UPDATE: Forest Labs To Buy Clinical Data For At Least $1.2 Billion

Forest Laboratories Inc. (FRX) agreed to buy Clinical Data Inc. (CLDA) for at least $1.2 billion, betting that Clinical Data's newly approved antidepressant Viibryd can help offset the loss of major products in coming years.

Shares of both companies fell on the news, as previous speculation on an acquisition of Clinical Data had recently pushed up its shares, and Forest said the deal may not be profitable until fiscal 2014 as it invests in marketing Viibryd. Clinical Data recently traded down 8.6% to $30.99, and Forest dropped 4.3% to $32.85.

The deal is part of Forest's strategy to offset the looming generic competition for its biggest-selling drugs, antidressant Lexapro and Alzheimer's disease drug Namenda, which provided 85% of product sales in the third quarter ended Dec. 31. Patents for Lexapro expire next year, and Namenda loses similar protection in 2015.

Forest is paying $30 a share in cash--a 12% discount from Friday's close of $33.90--and may pay an additional $6 a share based on the sales of performance of Viibryd. The rights to those extra payments, which could total $275 million based on Clinical Data's fully diluted 45.8 million shares outstanding, aren't transferable and won't be listed on an exchange.

Viibryd was approved in January to treat major depressive disorder, prompting Clinical Data to say it was open to exploring a sale. Forest said the deal provides a 19.2% premium over Clinical Data's closing price on the first full day of trading after the approval was announced.

Forest, which also sold antidepressant Celexa that went generic in 2004, plans to launch Viibryd in the U.S. during the second half of this year. While Forest has the experience of selling drugs like Viibryd, it warned that it will require "significant" investment in sales and marketing.

Goldman Sachs analyst Randall Stanicky said Viibryd may help fill the coming loss of Lexapro, but the deal includes risk related to Forest's ability to successfully market the drug. Furthermore, Clinical Data doesn't expand Forest's geographic presence or diversify its product offerings, Stanicky wrote in a note to clients.

Collin Stewart analyst Louise Chen applauded the deal--calling it a "good strategic fit" and arguing that Forest's expertise will help sell Viibryd and that investors are undervaluing the company's ability to market its coming batch of new drugs.

The deal is expected to reduce Forest's per-share earnings for the next three fiscal years and "may" add to earnings in fiscal 2014. In 2012, the acquisition will dilute earnings per share by 55 cents to 65 cents. The company said there is no change to its fiscal 2011 financial projections.

Roth Capital Partners analyst Andrew Vaino projects that sales of Viibryd will exceed $1.5 billion in 2017 and trigger all payments of the right. He currently values the right to receive those payments at about $2 a share.

If the sales of Viibryd for four consecutive quarters hit $800 million in the first five years after launch, Forest will pay another $1 a share. If sales hit $1.1 billion in the first six years, it will pay $2 a share, and $3 a share if sales rise to $1.5 billion within seven years.

On a conference call Tuesday, Chief Executive Howard Solomon said Forest could continue to make deals to boost its product offerings. At Dec. 31, the company had about $3.7 billion in cash and marketable securities.

The deal has been approved by both companies' boards and is expected to close in the second quarter.

Forest said it expects to launch antibiotic Teflaro this year and gain approval of Daxas for chronic obstructive pulmonary disease by late March. It plans to submit marketing applications for two other drugs later this year, and two more in calendar 2012.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com

--Nathan Becker contributed to this report

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