Earnings Scorecard: Forest Labs

Following the release of first quarter fiscal 2011 results on July 20, 2010, almost all the analysts covering Forest Laboratories (FRX - Analyst Report) have made upward revisions to their earnings estimates for 2011 and 2012. The upward revision in estimates is mainly in response to the company’s revised guidance for fiscal 2011.
 
First Quarter Highlights: Forest Labs reported first quarter earnings per share of 95 cents, well above the Zacks Consensus Estimate of 86 cents and the year-earlier earnings of 87 cents. Strong Namenda sales, lower SG&A expenses and lower share count boosted earnings.
 
First quarter revenues increased 5.8% to $1.07 billion, with net sales increasing 7.6% to $1 billion. While contract revenues slipped 16.6% to $39.8 million, interest income declined 42.5% to $7 million.
 
Following the release of first quarter results, Forest Labs updated its 2011 guidance to reflect the impact of a recently announced share repurchase program. Forest Labs now expects earnings in the range of $3.67 to $3.77 per share, up from the earlier guidance of $3.50 to $3.60.

 Agreement of Estimate Revisions
 
There is a significant positive bias in earnings estimate revisions for Forest Labs. While 19 of the 23 analysts covering the stock have raised their earnings estimates for fiscal 2011, 17 of the 24 analysts covering the stock have raised their estimates for fiscal 2012 in the last 7 days. Although there are no downward revisions for fiscal 2011, 3 analysts have reduced their estimates for fiscal 2012.
 
Estimates are up for the September quarter as well with 17 of the 24 analysts following the stock raising their estimates in the last 7 days. Only, one analyst has moved in the opposite direction during this time period.
 
The upward revisions in estimates for fiscal 2011 mainly reflect the impact of lower share count based on Forest Labs’ recently announced share repurchase program, which is expected to boost earnings by 17 cents. The lower share count should also boost the bottom line in fiscal 2012.

Magnitude of Revisions
 
Estimates for fiscal 2011 have gone up by 13 cents over the past 7 days. The current Zacks Consensus Estimate of $3.76 is toward the higher end of the company’s revised guidance of $3.67 to $3.77 per share. 2011 estimates are up 12 cents.
 
Meanwhile, estimates for the September quarter are up 3 cents.
 
Our Recommendation
 
We currently have a Neutral recommendation on Forest Labs. Despite the better-than-expected first quarter earnings performance, we remain concerned about the strength of the pipeline relative to the loss in sales that will come with the Lexapro (2012) and Namenda (2015) patent expirations. With Lexapro losing patent protection in March 2012, roughly half the company’s top line will be at risk to generic competition.
 
While Bystolic and Savella should be meaningful contributors by that time, we believe that their combined sales will not be enough to compensate for the loss of Lexapro sales. Namenda will face generic competition in early 2015 - this puts another $1+ billion at risk.
 
Given the situation, we believe that Forest Labs will continue to seek in-licensing and acquisition activities to grow its pipeline. In fact, Forest Labs’ goal is to double the commercial value of its late-stage pipeline by 2012 through in-licensing deals and acquisitions. Forest Labs has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years.
 
 
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

Read the full analyst report on FRX