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A couple of months after taking up the position of Chief Executive Officer (CEO) and President at Forest Laboratories, Inc.’s , Brenton L. Saunders revealed his plans for the company. He said that the company is undertaking several initiatives to streamline operations and cut down costs.

$500 Million Cost Savings By End of Fiscal 2016

Saunders announced Project Rejuvenate, which will make Forest Labs a nimbler and more streamlined organization. Project Rejuvenate is targeted towards cutting operating costs by $500 million by the end of fiscal 2016 compared to the fiscal 2014 cost base.

About 65%-75% of these cost savings will be achieved by the end of fiscal 2015 with the balance being achieved a year later. Of the $500 million savings, $270 million will be realized from the streamlining and realignment of the research and development (R&D) organization.

While another $150 million of the savings will be realized through the marketing expenses line, the balance ($80 million) will come from lower general, administrative and other expenses. Job cuts will account for about 22% of the entire $500 million savings. The sales force and people responsible for the submission of important late-stage pipeline candidates will be spared from the impact of this restructuring program.

Share Buybacks to Boost Bottom-Line

In addition to announcing Project Rejuvenate, Forest Labs announced its plans of leveraging the balance sheet through the issuance of new debt. The company will issue $1 billion in new long-term debt (senior unsecured fixed rate notes due 2021) and the net proceeds will be used for share repurchases, bolt-on acquisitions and general corporate purposes.

The Board has authorized a new share buyback program worth up to $1 billion with the earlier program being terminated. By year end, Forest Labs will enter into a $400 million accelerated share buyback program. The company currently has more than $3 billion in cash and investments.

Announces Accretive Deal

Forest Labs also announced an agreement with Merck (MRK - Analyst Report) for the acquisition of exclusive rights to Saphris in the U.S. Saphris, approved for the treatment of schizophrenia and acute bipolar mania in adults, generated sales of $150 million for Merck during the 12 months ended Sep 2013.

The deal terms include an upfront payment of $240 million to Merck plus sales milestones. While Merck will supply the product, Forest Labs will be responsible for commercialization including the completion of post marketing studies, and will be the marketing authorization holder. The deal, which will be immediately accretive for Forest Labs, is slated to close in early 2014.

Our Take

The strategic initiative announced by the new CEO represents a step in the right direction. We are positive on the cost-cutting initiative as well as the accretive Saphris deal. Saphris should be a good fit in Forest Labs’ central nervous system franchise. Meanwhile, share buybacks should boost the bottom-line. We expect a significant increase in earnings estimates. Investors reacted positively to the company’s strategic initiative with shares moving up 9.76%.

Forest Labs is a Zacks Rank #2 (Buy) stock. Some better-ranked stocks include Jazz Pharmaceuticals (JAZZ - Analyst Report) and Shire (SHPG - Analyst Report). Both carry a Zacks Rank #1 (Strong Buy).

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