product pipeline -- were discovered and licensed from European and Japanese drugmakers. Forest also has drugs for Alzheimer's and cardiovascular disease in the works that were developed by foreign drugmakers.
Larger rivals are jumping on the bandwagon. Major outfits, such as Pfizer, Biogen (BGEN
), and Lilly, have recently acquired the U.S. rights to products already launched overseas or that are likely to be launched in the coming year or two. Some analysts believe with bigger U.S. drugmakers looking for hidden gems elsewhere, it will be harder for Forest to bid on major products from Europe and Asia.
RACE FOR A "RACEMATE." Forest deserves further scrutiny because Lexapro is a "me-too" drug, doctors and analysts say. "Me-too" drugs are slight modifications on existing drugs that allow its maker to seek a new commercial patent to replace sales lost when a patent expires.
Eli Lilly (LLY
), for instance, faced patent expiration on blockbuster antidepressant Prozac in the late 1990s. The Prozac molecule is a "racemate," which means it has two sides that may not have the same level of medicinal potency. To prevent the loss of the Prozac revenues, Lilly and its partner Sepracor (SEPR
) initiated development of a chemically purer version of the Prozac molecule -- or one side of the racemate. When it became clear, however, that Lilly wouldn't get that drug on the market well in advance of the patent expiration, Lilly canceled the partnership in late 2000. The so-called second-generation Prozac was nixed entirely, and Lilly lost its $2 billion-plus antidepression franchise to generic competition.
Forest has had better luck and timing. Celexa is also a racemate. One side of its molecule, in purified form, may be more effective than the entire molecule at inhibiting the movement of serotonin in the brain -- the target of modern antidepressants, Forest says. The one-half of Celexa that seems to work best on serotonin has been made into a new drug, Lexapro.
"The end result is that 10 mg of [Lexapro] has been shown to be as effective as 40 mg of the racemate Celexa and to have less of certain side effects," Forest Labs Chairman Howard Soloman wrote in the company's annual report. Forest is hiring several hundred sales reps to pitch the Lexapro story to physicians, a spokesman says.
DIFFERENT ENOUGH? Many doctors are skeptical. They say major antidepressant drugs are all effective, and that while Celexa may work well on one patient, Paxil or Zoloft may work better on another. Says Dr. Devendra Kurani, chairman of the department of psychiatry at St. Barnabus Medical Center in Livingston, N.J.: "I don't see Lexapro as a significant advancement. I see it as another choice among many safe and effective drugs."
For investors, this medical debate isn't necessarily crucial. What matters is that Forest continues to hit earnings targets and to outperform the industry on profit growth. Forest is expected to have impressive earnings of $2.15 a share, or roughly $780 million, in fiscal 2004, which ends Mar. 31. Although at its current valuation, investors should be wary, Forest is a proven winner in the pharmaceutical industry -- and Lexapro stands to keep that track record going.
MARCH 24, 2003 |
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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