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Following the release of second quarter fiscal 2013 results, most of the analysts providing earnings estimates for Forest Laboratories have made downward revisions to their estimates for fiscal 2013. The downward revision in estimates is mainly in response to the company’s lowered guidance for fiscal 2013.

Second Quarter Fiscal 2013 Quarter Highlights

Forest Labs 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.

A detailed discussion of second quarter fiscal 2013 results is available here: Earnings Decline at Forest Labs

Agreement of Estimate Revisions

There is a significant negative bias in earnings estimate revisions for Forest Labs for fiscal 2013. Following the release of second quarter fiscal 2013 results, all 12 analysts providing estimates for the stock lowered their estimates for fiscal 2013.

A similar trend is seen for fiscal 2014 as well with 19 of the 22 analysts providing estimates cutting their estimates with no movement in the opposite direction.

Forest Labs expects to earn 45 - 60 cents per share (excluding acquisition-related amortization), down from the earlier guidance of 95 cents - $1.10 per share.

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 although sales in the retail segment were in line with expectations, long term care sales were below expectations. Long term care sales account for 35-40% of the company’s Namenda sales.

Meanwhile, 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. Linzess is partnered with Ironwood Pharmaceuticals (IRWD - Analyst Report).

Magnitude of Revisions

Estimates for fiscal 2013 have gone down by 43 cents following the release of second quarter fiscal 2013 results. The current Zacks Consensus Estimate is 25 cents. Fiscal 2014 estimates have been slashed by 28 cents to $1.27 per share. The reduction in fiscal 2014 estimates mainly reflects reduced expectations from Namenda.

Our Recommendation

We currently have a Neutral recommendation on Forest Labs, which carries a Zacks #3 Rank (short-term Hold rating). Forest Labs is facing tough times with Lexapro losing patent protection.

More than Lexapro’s genericization, the cut in Namenda’s guidance is disappointing as Namenda is currently the main contributor to the Forest Labs’ top line. Moreover, the performance of new products especially Teflaro, has been below expectations. However, we remain encouraged by Forest Labs’ progress with its pipeline candidates.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks 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/
 

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