Friday, July 14, 2006

Colour on FRX's Lexapro court win

Several firms commenting on Forest Labs (NYSE:FRX) after Judge Joseph Farnan of the Delaware U.S. District Court ruled in favor of Forest and Lundbeck in the Lexapro patent challenge initiated by Teva/Ivax, thereby confirming validity of Lexapro's key FDA Orange Book listed patent RE 34,712, which expires in March 2012.

* Deutsche Bank notes had the ruling gone in favor of the generic challenger, it would have been devastating to Forest's outlook, as Lexapro currently represents nearly 70% of the company's CY06 revs.

With this significant overhang removed, investors can now focus on the company's fundamentals, which have steadily improved over the past 6-9 months - both in terms of Rx trends and pipeline breadth. Forest has also quietly improved its mid to late-stage development pipeline in the past six months with three notable product in-licensings, including the hypertension drug nebivolol (approvable letter) from Mylan (January), oral antibiotic Orapem from Replidyne (February), and an inhaled, long-acting muscarinic antagonist (LAS34273) for the treatment of COPD from Almirall (April).

Firm maintains their Buy rating and $51 tgt.

* CIBC on the other hand notes that appeal is inevitable and FRX now faces a new Lexapro challenger in Caraco (AMEX:CPD). Decision will likely draw in "sideline" money as was the case with positive outcomes for Lipitor and Plavix,they expect rally will be short-lived as focus shifts to back to fundamentals.

Lexapro decision eliminates big downside to FRX shares though that's quite different than suggesting budding bull case. Elimination of overhang opens up possibility of return to mid-teens forward P/E suggesting low $40's valuation. Maintains neutral stance.

* Merrill Lynch notes that while they believe that investors have been generally confident in Forest's position, they expect the stock to react favorably given the potential downside that could have occurred with a negative ruling. Reiterates Buy. Firm's $55 price objective for Forest assumes that the stock can trade at roughly 17x our C2007E EPS of $3.17 (ex-options).

* Prudential notes a "win" was largely expected to occur, but if FRX would have lost the impact to share price would have been devastating - this possibility has kept at least some investors on the sidelines. Feels that with a "win," FRX shares would rise between 10-15%.

* Goldman Sachs believes this is clearly a positive and the stock will trade meaningfully higher. Firm's estimates and consensus estimates had already included a patent victory, but the valuation had a discount associated with the patent challenge. Their 12-month price target is $44/share. They expect the shares to test these levels. Firm would consider taking profits in the mid-$40s, if the shares pass the price target.

Notablecalls: My gut tells me FRX will not trade much above $44-$45 level.