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Forest Laboratories, Inc. reported earnings per share of 8 cents in the second quarter of fiscal 2013, well below the year-earlier earnings of 91 cents per share. Results were hit by the loss of exclusivity on Lexapro.

Excluding acquisition-related amortization costs, second quarter fiscal 2013 earnings came in at 15 cents, down from 95 cents in the year-ago quarter. The Zacks Consensus Estimate was hinting towards breakeven earnings.

Second quarter revenues declined 34.9% to $760.6 million, with net sales falling 38.8% to $692.0 million. Total revenues missed the Zacks Consensus Estimate of $779 million.

The Quarter in Detail

Second quarter product revenues declined 38.8% to $692.0 million. While Lexapro revenues fell 92.5% to $44.7 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $367.6 million, recording year-over-year growth of 9.1%.

Lexapro sales will continue declining in fiscal 2013 as additional generics enter the market following the expiry of the Hatch-Waxman six-month exclusivity period on September 13.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $106.5 million, up 29.4% from the year-ago period. Forest Labs is looking to drive Bystolic's growth by providing additional data on the appropriate use of the product.

The company is also working on extending the product’s lifecycle and is conducting a phase III study with a fixed dose combination of Bystolic and valsartan (the market leader) for hypertension. A fixed dose combination product would expand the patient population for Bystolic. Top-line data should be out in mid-calendar 2013. Approval as a first-line treatment would also boost sales significantly.

Savella, which is approved for the management of fibromyalgia, posted revenues of $26.2 million, up 2.7% from the year-ago period. Savella sales remain lackluster with growth in the fibromyalgia market being more modest than expected.

Forest Labs’ new product, Teflaro, posted revenues of $10.0 million, slightly above $9.4 million posted in the first quarter of fiscal 2013. The FDA granted approval to Teflaro for the treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia in October 2010.

Forest Labs launched the product in March 2011. Teflaro’s performance continues to disappoint and Forest Labs has cut its fiscal 2013 Teflaro sales guidance by $20 million to $45 million.

Two other new products, Daliresp and Viibryd, were launched in August 2011. While Daliresp, which is approved for the treatment of chronic obstructive pulmonary disease (COPD), recorded revenues of $19.5 million (up from $17.8 million in the first quarter), Viibryd (vilazodone HCl), approved for the treatment of major depressive disorder (MDD) recorded revenues of $39.9 million (up from $37.4 million in the first quarter).

Contract revenue came in at $54.3 million, up from $33.6 million in the year-ago period. Contract revenue included $22.7 million earned under the company’s agreement with Mylan (MYL - Analyst Report) for the authorized generic version of Lexapro. Forest Labs expects to earn royalty income of $60 million in fiscal 2013 from the sale of the authorized generic version of Lexapro.

Benicar co-promotion income dropped 4.1% year-over-year to $30.2 million. Under its agreement with Daiichi Sankyo, Forest Labs is now receiving a gradually declining royalty rate on Benicar until the end of March 2014. Benicar earnings will continue declining in fiscal 2013.

SG&A expense declined 3.6% to $374.9 million in the reported quarter. Forest Labs continues to focus on promoting its new products. R&D spend increased 2.8% during the quarter. With the acceleration of enrollment in some development programs, Forest Labs now expects R&D expense, including milestones, of $900 million in fiscal 2013, up from the previous guidance of $850 million.

Fiscal 2013 Guidance Cut Again

Following the release of second quarter fiscal 2013 results, Forest Labs once again lowered its outlook for fiscal 2013. The company expects to earn 45 - 60 cents per share (excluding acquisition-related amortization), down from the earlier guidance of 95 cents - $1.10 per share.

Reported earnings are expected in the range of 15 – 30 cents per share, down from the earlier guidance of 65 - 80 cents per share. The Zacks Consensus Estimate for fiscal 2013 is currently 67 cents per share.

Revenues are now expected to be $3.2 billion, down from the previous guidance of $3.4 billion. Lexapro, which was a key revenue generator at Forest Labs, lost exclusivity in March 2012.

With the entry of generic competition, Lexapro sales will continue declining. In addition to lower Lexapro sales, other factors expected to affect sales are lower than expected royalty income and the discontinuation of shipping of Levothroid.

However, more than the Lexapro impact, we were disappointed to see Forest Labs cut its revenue expectations for Namenda. The company now expects Namenda sales to grow 11% in fiscal 2013 instead of 17%. This means that Namenda’s sales will be affected by about $85 million. Forest Labs said that new initiatives undertaken by nursing homes have led to a reduction in the demand for Alzheimer’s drugs.

Linzess, which gained FDA approval in August for the treatment (once-daily) of adults suffering from irritable bowel syndrome with constipation (IBS-C) or chronic idiopathic constipation (CIC), is expected to deliver sales of $25 million instead of $60 million. The reduced forecast reflects a delay in the product launch due to the three-month extension of the FDA review period.

The second quarter of fiscal 2013 was a tough quarter for Forest Labs which is facing stiff generic competition for Lexapro. More than Lexapro’s genericization, the cut in Namenda’s guidance is disappointing as Namenda is currently the main contributor to the company’s top line. Moreover, the performance of new products especially Teflaro, has been below expectations.

We currently have a Neutral recommendation on the stock, which carries a Zacks #3 Rank (short-term Hold rating).

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