Good News for Forest Labs

Positive Top-Line Data on Ceftaroline

Forest Laboratories, Inc. (FRX - Analyst Report) announced positive results recently from two global multi-center phase III studies which were conducted to evaluate the efficacy, safety and tolerability of ceftaroline for the treatment of community-acquired bacterial pneumonia (CABP).

The top-line data in each of the studies (FOCUS I and II) showed that ceftaroline met the primary endpoint of non-inferiority and achieved high clinical cure rates compared with ceftriaxone (84.3% vs. 77.7%). Additionally, ceftaroline was well tolerated with an adverse event profile similar to ceftriaxone. Earlier, Forest had reported positive phase III results on ceftaroline for the treatment of complicated skin and skin structure infections (cSSSI).

Ceftaroline is a novel, bactericidal, injectable, broad-spectrum cephalosporin which is being developed for the treatment of cSSSI and CABP. The anti-infective market, which is currently dominated by antibiotics, represents a significant commercial opportunity for the company.

Commonly prescribed anti-infective treatments include products like Cubicin from Cubist (CBST - Snapshot Report), Vancocin from ViroPharma (VPHM - Analyst Report) and Zyvox from Pfizer (PFE - Analyst Report) among others. Improved clinical cure rates and a good side effect profile should help ceftaroline gain share once approved and launched. We estimate peak sales could be in the range of $250 - $300 million.

The recently released positive data on ceftaroline is good news for Forest. With key products Lexapro and Namenda losing marketing exclusivity in 2012 and 2015, respectively, Forest’s pipeline needs to deliver. We believe the company will go ahead with its plans to file a New Drug Application (NDA) for ceftaroline for both CABP and cSSSI later this year. We are modeling the product launch in fiscal 2011.

Going forward, we expect investor focus to remain on the company’s pipeline and sales ramp of recently launched Savella. Although Forest has some interesting late-stage development candidates in its pipeline, these might not be sufficient to make up for the loss of revenues once Lexapro goes generic in 2012.

We believe the company will seek to augment revenues through in-licensing deals as well as outright acquisitions. We maintain a Hold rating on the stock with a $27 target price.