Analysts Mixed On Forest Labs (FRX) After Daxas Fail

Forest Laboratories (NYSE: FRX) has seen a drop in share value after an FDA panel rejected their chronic obstructive pulmonary disease drug, Daxas, with a 10-to-5 vote. Analysts have given mixed thoughts on whether there's still a little magic left in the stock. Shares are currently trading at $28.27, down about 13% from the close yesterday.

The 10-5 vote came when asked whether or not there was "substantial evidence" to support the approval of the COPD product. The advisory committee originally voted in favor, 9 - 6, in two separate votes judging efficacy and safety of the product. They cited concerns of three completed suicides, two attempts, some gastrointestinal side effects such as diarrhea and nausea, and psychiatric side effects. Most on the panel said that they would be okay with the drug if it carried a revised label.

To start, Soleil Securities removed FRX from their DCF model following the U.S. FDA decision. They now have a price target of $36, down from $38, which currently carries an upside premium of 28%. They are still keeping their Buy rating on Forest. Soleil believes that the approvability of Daxas wil be pushed out substantially. They maintain their Buy because of a superior balance sheet with the company, and significant upcoming cash flow generation up until their patents begin to expire. Soleil says that Forests' management is planning to double their pipeline within the next several years.

Piper Jaffray & Co. however, is downgrading the stock, from Neutral to Underweight. The firm views the rejection as a big blow to FRX's pipeline, and their leading seller, Lexapro, is set to expire in 2012. They say that, given Forests large exposure to the generic realm, there is little margin for error on their part, and they see shares underperforming compared to their peers in the foreseeable future. They note that the company has a strong cash position, at about $12 per share, but management hasn't done enough in their view to fight Lexapro's exposure to generics. Piper Jaffray now has a price target of $26 on the company, down from $27 prior.

Deutsche Bank is maintaining their Hold rating on the stock, and keeping their 12-month price target of $31. Deutsche sees Forest as having a nice, long pipeline of product ready to burst out at any moment. Get out your sick bags, this could be a wild ride. They also see the loss of Lexapro and Namenda as a setback for current EPS. The two account for about 90% of total product revs with combined sales of $3.25 billion last year. They are set to have their patents expire between 2012 and 2015, and Deutsche doesn't see an EPS rebound until 2017. With Daxas, Deutsche believes that there is a good chance that the FDA will request another trial, given the modest risk/benefit of Daxas. They see a Q410 launch, and sales estimates of $700 million in total sales for the drug over its lifetime. Deutsche thinks risks to their estimates include events related to drug trends for key promoted products and potential clinical and regulatory setbacks to key pipeline programs.

Finally, Goldman Sachs & Co. maintain their Buy rating on the stock, and have a price target of $35 for Forest. They see the advisory committee's decision as a buying opportunity for the shares. They expect a decision on Daxas by mid-May of this year, and estimate that peak sales of $100 million is a bit conservative. Goldman believes that Forest's ability to develop and market drugs is still under appreciated.

Forest currently has a pipeline of about 17 drugs, ranging from treatments for schizophrenia and bipolar mania, to diabetes, and Alzheimer's disease. Though not for all investors, Forest may prove to be a bargain upon the approval of Daxas, decent balance sheet, and promising drug prospects.

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