UPDATE: Forest Labs Down 12% After Negative FDA Panel Vote

Forest Laboratories Inc. (FRX) shares dropped about 12% Thursday after a U.S. regulatory advisory panel gave a thumbs-down to Forest's proposed lung-disease drug, in what some analysts viewed as a bizarre sequence of events.

The setback adds to the challenges the New York-based drug maker faces as it nears the March 2012 expiration of the U.S. patent for its best-selling product, the antidepressant Lexapro, which generates nearly 60% of the company's revenue. Lexapro had $2.3 billion in sales for its last full fiscal year, but that's expected to shrink dramatically when generic copies enter the market.

Forest shares recently traded at $28.48, down 12.3%.

The proposed new drug is roflumilast, which Forest proposes to sell under the brand name Daxas, and would treat chronic obstructive pulmonary disease, or COPD, which is informally known as "smoker's cough." Some analysts had predicted the drug could generate peak annual sales of about $500 million, which would have at least partly offset the expected decline in Lexapro revenue.

"Unfortunately, Forest is in a position where they have significant exposure to generics for their largest franchise in the not-too-distant future," said BMO Capital Markets analyst Robert Hazlett. "This drug had an outside chance to materially offset that, and it doesn't have that chance in our view anymore."

Hazlett has removed Daxas sales estimates from his forecast model for Forest.

A U.S. Food and Drug Administration advisory committee voted Wednesday afternoon that the clinical-trial data for Daxas didn't provide substantial evidence to support FDA approval of the drug. The FDA usually follows its committees' advice but isn't required to do so.

The vote caught many observers off guard because the same advisory panel had voted minutes earlier in favor of the drug's efficacy and safety, in separate votes. Jefferies analyst Corey Davis wrote in a note to clients that the advisory meeting "was the most bizarre we've ever seen."

Some panel members expressed concern about the safety of the drug, and how it compares to other treatments for COPD. FDA staff had concluded the drug's effectiveness was "quite modest." Also, the agency noted that in clinical trials, there were three suicides and two suicide attempts in Daxas users, versus none among those taking a fake drug. Davis said the suicide data weren't previously disclosed before the FDA staff posted briefing documents online earlier this week.

A Forest executive said Wednesday the door may still be open for approval of Daxas, given the positive votes on efficacy and safety.

In a written statement, Forest said it expects FDA action by midyear. The company said it will work closely with the FDA to address the advisory committee's findings. A company spokesman declined to comment beyond the written statement.

Lazard Capital Markets said there's still modest hope the FDA could approve Daxas, but it might require additional testing.

The Daxas setback--coupled with the looming generic competition for Lexapro--translates into increased urgency surrounding another drug in Forest's pipeline, the constipation treatment linaclotide. New clinical data on the drug is due later in 2010.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com

(Jennifer Corbett Dooren in Washington contributed to this article.)

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