Measured Approach

FOREST LABORATORIES, INC. (NEW YORK: FRX) Data as of: 11/06/2009

Industry: Biotechnology and Drugs

Current Data
Current Price $28.67 PEG 1.38X
Market Cap ($M) $8,649.1 EPS TTM ($) $2.41
Shares Outstanding (M) 302.9 P/E TTM 11.9X
Institutional Holdings % 92.6 EPS Estimated 2010 ($) $3.46
Insider Holdings % 0.7 P/E Est. EPS 8.3X
Beta 0.79 MA Value ($) $33.17
Latest Quarter Reported 09/30/09 Price Value Ratio 0.86

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and
generic forms of ethical drug products, which require a physician's prescription. The Company's
products in the United States consist of branded ethical drug specialties marketed directly or
detailed to physicians by its Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare,
Forest Ethicare and Forest Specialty Sales. Its products include Lexapro, the Company's
selective serotonium reuptake inhibitor (SSRI) for the treatment of major depression and
generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for
the treatment of moderate and severe Alzheimer's disease; Bystolic, its beta-blocker for the
treatment of hypertension, and Savella, a dual reuptake inhibitor for the treatment of fibromyalgia.

Highlights

 Less debt equals less risk. FRX’s debt to equity ratio of 0.00% is exceptional.
 FRX spends an increasing amount on Research & Development to keep its pipeline full.
The company has a Price to Research ratio of 10.7, about right for a company of its size.
 T measure growth rate persistence, we average the 3-year, 5-year and 7-year growth
rates. Sales growth is 10.47% and the average EPS growth rate is 8.63%. This produces
a current PEG of 1.38X.
 The company is showing promising results with their investigational drug linaclotide in
two Phase 3 trials.
 FRX and their partner, Richter Gedeon Nyrt, will start Phase 3 trials for the schizophrenic
drug cariprazine.

Analysis of the Balance Sheet:

The schedule below shows the year-end balance sheets for the years between March 31, 2005
and March 31, 2009 and for the twelve month period ending September 30, 2009. Short term
investments comprise approximately 70 percent of the business’s current assets. Other current
assets are primarily composed of accounts receivable (12 percent) and inventory (10 percent.)

Fixed assets include all of the company’s production machinery and equipment (Net Property,
Plant & Equipment.) As of September 30, 2009, Net PP&E made up approximately 23 percent of
FRX’s non-current assets. Other non-current assets include Long-term investments (37 percent)
and Goodwill/Intangibles (34 percent.)

Overall, the company’s assets have increased by approximately 51 percent during the period
March 31, 2005 to September 30, 2009. During the same period, sales increased approximately
28 percent.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Other current liabilities comprise the largest segment of current liabilities. Accounts payable make
up the remainder of current liabilities.

As the business’s earnings steadily increased, so did its equity. The company increased booked
equity during the period shown by approximately 70 percent.

Balance Sheet
(Amounts in Millions)
TTM FYE FYE FYE FYE FYE
Assets 09/30/09 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05
Cash 0.4 1.0 0.0 7.1 1.2 1,165.5
ST Investments 2,853.7 2,579.9 1,906.1 1,345.5 1,026.2 453.7
Accounts Receivable 487.2 449.4 446.0 382.7 366.5 323.1
Inventory 419.8 393.5 425.1 434.2 635.7 613.9
Other Current Assets 337.7 362.1 259.4 253.3 177.5 151.7
Total Current Assets 4,098.8 3,786.0 3,036.6 2,422.7 2,207.2 2,708.0
Net Property,Plant & Equip. 340.6 345.9 350.0 361.1 375.7 362.0
LT Investments 547.2 449.8 534.5 660.4 295.1 351.6
Goodwill/Intangibles 504.2 512.9 542.8 172.0 226.8 278.3
Other LT Assets 101.8 102.3 61.4 37.2 15.1 5.0
Total Assets 5,592.9 5,196.8 4,525.4 3,653.4 3,119.8 3,705.0

Liabilities
Accounts Payable 115.0 117.2 223.7 154.6 140.9 228.0
Short Term Debt 0.0 0.0 0.0 0.0 0.0 0.0
Other Current Liabilities 765.2 700.6 387.1 473.0 280.1 335.7
Total Current Liabilities 880.2 817.8 610.8 627.6 421.0 563.7
LT Debt 0.0 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 286.3 264.4 199.2 1.0 1.1 8.9
Total Liabilities 1,166.5 1,082.2 810.1 628.6 422.0 572.6
Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0
Common Stock Equity 4,426.4 4,114.6 3,715.3 3,024.8 2,697.8 3,132.4
Total Liabilities & Equity 5,592.9 5,196.8 4,525.4 3,653.4 3,119.8 3,705.0

Analysis of the Income Statement:

As part of my analysis of FRX, I have analyzed the business’s income statements for the years
ended March 31, 2005 through March 31, 2009 and for the twelve month period ending
September 30, 2009.

Revenues have increased steadily from $3,159.6 million to $4,035.5 million during this period.
During this same period, the gross profit margin has remained stable, ranging from 78.2 percent
to 79.2 percent. The result is a 29 percent increase in gross margin dollars for the twelve month
period ending September 30, 2009 as compared with the year ending March 31, 2005.

During the period under consideration, operating expenses have ranged, as a percentage of
sales, from 62.5 percent to 79.4 percent. Pretax income has declined by approximately 22
percent between year ending March 31, 2005 and the twelve month period ending September 30,
2009.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
 Income Statement
Amounts in Millions
TTM FYE FYE FYE FYE FYE
09/30/09 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05
Sales 4,035.5 3,922.8 3,836.3 3,441.8 2,962.4 3,159.6
Cost of Goods Sold 852.2 816.7 800.1 745.6 651.0 687.5
Gross Income 3,183.3 3,106.1 3,036.2 2,696.2 2,311.4 2,472.1
Depreciation & Amortization n/a n/a n/a n/a n/a n/a
Research/Development 813.0 661.3 671.0 465.0 410.4 293.7
Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0
Unusual Expenses/(Income) 0.0 0.0 0.0 476.0 0.0 0.0
Total Operating Expenses 3,107.1 2,952.2 2,625.9 2,732.9 2,092.9 1,974.9
Operating Income 928.5 970.6 1,210.4 708.9 869.5 1,184.7
Interest Expense - Non-Op. n/a n/a n/a n/a n/a n/a
Other Expenses/(Income) 0.0 0.1 0.0 0.1 0.0 (0.1)
Pretax Income 928.5 970.5 1,210.4 708.8 869.5 1,184.8
Income Taxes 198.2 202.8 242.5 254.7 161.0 346.0
Income After Taxes 730.3 767.7 967.9 454.1 708.5 838.8
Adjustments to Income 0.0 0.0 0.0 0.0 0.0 0.0
Income for Primary EPS 730.3 767.7 967.9 454.1 708.5 838.8
Nonrecurring Items 0.0 0.0 0.0 0.0 0.0 0.0
Net Income 730.4 767.7 967.9 454.1 708.5 838.8
EPS Basic 2.42 2.53 3.08 1.43 2.11 2.30
EPS Diluted 2.41 2.52 3.06 1.41 2.08 2.25

Industry Comparative Analysis:

The following schedule presents a comparative ratio analysis of FRX and the median company in
the biotechnology and drug industry. Four categories of ratios (profitability, liquidity, debt
management and asset management) have been used to compare the operating results of FRX
with that of the industry median.

Liquidity ratios give an indication of the company’s ability to meet its current obligations with the
use of current assets. As indicated by the comparative ratio analysis, FRX’s liquidity ratios are
significantly stronger than those of the industry median company. This indicates that FRX is in a
much better position than the industry median company to meet its current obligations.

The debt management ratios indicate the extent to which the business’s assets are funded by
debt. As shown in the schedule, FRX has no long term debt.

The profitability ratios measure management’s effectiveness in overseeing the company’s

resources. Compared to the industry median, FRX is more effective than the industry in
producing earnings from its assets.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
 Industry Comparative Analysis

Industry Industry
PROFITABILITY Company Median LIQUIDITY Company Median
Gross Profit 78.90 51.00 Quick ratio 4.20 1.80
Operating Margin 23.00 (42.30) Current Ratio 4.70 2.10
Net Profit Margin 18.10 (42.00) Payout Ratio 0.00 0.00
Return on Equity 17.80 (14.70) Times Interest Earned n/a (11.00)
Return on Assets 14.30 (52.30)

Industry Industry
DEBT MANAGEMENT Company Median ASSET MANAGEMENT Company Median
Total Liab. / Total Assets 20.90 51.60 Receivables Turnover 9.00 6.30
LT Debt / Equity 0.00 0.00 Asset Turnover 0.80 0.50
LT Debt / Capital 0.00 0.40 Inventory Turnover 2.10 3.00

Summary of Analysis:

Based on my analysis of FRX, the business appears to be in a strong financial position. Over the
years, both revenues and earnings have increased significantly as well as its equity position. In
addition, compared to the industry, FRX has more liquidity, less leverage, and operates more
profitably. Based on the financial analysis FRX, the business has less risk than does the median
company in the same industry.

Value Conclusion:

Based on my analysis, I am establishing a target price of $33.17.

Valuation Ratios

Current Industry
Company MA Value Median
Price Earnings 11.9 13.8 15.2
PE to Growth 2.2 2.6 0.7
Price to Book 1.9 2.3 2.6
Price to Sales 2.1 2.5 3.5
Price to Cash Flow 11.9 13.8 13.6
Price to Free Cash Flow 8.2 9.5 13.7

Disclosure: The author is long FRX.

Please visit http://measuredapproach.wordpress.com for important disclosures.

© Copyright 2009 Ronald Sommer. All Rights Reserved.