Forest Laboratories, Inc. (NYSE:FRX) is now moving to an M&A story like other specialty pharma companies, and much of this move is anticipation of further accretive deals starting to get discounted in FRX shares.
Financial Times reported that London-based AstraZeneca plc (ADR)(NYSE:AZN) is eyeing Forest Labs, which makes antidepressants and Alzheimer's drugs. However, takeover talks may have stalled following the recent surge in Forest Labs shares.
Skeptics wondered why Forest announced a major restructuring on Monday if it planned to sell itself.
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Forest Laboratories plans to save $500 million over the next two years as part of its plans to cut about 500 jobs. The company expects to achieve 65-75 percent of the cost savings from Project Rejuvenate by the end of fiscal 2015 and the remainder by the end of fiscal 2016.
The drugmaker has authorized the repurchase of up to $1 billion of shares, of which $400 million would be completed by the end of 2013. It also agreed to pay $240 million to Merck & Co. (NYSE:MRK) for the U.S. marketing rights to Saphris, which is used to treat schizophrenia and bipolar mania.
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New York-based Forest Labs will fund the buyback and acquisition with the help of the sale of $1 billion in debt due in 2021. The company said it would focus more on merger, acquisition and licensing deals that would add to its profits.
All these actions suggest that Forest Labs is not trying to sell itself but expanding its horizons. The added $1 billion in debt for share repo and M&A is a smart strategy and long overdue.
The Saphris deal may be a thorn in the road for Forest. Despite, the drug is expected to add about 35 cents to EPS next year, it has been disappointing for Merck, and would be tough for Forest to fix it. The sublingual tablet had sales! of $150 million in the last twelve months ending September 2013. The gross margin should be about 65 percent.
On future M&A, Forest Labs expects to focus on filling the company's white space to better leverage its existing sales organizations in five key therapeutic areas – gastrointestinal, cardiovascular, central nervous system, respiratory, or infectious disease.
While the Saphris deal was not directly related to Project Rejuvenate, management noted that this was an example of how it plans to become more nimble with opportunities to do deals that are both near-term accretive and bolt-on acquisitions to better leverage the sales forces. The marketing of Viibryd, Fetzima, and Saphris highlight the CNS space.
On the other hand, AstraZeneca, a British-Swedish multinational pharma and biologics company, has kept investors in the suspense over its M&A strategy since suspending the buyback last year.
The patent expiration of AstraZeneca's key drugs has led to a 4 percent revenue drop on a constant currency basis in the third quarter. These brands were contributing up to $350 million in annual constant exchange rate sales. The company's profit from its core operations has also plunged by 29 percent to $2.21 billion million. The company continues to expect core EPS to decline at a rate that is significantly higher than the decline in revenue in 2013 and forecasts full year revenue to drop in mid-to-high single-digits.
Although AstraZeneca's diabetic and oncology portfolios are showing nice developments, a company like Forest Labs would provide the much needed impetus with its impressive portfolios in cardiovascular, central nervous system and respiratory treatments.
Moreover, Forest Labs has a long history of successful product approvals and commercial success, and the growth potential from a series of newly launched products. Its products are broadly prescribed by primary care physicians.
Forest recently launched a number of promising new products that hav! e the pot! ential for substantial revenue and cash flow, which is critical given the upcoming loss of Namenda exclusivity in January 2015.
Forest will steadily convert this franchise to Namenda XR, which faces long-term patent protection, but conversion back to generics of the original version will pressure the franchise. Moody's has a 'Ba1' rating on the company. Moody's expectation is that the Forest Labs' debt/EBITDA will be sustained below 3.0 times even as EBITDA is reduced by the January 2015 Namenda patent expiration.
But, as we said before, FRX shares have climbed 30 percent in the last three months and are trading $56ish, more than the mean target of $54.27.
At the current levels,Forest Labs may ask more than $15 billion from AstraZeneca if there is a takeover interest (and if it agrees to it). A valuation of $15 billion plus for Forest Labs may not be currently feasible for AstraZeneca as the U.K. company would have to pay at least $3 billion more now than in October when FRX shares were trading at $43 levels.
At Sept. 30, 2013, AZN's outstanding gross debt (interest-bearing loans and borrowings) was $10.275 billion, and cash and cash equivalents totaled $7.45 billion.
Other than Forest Labs, AstraZeneca may target the diabetes portfolio of Bristol-Myers Squibb Company (NYSE:BMY) which has announced to stop its early research and development activity in diabetes, hepatitis C and neuroscience. Citi analysts have predicted that the consideration demanded can range in between $4 billion - $6 billion and is likely to add an increment of 1-5 percent to the company's earnings in the future.
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