Forest Reports In-Line

This morning, Forest Laboratories, Inc. (FRX - Analyst Report), reported earnings per share of 85 cents for the second quarter of fiscal 2010, in-line with the Zacks Consensus Estimate. Product sales increased 4% to $962.7 million.

Although Lexapro sales declined 3.1% to $566 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $275.3 million, recording a growth of 11.9% from the year-ago period. Improved patient access and increased promotional efforts should help keep Namenda sales strong.

Bystolic, Forest’s beta-blocker for the treatment of hypertension, posted sales of $40.7 million. This was significantly higher than the year ago sales of $14.2 million. Contract revenue, consisting primarily of Benicar co-promotion income, increased 7.2% to $50.6 million.

Forest’s most recent product launch, Savella, which is approved for the management of fibromyalgia, posted sales of $10.2 million. The product, which has been developed in collaboration with Cypress Biosciences (CYPB - Analyst Report), was launched in late April 2009. We believe Savella may have multi-hundred million dollar potential.

Selling, general and administrative expense was $324.9 million, reflecting the company’s promotional activities in support of its currently marketed products, especially the recently launched Bystolic and Savella. Research and development spending increased 11.4% during the quarter.

The company updated its guidance for fiscal 2010. Forest now expects earnings in the range of $3.40 to $3.50, down from the earlier guidance of $3.45 - $3.55. However, Forest maintained its revenue guidance of $4.1 billion.

We remain concerned about longer-term growth at Forest, especially towards the beginning of the next decade when Lexapro is exposed to generic competition. That puts a lot of pressure on the pipeline to come through. We believe the company will look to beef up its pipeline through additional licensing deals or an acquisition. We currently have a Neutral recommendation on the stock.