Spring For This Forest

tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Forest Laboratories (NYSE: FRX) released its third quarter earnings on Jan. 15, 2013, and there was nothing pleasing about it. Revenue has fallen over the year, net income has turned into loss, and the company has reduced its future earnings projection. On the face nothing seems to be going right for Forest Laboratories, but let’s take a deeper look in it and what it holds for its investors.

Dwindling numbers of current quarter

Forest Laboratories' revenue dropped from $1.21 billion to $722.70 million compared to the same quarter last year. The revenue mainly fell because the company lost its patent protection on its anti-depressant Lexapro in last March. A net loss of $153.6 million was reported in the quarter, compared to a net gain of $278.44 million in the same quarter a year ago.

The current situation

Recently the company has lost a major revenue generating patent, but it has made progress by launching new products and forming an alliance with other companies in the industry. The company’s Next Nine R&D and commercialization strategy is delivering results. The company has submitted New Drug Application to the FDA for cariprazine for the treatment of schizophrenia and bipolar mania.

The company has also moved forward with the launch of Tudorza and LINZESS and the overall performance has been better than expected. Forest Laboratories has also entered in an alliance with Moksha8, helping it to commercialize Viibryd and its other products in Latin America, which should provide support to the revenue.

Another bright side for the company is its impeccable balance-sheet with no debt and ample cash to fund its projects and researches. The prospects seem promising, but there are always uncertainties surrounding the drug-manufacturing industry, like research not delivering the desired results, or a patent not being renewed, or a competitor coming up with a cheaper generic medicine which might affect the companys performance.

Other players

The industry uncertainties also surround Pfizer (NYSE: PFE), as its oncology drug Torisel, which is in its third phase of research, has not significantly proved to be better than competitor Bayer/Onyx's product, Nexavar. Future revenue streams might also be affected with emerging economies like India selling generic versions of Pfizer’s products like Lipitor and Viagra at lower margins.

The company has a very strong balance-sheet like Forest Laboratories and has a huge cash surplus of over $24.3 billion. Even though the revenue might be affected by the uncertainties of some of the company’s projects, with strong revenue generation from its core business it seems to be well positioned. The company currently also pays out a stable dividend of 3.6%. Pfizer is thus a secure investment with sound returns over a longer time horizon.

GlaxoSmithKline (NYSE: GSK) is another major player in the industry which can be a good stock for investors whose prime objective is safety. The company is also facing lawsuits against its drug "Avandia," which is reported to be a cause for cardiovascular failures. These lawsuits should not cause much trouble to the company in the long-run as its strategies and core revenue generating businesses are performing well. Like Pfizer, GlaxoSmithKline also pays a stable dividend, but at a higher current yield of 5.3%. Carrying a low beta of 0.53, the company is better positioned to combat economic fluctuations.

Final words

Forest Laboratories has a strong balance-sheet and a number of important projects in the pipeline that can help it regain its lost share of revenue over a period of time. The current stock price of Forest Laboratories seems to have absorbed the impact of loss from Lexapro patent. Investor’s with a long-term horizon can diversify their portfolio with Forest Laboratories, as things should improve from here on for the company. 


tarunbachhawat has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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