Forest Labs’ Prescription for Success (FRX)

Forest Labs (NYSE: FR) has some good news and some bad news for its investors.

The bad news is that the patent for its best selling drug Lexapro, which is one of the most popular antidepressants, is expiring in March 2012. Another patent for the Alzheimer treatment drug, Namenda, is set to expire in April 2015. This means a loss of 80% of its total revenues as Forest Labs will be facing more competition from generic competitors who offer cheaper substitutes.

However, the good news is that all this news has already been reflected in Forest Labs’ stock, which is trading at $29.43 as of now. Analysts at Barron's say that this is underrated because it does not incorporate the news that Forest Labs is planning to launch seventeen new drugs, including several that are in the clinical trial stage. Many are expected to be successful and hit the market. It also does not incorporate the fact that Forest Labs has ready cash and marketable securities of $3.6 billion to invest in getting licenses for additional drugs.

Analysts have confidence in the company’s marketing abilities and its 2800 people sales force to actively market these new drugs and earn additional revenues. Analysts say that Forest Labs is underrated because in spite of all these developments in the company it is still trading at an EPS multiple of 8.7x which is at a 25% discount to the pharmaceutical sector. Cowen’s analyst Ian Sanderson is expecting the stock price to rise by 25% within 12 months.