BERKO: Forest Labs not worth the market shootout
Friday, August 03, 2012 7:00 AM
Dear Mr. Berko:
Please give me your thinking on Forest Laboratories Inc. In July 2009, I thought it looked cheap and invested $4,000 in 160 shares at $24 for my IRA. The value of my IRA is $83,000, and as you know, Forrest reached $40 about this time last year, and now it’s fallen to $34. I also bought 240 shares for my joint account at the same time from another brokerage firm. That account is worth about $128,000. Here’s my dilemma. My IRA broker recently advised me to sell because his firm has an “underperform” on Forest Labs, and my other broker says his firm has a buy on the stock. In the past 16 months, my accounts are down 4.4 percent and 7.2 percent, respectively. Your advice would be greatly appreciated,
G.D., Springfield, Ill.
I can’t help wondering: If your middle name were Oliver, Owen, Orville or Otis, would you still write me for an answer? It’s really disappointing that two of the nation’s largest brokerages have opposite opinions on Forest Laboratories (FRX-$33). This must give millions of investors who depend upon Wall Street’s wisdom the warm fuzzes. Perhaps the CEO of one brokerage is a Republican and the CEO of the other is a Democrat or vice versa.
Founded in 1956 by Howard “Solly” Solomon and his English step-second cousin, Sherwood, FRX produced $4.3 billion worth of pills, powders and liquids in 2011 for pain, depression, respiratory and cardiovascular disorders and in the process earned $3.70 a share. This year, with the loss of Lexapro, an impressive (more than $1 billion in annual revenues) antidepressant that came off patent last March, and the eventual loss of Namenda (more than $1 billion in annual revenues), an effective Alzheimer’s drug soon to go off patent, FRX will be lucky to post $2 billion in revenues and fortunate to earn $1.05 a share. Though FRX has a raft of new drugs online, the naysayers say these drugs are early in their life cycles and won’t make up for the loss of Lexapro and Namenda. So while these new drugs look promising, FRX must greatly increase the size of its sales force to promote its new products. As a result, FRX’s cash flow will fall like a stone, and net profit margins on the remaining $2 billion in revenues will crash from 30.4 percent to 15.5 percent this year. That’s got to smart!
But the “yea-sayers” say that two soon-to-be-approved drugs, Linaclotide for irritable bowel syndrome and Aclidinium, a pulmonary disease inhaler, are potential blockbusters. Last year, anticipating the loss of Lexapro, FRX purchased Clinical Data, adding Viibryd, a highly regarded antidepressant (and a unique sexual stimulant) to its portfolio. So by 2016-17, management believes these drugs could add $2.6 billion to FRX’s revenues, offsetting the losses from Namenda and Lexapro. FRX’s highly regarded Savella (fibromyalgia), Bystolic, a superb beta blocker, its strong generic drug line using controlled-release technology, a huge cash position of $2.5 billion, zero long-term debt and a motivated sales force complete the other side of this coin.
FRX’s share price, like many of today’s stocks, has little to do with revenues and earnings potential. Certainly a company expecting to earn $1.05 a share in 2013 and $1.20 in 2014 can’t be worth 31 times its earnings. Carl “Icky” Ichan owns 10 percent of FRX, which is just a plaything on his ivory Monopoly board. And like other game players, he doesn’t give a fig about FRX. Rather, they care if it can it be traded up for Park Place, Reading or Boardwalk. Increasingly, it has been Wall Street’s modus operandi for almost 20 years, and investors realize that the OK Corral has become a metaphor for the New York Stock Exchange. And sadly, the Securities and Exchange Commission, a toothless paper tiger, is becoming as corrupt as the gamers. I suggest you take your profits, find a suitable income growth issue and let the gunslingers like J.P. Morgan shoot themselves in the foot.