UPDATE 2-Forest Labs to buy schizophrenia drug, cut costs

Mon Dec 2, 2013 2:47pm EST

By Ransdell Pierson

Dec 2 (Reuters) - Forest Laboratories Inc, which is facing patent expirations on several of its biggest drugs, on Monday said it plans to buy rights to a new schizophrenia treatment from Merck & Co and cut annual operating costs by $500 million in fiscal 2016.

The specialty drugmaker said it will acquire rights to the oral drug, Saphris (asenapine), for an upfront payment of $240 million to Merck and additional payments on defined sales milestones. The product, which was approved in 2009, is also used to treat acute bipolar mania.

Saphris, with annual revenue of about $150 million, has been a commercial disappointment for Merck. Earlier this year, Merck took $330 million in write-offs on the drug due to reduced sales expectations for it. Merck acquired the product through its merger in 2009 with Schering-Plough Corp.

Forest Chief Executive Brent Saunders said his company plans to ramp up sales of Saphris, using 250 sales representatives dedicated to psychiatric products.

"We have almost double the number of reps that will focus on this, compared to Merck," Saunders said in an interview on Monday. But he declined to predict how greatly they could boost Saphris sales.

Forest, whose shares rose almost 7 percent, said it would issue $1 billion in new long-term debt through an offering of eight-year senior unsecured fixed-rate notes. Proceeds from the offering will also be used to fund share repurchases and for general corporate purposes, the company said.

Forest said its board authorized up to $1 billion in repurchases of its common stock, and the company would begin an initial $400 million accelerated buyback program before the end of the calendar year.

The moves come two months after Forest named Saunders, the former head of eye-care products company Bausch & Lomb Inc, as its chief executive. He replaced Howard Solomon, who had been at the helm for more than 30 years.

Forest, which makes antidepressant Lexapro and Alzheimer's treatment Namenda, said it plans to reduce operating expenses by $500 million by the end of fiscal year 2016, compared with expenses it expects to incur in 2014.

BOOSTING BOTTOM LINE

"Forest's operating expenses as a percentage of sales will still likely be above industry averages by fiscal year 2016, something we anticipate will be addressed over time through either further cost restructuring opportunities or product acquisitions," JP Morgan analyst Chris Schott said in a research note.

Even so, Schott said the $500 million in cost savings could boost Forest's earnings per share by more than $1 in fiscal year 2016 and beyond. Analysts, on average, have been expecting Forest to earn $1.09 per share in current fiscal year 2014 and $1.68 per share in fiscal year 2015, excluding special items.

The company said about $270 million of the savings will come from streamlining and realigning research and development, while $150 million in savings will result from reduced marketing expenses. Another $80 million in cost savings will come from a reduction in general, administrative and other expenses.

Forest's sales and earnings have been hurt since Lexapro, which once had annual sales of $2.3 billion, lost U.S patent protection in March 2012 and was clobbered by cheaper generics. And Namenda, meant to improve cognitive function in people with Alzheimer's disease, loses patent protection in 2015. It has annual sales of more than $1.5 billion.

The company is hoping that newer products, including a longer-acting form of Namenda called Namenda XR that has been on the market since 2010, will help cushion the blow once Namenda faces generic competition.

The patent cliff, and whether Forest can rebuild a strong pipeline of experimental drugs, has caused nervousness on Wall Street. But company shares have jumped 55 percent this year, far outpacing a 25 percent gain for the ARCA Pharmaceutical Index , largely on hopes Saunders will buy lucrative new products and maximize sales of existing drugs.

Forest had wrangled with billionaire investor Carl Icahn for years and ultimately struck a deal with him last summer that averted a proxy fight.

Saunders had been Bausch & Lomb's CEO from 2010 until August. Previously, he held senior positions at Schering-Plough, where he was considered a protege of that company's former chief executive, Fred Hassan.

Canada's Valeant Pharmaceuticals International Inc agreed to buy Bausch & Lomb for about $8.7 billion earlier this year.

Forest shares were up $3.42 at $54.73 on the New York Stock Exchange.

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