Forest Laboratories, Inc. Business Information, Profile, and History

Company Perspectives:

Forest's business strategy involves three elements: Licensing promising new compounds from innovative companies worldwide; Conducting rigorous scientific investigation and development of unique, highly effective drug therapies; and Executing marketing and sales initiatives to establish products in the marketplace.

History of Forest Laboratories, Inc.

Forest Laboratories, Inc. develops, manufactures, and sells both brand-name and generic prescription and nonprescription drugs in the United States and Europe. The main therapeutic areas that the company concentrates on include depression, Alzheimer's disease/neuropathic pain, hypertension, asthma, and gastrointestinal disease. Since its introduction in 1998, the antidepressant drug Celexa has been Forest's blockbuster, accounting for nearly 70 percent of company revenues by fiscal 2002. Sales of Celexa helped make Forest one of the fastest growing companies in the United States in the late 1990s and early 2000s. Late in 2002 the company stopped promoting Celexa in favor of a second-generation version of the drug called Lexapro. Other key products include Tiazac, used to treat hypertension and angina; Benicar, also a treatment for hypertension; Aerobid, an inhaler for treating asthma; and Infasurf, used to treat respiratory distress in infants. Most of the pharmaceutical products marketed by Forest Laboratories were developed by other companies and then licensed by Forest.

Early Years: Transitioning from Lab Service to Generic Drug Marketer

Forest Laboratories was founded in 1956 as a small laboratory service company. It helped larger pharmaceutical companies, which had hefty research and development funds, to create new drugs. After Forest developed a drug, it would hand the new product off to its client, who would then market, sell, and distribute the offering. Forest achieved a degree of success in its niche and found a steady demand for its services during the late 1950s and early 1960s. In addition, the company swerved slightly from its pharmaceuticals focus by diversifying into other markets: it invested particularly heavily in food businesses--principally candy and ice cream--and also sold branded vitamins. Its foray into other ventures was an attempt to bolster the company's bottom line and to protect it from risks associated with the drug industry.

Forest, which went public in 1967, continued to enjoy the greatest amount of success in its core drug development business. One of its most successful achievements was its creation of a controlled-release technology, called Synchron, that allowed an ingested drug to be slowly released inside the body. It was this penchant for exploiting profitable niches that would later become the base of the company's meteoric rise.

By the mid-1970s accusations had been raised against the company's chairman, Hans Lowey, that he had inflated profits. Howard Solomon, who at the time was serving as outside counsel for Forest, was asked to investigate the charges. He found evidence to support the allegations, Lowey resigned, and Solomon took over as CEO of the company in 1977. Solomon sold off Forest's lagging food businesses and dropped out of the vitamin business to focus on the pharmaceutical market. He then led the company through an important transition from a service firm to a company that actually manufactured and sold its own pharmaceuticals.

Recognizing that the big profits in the drug industry were garnered from the marketing and sale of new drugs, Solomon began looking for a way to break into that side of the business. The company lacked the vast resources, however, that were necessary to fund the development, testing, marketing, and distribution of an entirely new drug. Indeed, it was entirely feasible that, even if Forest could gather enough capital to fund a new drug, the venture could go bust for any number of reasons and force the company into bankruptcy. For example, a newly developed drug could fail to pass federal approval, rendering it commercially useless, or the drug could simply fail to achieve commercial appeal.

Rather than trying to develop and market new drugs, Solomon decided to steer the company toward the drug marketing business through a sort of back door--generics. Generic drugs (drugs that perform the same essential function as the brand-name drugs they mimic, but cost less) were becoming increasingly popular during the late 1970s as an alternative to expensive brand-name pharmaceuticals. Because generics lacked patent protection, however, profits were typically elusive--the first company to introduce the drug could make big profits for a short time, until lower-priced generics from competing companies entered the market.

Solomon was able to successfully exploit the limited opportunities offered in the generics business by focusing on Forest's controlled-release Synchron technology. Forest had already succeeded in applying the technology to drugs for several major pharmaceutical companies. Solomon correctly suspected that a viable market existed for controlled-released versions of several popular drugs. As a result, the company shifted its corporate focus to generics, realizing sound revenue and profit growth during the late 1970s and early 1980s.

Despite its success with generics, Forest Labs' management in the early 1980s was still eager to participate in the potentially lucrative business of marketing brand-name, patented drugs. It had most of the tools necessary to compete in the industry--it maintained a talented research and development arm, which had long been one of its core competencies, and had accrued a degree of manufacturing, sales, and distribution knowledge through its generics business. But Forest still lacked the resources it needed to go toe-to-toe with the industry giants.

Mid-1980s: Shifting Focus from Generics to Licensed Brand-Name Drugs

Forest embarked on a new corporate strategy in the mid-1980s that it hoped would allow it to market and sell proprietary drugs without having to face pharmaceutical industry leaders. It would look for branded drugs that had already been developed and marketed by larger companies, but served very small customer niches. If it found a drug that it felt was undervalued, it would purchase or receive license to the product and increase its value through aggressive marketing. The reasoning behind the strategy was that the big companies tended to ignore their smaller drugs, focusing their resources instead on popular, high-profile, high-profit offerings.

The only weapon needed to carry out the new strategy that was still missing from Forest Labs' armory was a sales force. So, in 1984 Forest purchased the assets of O'Neal, Jones & Feldman Inc., a St. Louis, Missouri-based pharmaceuticals company, for $10 million. O'Neal, Jones & Feldman was put on the block after its president and another executive were convicted and jailed for selling a drug that had not been approved by the Food and Drug Administration (FDA). Tragically, 27 infant deaths were linked to the misbranded drug before the company pleaded guilty to 17 violations.

Forest paid $8.3 million for its new acquisition and assumed an additional $1.5 million in debt. In what turned out to be a savvy purchase, Forest immediately gained an established 71-member sales force. In a carefully plotted stratagem, the company began tagging new drugs on to its existing line of generics and branded drugs, some of which had belonged to O'Neal, Jones & Feldman. For example, the company bought a drug called Esgic, a stress headache remedy, and was able to significantly boost its sales. Forest also purchased other small pharmaceutical companies, continually increasing the size and scope of its sales force and gaining access to new proprietary drugs. In 1989, for instance, Forest acquired UAD Laboratories for $33 million in stock. This deal increased the sales force to 300 and added to the company portfolio a narcotic analgesic product, Lorcet, which within a few years had annual sales of $60 million. All the while, the company's generics business remained strong.

Forest's growth strategy during the late 1980s and early 1990s was relatively simple and straightforward, yet few other firms were successfully implementing the same tactics. Before it purchased an undervalued drug, it would make sure that the product was a good match with the company's existing product line. By emphasizing a small number of therapeutic categories, such as asthma and headache relief, Forest was able to increase the potency of its sales force and achieve a higher number of prescriptions written per sales call. Indeed, whereas many pharmaceutical firms would send salespeople to general practitioners, offering them a range of drug lines, most Forest salespeople focused on a few groups of specialists, particularly allergists, internists, and pulmonary physicians.

Forest's knack for turning an undervalued drug into an industry overachiever was evidenced by its 1986 purchase of Aerobid, an asthma drug, from industry giant Schering-Plough Corporation, for $6 million. Although Aerobid sales totaled only $2.3 million annually at the time of purchase, Forest was able to generate huge returns from the drug. By 1991, in fact, Aerobid revenues had exploded to $30 million annually. Furthermore, bolstered by independent research that recommended increased use of the drug in certain applications, sales of Aerobid eventually rocketed past the $100 million mark by the mid-1990s. Aerobid, along with Forest's other two major drugs (Tessalon, a cough medication, and Propranolol, a generic used to treat high blood pressure), would account for over 40 percent of the company's sales by 1993.

Rapid Revenue Growth in the Early 1990s

By the early 1990s it was clear that Forest Labs' new strategy was a shrewd one. Indeed, the company's annual revenues had ballooned since the mid-1980s to about $133 million by 1990, of which $30 million was profit. Sales increased to $176 million in 1991 as income leapt to approximately $40 million. Importantly, Forest's sales force had swelled to more than 500, including more than 50 salespeople employed by subsidiaries acquired in Europe. "The large sales force is really helping the company pick up drugs that fall through the cracks," observed industry analyst Martin Bukoll in a November 1991 issue of Crain's New York Business.

The strength of Forest's overall operations was exhibited by a setback that it encountered in 1991. Forest had spent $20 million for a license to market a new drug called Micturin, which had been developed through a joint venture between E.I. du Pont and Merck & Co., Inc. Forest hoped the drug would become one of its primary offerings with over $100 million in annual sales. Unfortunately, the FDA, citing negative side effects, chose not to approve the drug. Although the company's stock price plummeted 30 percent, within a few months it had regained most of its value on expectations of growth from other segments of Forest's operations. Furthermore, growth of Forest's sales, earnings, and equity value continued unabated through 1991 and 1992.

As Forest Labs continued to acquire low-profile underachievers that were being ignored by the major manufacturers, sales mushroomed throughout 1993 and 1994. "We can do things that large companies can't do," explained Solomon in an October 1993 issue of the St. Louis Post Dispatch. "Large companies are not interested unless a product can do $100 million per year in sales." Solomon watched his company's sales jump to $239 million in 1992, $285 million in 1993, and to an amazing $348 million in 1994 (fiscal year ending March 31, 1994). Likewise, net income tracked revenue growth, soaring more than 30 percent in 1992 to $50 million, to $64 million during 1993, and then to a whopping $80 million in 1994. The company's workforce had multiplied to about 1,300 worldwide.

To accommodate the company's 100 percent sales growth in less than three years, Forest hurriedly expanded its U.S. and overseas facilities. Its major St. Louis subsidiary, Forest Pharmaceuticals Inc., which accounted for roughly two-thirds of company sales in 1993, was consolidated into a newly renovated 87,000-square-foot facility replete with high-tech manufacturing and distribution systems. The company added 65,000 square feet to a manufacturing operation in Cincinnati, and boosted its New York production facility, which manufactured generics, to 150,000 square feet. Forest was also completing a major new production facility in Ireland in 1994, which would be used to supply its eastern and western European clients.

Although Forest's established brand-name drugs and generics had provided consistent growth for the company since the mid-1980s, it was forced to continue its search for new acquisitions that would supplant its fading superstars. Indeed, many of the brand-name drugs that it had licensed had only a few years of patent protection remaining before generics would diminish their profit margins. As a result, Forest was reliant on new additions to its pharmaceutical arsenal to sustain its rampant growth. Reflecting the company's intent to introduce new products was its growing emphasis on research and development (R&D)--annual R&D expenditures by Forest increased from $10 million in 1990 to nearly $30 million during 1993.

Forest reached a peak in fiscal 1996 when record revenues of $461.8 million were recorded. Leading the way was Aerobid, with sales of $147 million. The very next year, however, the company was hit by several setbacks, leading to a 37 percent decline in revenues and the first loss ($25 million) in company history. During the year, Aerobid began facing stiff competition from a new asthma drug from Glaxo Inc. called Flovent. Sales of Forest's number two drug, the painkiller Lorcet, plunged after its patent expired and generic competitors were quickly introduced into the market. Forest's own generic product business suffered from severe competition from both industry giants and hundreds of smaller players. In addition, while the company's product pipeline remained promising, delays in getting government approvals for several new drugs cost the company additional potential sales.

Explosive Growth in the Late 1990s and Early 2000s Fueled by Celexa

Forest Labs' downturn proved temporary, and the company would soon begin a new period of even more explosive growth. In fact, the foundation had already been laid for the turnaround. Late in 1995 Forest licensed the U.S. rights for Tiazac from Biovail Corporation, a Toronto firm. The 1996 introduction of Tiazac, a once-daily calcium channel blocker used to treat hypertension and angina, marked Forest's entrance into the huge cardiovascular market. After achieving $30 million in sales during its year of introduction, Tiazac generated $158 million in revenues by 2000.

While Tiazac was certainly a success, it and all of Forest Labs' other products were soon far overshadowed by a drug called Celexa. This latest turn in the company's fortunes began in 1994 when CEO Solomon's son Andrew fell into a deep depression. Solomon began researching treatments for his son and discovered a European antidepressant named Cipramil, which had been developed by the Danish company H. Lundbeck A/S. Cipramil had achieved market share in Europe of more than 40 percent mainly because it was considered to have fewer side effects than the U.S. blockbusters Prozac (Eli Lilly and Company) and Zoloft (Pfizer Inc.) The head of Lundbeck had tried to license the drug to several large U.S. drug companies, but each deal fell through--the companies apparently having concluded that Cipramil's sales potential was not large enough for them. For Forest, however, Cipramil was a perfect fit, and so Solomon signed a deal with Lundbeck in early 1996 to license the drug for sale in the United States under the name Celexa.

The FDA approved Celexa in July 1998. To help market the drug, Solomon reached a copromotion deal with Warner-Lambert Company. This alliance ended after only a year, however, because Warner-Lambert agreed in 1999 to be acquired by Pfizer. Rather than pursue another copromotion alliance, Forest elected to go it alone. The company's sales force was substantially beefed up, growing from 850 representatives to 1,425, an increase of 70 percent. The reps touted Celexa's minimal side effects, and to give the product a further edge Forest offered the drug for 20 percent less than the cost of its formidable rivals. The strategy proved brilliant. Celexa quickly grabbed a 9 percent share of the $6 billion antidepressant market. Sales in fiscal 1999--specifically, from launch in September 1998 through March 1999--already amounted to $91 million. Celexa sales then mushroomed to $427 million the following year, with the drug reaching blockbuster status as a $1 billion product by 2002. By that year, Celexa's market share had reached 17 percent.

Overall sales and profits for Forest Labs ballooned thanks to the great success of Celexa. The company posted net income of $77.2 million on sales of $624 million for fiscal 1999, but by 2002 these figures were $338 million and $1.6 billion, respectively. During this same period, the company's stock surged as well, nearly quadrupling in value. In 1999 the stock began trading on the prestigious New York Stock Exchange, having been listed for three decades on the American Stock Exchange. On the down side, Forest was slated to lose patent protection on Celexa in mid-2003, with generic competition expected to be introduced in early 2005, so there was a pressing need to find other winning products--particularly because Celexa was generating more than 60 percent of revenues by fiscal 2001.

A minor success for Forest came in October 1999 when Infasurf was launched. Infasurf was used to treat and prevent respiratory distress syndrome (RDS), an affliction that occurred in tens of thousands of infants annually and could cause death or physical abnormalities. Forest had licensed the drug from ONY, Inc. in 1991. Sales during fiscal 2000 totaled less than $5 million. A much more significant product introduced by Forest was Benicar, an agent used to treat hypertension and therefore a follow-up to the successful Tiazac. Benicar had been developed by Sankyo Pharma Inc., and through an agreement signed in December 2001, it was copromoted by Forest and Sankyo following the receipt of FDA approval in April 2002.

Forest hoped its next blockbuster would be Lexapro. This drug was a new version of Celexa that the company touted as being more pure and powerful than the original. Lexapro was approved by the FDA in August 2002, and Forest launched it the following month. At the same time it stopped promoting Celexa and added an additional 175 sales representatives to further strengthen the sales force. Lexapro got off to a strong start, achieving sales of $21.7 million during its first month on the market. Initial indications were that the level of cannibalizing of Celexa prescriptions were minimal, with most of the Lexapro prescriptions coming either from patients taking an antidepressant drug for the first time or from patients switching from other antidepressants. To further expand the market potential of the drug, Forest was also working to gain FDA approval for the use of Lexapro in treating other disorders: generalized anxiety, social anxiety, and panic disorders. Some industry analysts believed that Lexapro could grow into a $2 billion-per-year drug by the mid-to-late 2000s.

There were several other promising drugs in the Forest development pipeline, adding to the company's bright prospects for the future. In October 2001 the company submitted a new drug application (NDA) to the FDA for lercanidipine, another hypertension treatment, which was licensed from Recordati S.p.A., a privately held Italian firm. Forest was jointly developing two pharmaceuticals with Merz + Co. of Frankfurt, Germany: memantine, a treatment for Alzheimer's disease, and neramexane, which was being investigated for the treatment of several nervous systems disorders. As a result of a March 1997 ruling by the FDA, Forest was facing the withdrawal of approval for Aerobid because it, like most other asthma inhalers, contained chlorofluorocarbons (CFCs), which were being phased out of use because of the harm they were doing to the environment. Working with the pharmaceuticals division of 3M, Forest was developing a new non-CFC version of Aerobid called Aerospan. An NDA for Aerospan was filed with the FDA in April 2000. Of these and other products in the pipeline, it appeared that memantine was the one most likely to become Forest Labs' next big seller.

Principal Subsidiaries: Forest Pharmaceuticals, Inc.; Inwood Laboratories, Inc.; Forest Laboratories Ireland Limited; Forest Laboratories Europe (U.K.); Tosara Products Limited (U.K.).

Principal Competitors: Merck & Co., Inc.; Pfizer Inc.; GlaxoSmithKline plc; Eli Lilly and Company; Novartis AG; Aventis; Bristol-Myers Squibb Company; Roche Group; Abbot Laboratories; AstraZeneca PLC; Schering-Plough Corporation.

Chronology

• Key Dates:
• 1956: Forest Laboratories, Inc. is founded as a small laboratory service company.
• 1967: Company goes public.
• 1977: Howard Solomon takes over as company CEO and subsequently shifts the company's focus to drug marketing, initially of generic drugs.
• Mid-1980s:[fsps*2.5]Company shifts focus from generics to licensed brand-name drugs.
• 1984: Forest significantly boosts its sales force with the purchase of O'Neal, Jones & Feldman Inc.
• 1986: Company purchases Aerobid, an antiasthma drug.
• 1996: Forest launches Tiazac, used in the treatment of hypertension and angina.
• 1998: Marketing of the antidepressant Celexa begins.
• 2002: Sales of Celexa surpass the $1 billion mark; Forest begins selling Lexapro, a next-generation version of Celexa.