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Forest Labs: Buy or Sell?

Forest Laboratories shareholders might be unsure of their investment, given two analysts recently made opposing calls on the stock. After all, when supposed Wall Street experts can’t agree, whom do you believe?

If Forest Labs’ earnings beat this week, and the increased full-year fiscal 2009 guidance that followed, are any indication, then this stock is a buy, buy, buy. But Goldman Sachs on the very same day downgraded FRX to a sell. The company’s allegedly weak pipeline, high research and development and marketing costs and patent expirations, as well as a lack of dividend protection, concerned Goldman enough to give the stock a thumbs-down.

But Cramer disagreed. So did Sanford Bernstein, who, a day after Forest Labs’ stellar quarterly report, reiterated its outperform rating on the company. That’s Wall Street jargon for buy, and Cramer on Thursday offered plenty of reasons why Sanford was right and Goldman was wrong.

First off, most the Goldman’s reasons for not liking Forest Labs are already priced into the stock. And no, the company doesn’t pay a dividend, but as Cramer pointed out, there’s $9.50 in cash per share – 38% of the market cap – and no debt to worry about. So Forest Labs can easily enter into any number of in-licensing partnerships or other deals to boost its pipeline.

As for those patent expirations, Forest Labs has done a good job so far of sidestepping similar problems. Lexapro, the company’s blockbuster anti-depressant drug that goes generic in 2012, is basically just a reiteration of Celexa, another FRX anti-depressant that went generic. Forest Labs was able to transition its Celexa customers to its new patent-protected Lexapro, thereby avoiding any lost sales.

And actually, a closer look at Forest Labs’ drugs in development shows a stronger pipeline than Goldman described in its report. The company holds five novel products in Phase III testing and two in advanced Phase II. These potential future earnings, combined with Forest Labs’ cash on hand, has Cramer thinking FRX will make quite the attractive takeover target if the stock dips just five more points to its 52-week low.

Another thing worth mentioning, even Goldman’s one original case regarding Forest Labs doesn’t make sense. Goldman worried that Forest Labs’ recently approved fibromyalgia drug, Savella, would disappoint because not enough doctors believe that fibromyalgia is a real disease. Cramer was willing to concede that Pfizer and Eli Lilly will dominate this market anyway, but Goldman’s estimates for Savella were still higher than those from Sanford Bernstein – and Sanford’s call on FRX was bullish.

Forest Labs is a cheap stock, trading at just seven times earnings, with all those pipeline-related catalysts yet to come. If Goldman’s analyst had a better understanding of the business, that FRX prefers partnerships rather than large-scale solo drug development, then he’d understand why Cramer, like Sanford Bernstein, thinks this stock is a buy.





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