Investors of Forest Laboratories, Inc. (NYSE: FRX) is banking on the prospect that Forest, under its newly anointed CEO, will simply become more specialized, shedding salesforce expenses along the way.
However, when one looks deeply into where Forest is getting its prescriptions and sales, they could see that is not likely to happen. If you are a drug company that markets drugs that address a large physician group, such as family practitioners or internists, then you have to field a large salesforce to reach physicians.
"Forest is among the most dependent on primary care sales of all drug companies, and so shedding salespeople would affect sales and shedding brands would not free up resources," BMO Capital Markets analyst David Maris wrote in a note to clients.
For Forest, 69.5 percent of its prescriptions come from the Primary Care area, the second-highest percentage overall and significantly higher than the percentages for all of its Specialty Pharma peers and next only to Merck (NYSE:MRK)., whose PCP rate is 75 percent
Many drugs that sound like a specialty sales call, like an asthma drug or a depression drug or even an Alzheimer's treatment drug like Namenda, actually get more than 50 percent of their sales and prescriptions from primary care physicians (PCPs).
"It is clear that even with recent launches, Forest is dependent on its large primary care salesforce, as more than 50% of prescriptions are coming from PCPs for each," Maris said.
It seems unlikely for a company to shrink salesforce when more than half its prescriptions and sales for lead products are coming from Primary Care. If Forest was to shed any part of its primary care salesforce, it would likely have a directly negative effect on overall sales of the product.
In addition, the idea of divesting some products to allow Forest to become more Specialty and less dependent on a PCP salesforce seems not to make any sense as the dependence on PCP sales is broad based across Forest's entire product ! line.
"Forest has the need for a PCP salesforce because all of its products – even the respiratory and GI products that many analysts call "Specialty" – get more than 50% of their prescriptions from PCPs," Maris said.
This clearly shows that Forest is a specialty pharma company by size only – its salesforce and product base is not specialty focused, and Forest has problems that large pharma often faces – the need to feed an expensively large, broad-based, and geographically diverse salesforce.
Forest is not in a good position to become specialized without drastically reducing sales. It is more likely that Forest would look to buy its way out of its problems, whether through in-licensing, acquisitions, or mergers.
"Some bulls might see this PCP problem and say it is yet more evidence that Forest might not have any avenue by which to streamline, but it would provide another large drug company with a lot of cost cutting opportunities," Maris wrote.
However, there are not any potential partners that want to acquire Forest given its pipeline is largely spoken for and already launched, and it faces the loss of patent protection on its largest product in April 2015.
"Instead of a focused Specialty company, we think Forest will spend much of its cash hoard to become larger, therapeutically, and geographically sprawling, to help blunt the trauma of the Namenda and Namenda SR generics," Maris noted.
Investors in the stock expect the new CEO to alter course dramatically and cut the company down to a smaller, more focused company – as Icahn and several analyst have suggested, but any refocusing would result in substantially lower revenues and earnings.
When cutting and refocusing doesn't turn out to be the game plan, and spending and acquiring become the game plan, then the recent rise in the shares - on the promise of new management streamlining the company - will reverse.
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