FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
|
September 30, 2007
(Unaudited)
|
March 31, 2007
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
Cash (including cash equivalent
investments
of $958,432 in
September and $556,586 in March)
|
$ 959,763
|
$ 563,663
|
Marketable securities
|
614,898
|
788,951
|
Accounts receivable, less allowance for
doubtful accounts
of $19,583 in
September and $20,033 in March
|
422,942
|
382,655
|
Inventories, net
|
447,324
|
434,163
|
Deferred income taxes, net
|
212,506
|
226,433
|
Other current assets
|
45,481
|
26,852
|
Total current
assets
|
2,702,914
|
2,422,717
|
|
|
|
Marketable securities
|
784,388
|
660,392
|
|
|
|
Property, plant and equipment
|
550,633
|
532,861
|
Less: accumulated depreciation
|
194,344
|
171,775
|
|
356,289
|
361,086
|
Other assets:
Goodwill
|
14,965
|
14,965
|
License agreements, product rights and
other
intangibles, less
accumulated amortization
of $398,807 in
September and $377,219 in March
|
135,945
|
157,049
|
Deferred income taxes
|
52,679
|
27,681
|
Other assets
|
1,100
|
9,482
|
Total other
assets
|
204,689
|
209,177
|
|
|
|
Total
assets
|
$4,048,280
|
$3,653,372
|
|
========
|
========
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except for par values)
|
September 30, 2007
(Unaudited)
|
March 31, 2007
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Current liabilities:
Accounts payable
|
$ 181,591
|
$ 154,614
|
Accrued expenses
|
393,746
|
332,995
|
Income taxes payable
|
3,104
|
139,999
|
Total current
liabilities
|
578,441
|
627,608
|
|
|
|
Long-term liabilities:
Income taxes payable
|
175,021
|
|
Deferred income taxes
|
975
|
951
|
|
175,996
|
951
|
|
|
|
Stockholders' equity:
Series preferred stock, $1.00 par; shares
authorized 1,000;
no shares issued or
outstanding
|
|
|
Common stock, $.10 par; shares
authorized 1,000,000; issued
421,366 shares in
September and 420,695 shares in March
|
42,136
|
42,069
|
Additional paid-in capital
|
1,410,201
|
1,354,264
|
Retained earnings
|
5,136,966
|
4,657,356
|
Accumulated other comprehensive
income
|
30,356
|
21,879
|
Treasury stock, at cost
|
|
|
(107,899 shares in
September and 101,143 shares in March)
|
(
3,325,816
)
|
(
3,050,755
)
|
Total
stockholders' equity
|
3,293,843
|
3,024,813
|
|
|
|
Total
liabilities and stockholders' equity
|
$4,048,280
|
$3,653,372
|
|
========
|
========
|
See notes to condensed consolidated financial
statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
|
Three Months
Ended
September 30,
|
Six Months
Ended
September
30,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Net sales
|
$842,337
|
$778,676
|
$1,684,953
|
$1,537,444
|
Contract revenue
|
50,313
|
48,909
|
103,690
|
91,571
|
Interest income
|
24,932
|
19,100
|
51,670
|
33,753
|
Other income
|
1,378
|
290
|
6,921
|
545
|
|
918,960
|
846,975
|
1,847,234
|
1,663,313
|
|
|
|
|
|
Costs and expenses:
Cost of sales
|
189,992
|
185,098
|
376,232
|
360,783
|
Selling, general and administrative
|
280,439
|
259,008
|
541,767
|
503,391
|
Research and development
|
170,738
|
93,752
|
307,646
|
232,834
|
|
641,169
|
537,858
|
1,225,645
|
1,097,008
|
|
|
|
|
|
Income before income tax expense
|
277,791
|
309,117
|
621,589
|
566,305
|
|
|
|
|
|
Income tax expense
|
52,547
|
68,006
|
128,183
|
124,587
|
|
|
|
|
|
Net income
|
$225,244
|
$241,111
|
$ 493,406
|
$ 441,718
|
|
=======
|
=======
|
========
|
========
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$0.71
|
$0.76
|
$1.55
|
$1.38
|
|
====
|
====
|
====
|
====
|
Diluted
|
$0.71
|
$0.75
|
$1.54
|
$1.36
|
|
====
|
====
|
====
|
====
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
315,510
|
317,809
|
317,534
|
319,623
|
|
======
|
======
|
======
|
======
|
Diluted
|
316,852
|
322,581
|
319,375
|
324,256
|
|
======
|
======
|
======
|
======
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
Three Months Ended
September
30,
|
Six Months
Ended
September
30,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Net income
|
$225,244
|
$241,111
|
$493,406
|
$441,718
|
Other comprehensive income
|
6,498
|
971
|
8,477
|
7,971
|
|
|
|
|
|
Comprehensive income
|
$231,742
|
$242,082
|
$501,883
|
$449,689
|
|
=======
|
=======
|
=======
|
=======
|
See notes to condensed consolidated financial
statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
Six Months
Ended
|
(In thousands)
|
September
30,
|
|
2007
|
2006
|
Cash flows from operating activities:
|
|
|
Net income
|
$ 493,406
|
$ 441,718
|
Adjustments to reconcile net income to
|
|
|
net cash provided by operating
activities:
|
|
|
Depreciation
|
23,075
|
22,557
|
Amortization and
impairments
|
21,588
|
33,627
|
Stock-based
compensation expense
|
20,078
|
17,898
|
Deferred income tax
benefit
|
( 5,304)
|
( 1,272)
|
Foreign currency
transaction gain
|
( 137)
|
( 380)
|
Net change in
operating assets and liabilities:
|
|
|
Decrease
(increase) in:
|
|
|
Accounts
receivable, net
|
( 40,287)
|
5,135
|
Inventories,
net
|
( 13,161)
|
126,493
|
Other
current assets
|
( 18,629)
|
( 15,695)
|
Other
assets
|
8,382
|
98
|
Increase
in:
|
|
|
Accounts
payable
|
26,977
|
32,561
|
Accrued
expenses
|
60,751
|
31,277
|
Income
taxes payable
|
24,330
|
19,022
|
Net
cash provided by operating activities
|
601,069
|
713,039
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property, plant and equipment,
net
|
( 17,791)
|
( 16,941)
|
Purchase of marketable securities
|
( 1,244,988)
|
( 1,184,573)
|
Redemption of marketable securities
|
1,295,045
|
900,697
|
Net
cash provided by (used in) investing activities
|
32,266
|
(
300,817
)
|
|
|
|
Cash flows from financing activities:
|
|
|
Net proceeds from common stock options
exercised
by employees under stock option
plans
|
24,856
|
62,891
|
Tax benefit realized from the exercise of
stock
options by employees
|
5,071
|
16,180
|
Purchase of treasury stock
|
(
274,804
)
|
(
409,225
)
|
Net
cash used in financing activities
|
(
244,877
)
|
(
330,154
)
|
|
|
|
Effect of exchange rate changes on cash
|
7,642
|
7,317
|
Increase in cash and cash equivalents
|
396,100
|
89,385
|
Cash and cash equivalents, beginning of period
|
563,663
|
414,579
|
Cash and cash equivalents, end of period
|
$ 959,763
|
$ 503,964
|
|
========
|
========
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
Income taxes
|
$104,082
|
$90,835
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
(In
thousands)
:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six-month period ended September 30, 2007
are not necessarily indicative of the results that may be expected
for the year ending March 31, 2008. For further information refer
to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form
10-K for the year ended March 31, 2007.
2. Accounts
Receivable:
Accounts receivable, net, consists of the
following:
|
September 30, 2007
|
|
(In thousands)
|
(Unaudited)
|
March 31, 2007
|
|
|
|
Trade
|
$360,858
|
$330,580
|
Other
|
62,084
|
52,075
|
|
$422,942
|
$382,655
|
|
=======
|
=======
|
3. Inventories:
Inventories, net of reserves for obsolescence,
consist of the following:
|
September 30, 2007
|
|
(In thousands)
|
(Unaudited)
|
March 31, 2007
|
|
|
|
Raw materials
|
$222,722
|
$257,042
|
Work in process
|
6,934
|
8,449
|
Finished goods
|
217,668
|
168,672
|
|
$447,324
|
$434,163
|
|
=======
|
=======
|
4. Net Income Per Share
(In
thousands)
:
A reconciliation of shares used in calculating basic and diluted
net income per share follows:
|
Three Months Ended
September 30,
|
Six Months Ended
September
30,
|
|
2007
|
2006
|
2007
|
2006
|
Basic
|
315,510
|
317,809
|
317,534
|
319,623
|
Effect of assumed conversion of
employee stock options
|
1,342
|
4,772
|
1,841
|
4,633
|
Diluted
|
316,852
|
322,581
|
319,375
|
324,256
|
|
======
|
======
|
======
|
======
|
Options to purchase approximately 12,238 shares of common stock
at exercise prices ranging from $36.50 to $76.66 per share and
options to purchase approximately 10,149 shares of common stock at
exercise prices ranging from $36.50 to $76.66 per share that were
outstanding during a portion of the three and six-month periods
ended September 30, 2007, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive. These options expire through 2017. Options to
purchase approximately 3,761 shares of common stock at exercise
prices ranging from $48.34 to $76.66 per share and options to
purchase approximately 5,955 shares of common stock at exercise
prices ranging from $43.30 to $76.66 per share that were
outstanding during a portion of the three and six-month periods
ended September 30, 2006, respectively, were not included in the
computation of diluted net income per share because they were
anti-dilutive. These options expire through 2016.
5. Stock-Based Compensation
(In
thousands)
:
In August 2007 the stockholders of the Company voted to adopt
the 2007 Equity Incentive Plan (the 2007 Plan) which replaces and
supersedes all prior Stock Option Plans. The 2007 Plan
provides for the granting of incentive and nonqualified stock
options, restricted stock, stock appreciation rights and stock
equivalent units. These awards generally vest in three to
five years. Stock option grants may be exercisable for up to
ten years from the date of issuance. As of September 30,
2007, 13,950 shares were authorized and 12,928 were available for
grant under the 2007 Plan.
Effective April 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" (SFAS 123R). During the six months
ended September 30, 2007, the Board of Directors awarded stock
options to employees and stock options and restricted stock to
non-employee directors. The fair value for stock options is
calculated using the Black-Scholes valuation model and restricted
stock is accounted for at fair value based upon the average high
and low stock price on the date of grant. These compensation
costs are amortized on an even basis (net of estimated forfeitures)
over the requisite service period. The Company has never
awarded stock options or restricted stock below market price on the
date of grant.
Compensation expense of $9,402 ($8,104 net of tax) and $20,078
($16,996 net of tax) was recorded for the three and six-month
periods ended September 30, 2007. For the three and six-month
periods ended September 30, 2006, compensation expense of $9,139
($7,789 net of tax) and $17,898 ($15,215 net of tax) was recorded.
This expense was charged to cost of sales, selling, general and
administrative and research and development expense, as
appropriate. Amounts capitalized as part of inventory costs were
not significant.
The weighted average number of diluted common shares outstanding
is reduced by the treasury stock method which, in accordance with
SFAS 123R, takes into consideration the compensation cost
attributed to future services not yet recognized.
6. Business Segment Information:
The Company operates in only one segment. Below is a breakdown
of net sales by therapeutic class:
(In thousands)
|
Three Months Ended
September
30,
|
Six Months
Ended
September
30,
|
|
2007
|
2006
|
2007
|
2006
|
|
|
|
|
|
Central nervous system (CNS)
|
$756,969
|
$685,134
|
$1,504,477
|
$1,349,063
|
Cardiovascular
|
6,849
|
14,536
|
15,268
|
29,321
|
Other
|
78,519
|
79,006
|
165,208
|
159,060
|
|
$842,337
|
$778,676
|
$1,684,953
|
$1,537,444
|
|
=======
|
=======
|
========
|
========
|
7. Income
Taxes
(In thousands)
:
On April 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Interpretation (FIN
48), "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109". As a result of the
adoption of FIN 48, the Company increased its tax liabilities by
$13,796 with a corresponding reduction to the April 1, 2007 balance
of retained earnings. In addition, accrued interest related to
unrecognized tax benefits totaled $11,576 as of April 1, 2007.
Interest and penalties, if any, are recorded in income tax expense
and are classified on the balance sheet with the related tax
liability. Unrecognized tax benefits totaling $152,695 have been
reclassified from current income taxes payable to long-term income
taxes payable and totaled $175,021 at September 30, 2007 based on
the Company’s expectation of cash payments within the next
twelve months.
The Company and its subsidiaries file a consolidated U.S.
federal income tax return.
The Company is subject to income taxes both in the United States
and several foreign jurisdictions. Significant judgment is required
in determining the worldwide provision for income taxes. The
Company’s tax returns are routinely audited by U.S. federal
and state as well as foreign tax authorities. The Company accrues
liabilities for identified tax contingencies that result from
positions taken by the Company that are being challenged or could
be challenged by tax authorities. The Company believes that its
accrual for tax liabilities is adequate for all open years, based
on management’s assessment of many factors, including its
interpretations of the tax law and judgments about potential
actions by tax authorities. However, it is possible that the
ultimate resolution of any tax audit may be materially greater or
less than the amount accrued.
The Company’s income tax returns for fiscal years prior to
1999 are no longer subject to review as such fiscal years are
generally closed. Tax authorities in various jurisdictions are in
the process of reviewing the Company’s tax returns for
various post-1999 fiscal years, including the Internal Revenue
Service (IRS), which has recently concluded its examination of the
Company’s U.S. federal income tax returns for fiscal years
2002 and 2003.
In connection with that examination, in July 2007, the IRS
issued a notice of proposed adjustment primarily relating to the
Company’s intercompany transfer pricing methodology. On
November 5, 2007, the IRS issued a Revenue Agent Report which seeks
to assess approximately $206.7 million of additional U.S.
corporation income tax relating to the examination period,
excluding interest and penalties.
The Company continues to disagree with the IRS position and
adjustment because it believes that it is inconsistent with
applicable tax laws and the Company intends to defend its position
vigorously. While the resolution of this issue may result in tax
liabilities that are greater or less than the reserves established,
Management believes that the ultimate resolution will not have a
material effect on the Company’s financial position or
liquidity. If the IRS prevails in a position that increases the
U.S. tax liability in excess of established reserves, it is likely
that the IRS could make similar claims for years subsequent to
fiscal 2003 which could be material.
FOREST LABORATORIES,
INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in thousands)
Total net revenues increased for the quarter and six months
ended September 2007 due to growth of our key marketed products
Lexapro® and Namenda® and higher co-promotion income from
Benicar®. During the September 2007 quarter, we entered into a
collaboration agreement with Microbia, Inc. (Microbia) to
co-develop and co-market the compound linaclotide. Linaclotide,
which is currently in Phase II testing, is being investigated for
the treatment of constipation-predominant irritable bowel syndrome
and chronic constipation. In connection with the signing of this
agreement, Forest recorded a $70,000 licensing fee, which was
charged to research and development expense. As a result of this
charge, net income during the September 2007 quarter was lower than
net income during the September 2006 quarter. For the six months
ended September 2007 net income increased 12% when compared with
the same six-month period of the prior year. Last year’s six
months research and development expense included a licensing
payment of $60,000 to Laboratorios Almirall, S.A. (Almirall) for
the U.S. rights to aclidinium, a long-acting muscarinic antagonist
being developed for the treatment of chronic obstructive pulmonary
disease (COPD).
In October 2007, we signed an agreement with Daiichi Sankyo to
co-promote its recently approved product, Azor™. Azor is a
once-daily combination of amlodipine and olmesartan medoxomil
(Benicar) for the treatment of hypertension. Under the terms of the
agreement, we will co-promote the product for a period of three
years and receive co-promotion fees based on net sales. We will
receive residual fees at a reduced rate for the three years
following the co-promotion period. In conjunction with the signing
of the agreement, we paid Daiichi Sankyo $20,000.
Financial Condition and Liquidity
Net current assets increased by $329,364 from March 31, 2007.
Cash and cash equivalents increased while short-term marketable
securities decreased in order to fund the 2007 Repurchase Program
described below. During the June 2007 quarter, we repurchased 1.8
million shares at a cost of $86,003 and in the current quarter we
repurchased another 4.95 million shares at a cost of $188,801,
leaving 17.9 million shares still available for repurchase.
Long-term marketable securities increased as certain funds, not
required to fund the share repurchase program, were shifted to
longer-term, principally auction rate notes, in order to receive
more favorable rates of return. Of our total cash and marketable
securities position at September 30, 2007, 31%, or about $736,000,
is domiciled domestically, with the remainder held by our
international subsidiaries. Trade accounts receivable increased
primarily due to higher sales of our principal branded products.
Finished good inventory increased in order to support continued
demand for our products. We believe that current inventory levels
are adequate to support the growth in our ongoing business.
Deferred tax assets increased as a result of the Microbia licensing
agreement. Other current assets increased principally due to the
renewal of insurance programs in the June 2007 quarter, which are
paid in full at the time of renewal and expensed over the life of
the policy years. Increases in accounts payable and accrued
expenses were due to normal operating activities.
Property, plant and equipment before accumulated depreciation
increased slightly from March 31, 2007. During the September 2007
quarter, we completed the refurbishment of a 90,000 square foot
facility in Ireland which will provide additional capacity for the
manufacturing of Lexapro and Namenda and capacity for future
products, subject to FDA qualification of the facility. We also
continued to make technology investments to expand our principal
operating systems to include salesforce applications.
On April 1, 2007, we adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation (FIN 48),
"Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109". As a result of the adoption of FIN 48, we
increased our tax liabilities by $13,796 with a corresponding
reduction to the April 1, 2007 balance in retained earnings. In
addition, accrued interest, related to unrecognized tax benefits
totaled $11,576 as of April 1, 2007. Interest and penalties, if
any, are recorded in income tax expense and are classified on the
balance sheet with the related tax liability. Unrecognized tax
benefits totaling $152,695 have been reclassified from current
income taxes payable to long-term income taxes payable and totaled
$175,021 at September 30, 2007 based on our expectation of cash
payments within the next twelve months.
During fiscal 2007 our Board of Directors (Board) approved the
2007 Repurchase Program which authorized the purchase of up to 25
million shares of common stock. On August 13, 2007 the Board
authorized the purchase of an additional 10 million shares of
common stock. In the June 2007 quarter, we repurchased 1.8 million
shares at a cost of $86,003 and in the current quarter we
repurchased 4.95 million shares at a cost of $188,801. As of
November 8, 2007, we have repurchased a total of 18.7 million
shares at a cost of $809,748 under the 2007 Repurchase Program,
leaving us the authority to purchase 16.3 million more shares.
Management believes that current cash levels, coupled with funds
to be generated by ongoing operations, will continue to provide
adequate liquidity to facilitate potential acquisitions of
products, payment of achieved milestones, capital investments and
the continued share repurchases.
Results of Operations
Net sales for the three and six-month periods ended September
30, 2007 increased 8% and 10%, respectively, from the same periods
last year to $842,337 and $1,684,953, primarily due to strong sales
of Lexapro and Namenda. Lexapro, our SSRI for the treatment of
depression and anxiety in adults and our most significant product,
with net sales of $559,063 and $1,111,376 for the quarter and six
months, grew 7% and 8%, respectively, and contributed $36,401 and
$81,681 to the net sales change, of which $9,021 and $25,990 was
due to volume and $27,380 and $55,691 was due to price. In fiscal
2004, we, along with our licensing partner, H. Lundbeck A/S
(Lundbeck) filed suit against Teva Pharmaceuticals (Teva) for
patent infringement related to our Lexapro patent. A trial was held
regarding the patent litigation with Teva in March 2006 and on July
13, 2006, the U.S. District Court for the District of Delaware
determined that the patent covering Lexapro is valid and
enforceable. Lexapro’s patent is set to expire in March 2012.
Teva filed an appeal of the court’s ruling, and on September
5, 2007 a federal appeals court upheld the patent’s validity.
Another generic manufacturer, Caraco Pharmaceutical Laboratories,
Ltd. (Caraco), has filed an ANDA with a Paragraph IV Certification
for a generic equivalent to Lexapro. Forest and Lundbeck have filed
a lawsuit in the U.S. District Court for the Eastern District of
Michigan against Caraco for patent infringement.
Net sales of Namenda, an N-methyl-D-aspartate (NMDA) receptor
antagonist for the treatment of moderate to severe Alzheimer's
disease, grew 24% and 25% in the current quarter and six months,
respectively, and totaled $192,872 and $384,591. This represents an
increase of $37,286 and $77,923 as compared to the same periods
last year, of which $26,516 and $59,833 was due to volume and
$10,770 and $18,090 was due to price. The remainder of the net
sales change for the period was due principally to price
fluctuations of our older non-promoted product lines.
Contract revenue for the three and six months ended September
30, 2007 was $50,313 and $103,690, respectively, compared to
$48,909 and $91,571 in the same periods last year primarily due to
co-promotion income from our co-marketing agreement with Daiichi
Sankyo for Benicar of $49,572 and $102,115, respectively, as
compared to $48,315 and $90,031 last year. Under the terms of the
agreement, fiscal 2008 is the final year of co-promotion activities
and accordingly, beginning in fiscal 2009 we will receive a reduced
share of product profits over the remaining six year term of the
agreement.
Interest income for the current quarter increased over the same
period last year primarily due to higher interest received on
higher levels of invested funds and more favorable rates of return.
Other income for the current six-month period included a milestone
payment received related to our European development program for an
inhaled cystic fibrosis product.
Cost of sales as a percentage of net sales was 22.6% and 22.3%
for the three and six-month periods of the current year as compared
with 23.8% and 23.5% for the prior year due mainly to manufacturing
and operational efficiency gains, as well as cost savings related
to the closure of our Inwood manufacturing facilities.
Selling, general and administrative expenses increased $21,431
and $38,376 for the three and six-month periods ended September 30,
2007 as compared to the same periods last year. The increase was
primarily attributable to salesforce activity and promotional
support for products currently marketed and pre-launch costs for
nebivolol and milnacipran.
Research and development expense increased $76,986 and $74,812
in the three and six-month periods ended September 30, 2007. In
September 2007 we recorded a $70,000 licensing charge in connection
with the collaboration agreement with Microbia for the right to
co-develop and co-market linaclotide. Linaclotide, which is
currently in Phase II testing, is being investigated for the
treatment of constipation-predominant irritable bowel syndrome and
chronic constipation. During the June 2007 quarter we recorded
approximately $28,000 in milestone expenses related to the
aclidinium and milnacipran development programs. In April 2006 we
recorded a $60,000 licensing charge in connection with our
collaboration agreement with Almirall for the U.S. rights to
aclidinium.
Research and development expense also reflects the
following:
·
During the fourth quarter of
fiscal 2006, we entered into an agreement with Mylan Laboratories,
Inc. (Mylan) for the commercialization, development and
distribution rights for nebivolol, a novel beta blocker. In May
2005, Mylan received an "approvable" letter from the FDA for
nebivolol for the treatment of hypertension. Final approval is
contingent upon the review of certain additional data requested by
the FDA. We and Mylan expect the FDA to complete its review prior
to the end of calendar 2007. Nebivolol is also being studied for
the treatment of congestive heart failure (CHF). We have completed
the data analysis of a Phase III study and are continuing to assess
the appropriate timing of a submission for this indication.
·
On May 22, 2007 we announced
that top-line results of a Phase III study demonstrated
statistically significant therapeutic effects of milnacipran as a
treatment of fibromyalgia syndrome (FMS). Subject to a favorable
review of the full study results and based in part on communication
with the FDA, we plan to submit an NDA including data from this
study and an earlier Phase III study around the end of calendar
2007. A third randomized pivotal Phase III study, which was
commenced in early 2006, is expected to have results in the middle
of 2008.
·
In connection with our
acquisition of Cerexa, Inc. in January 2007, we acquired worldwide
development and marketing rights (excluding Japan) to ceftaroline,
a next generation, broad spectrum, hospital-based injectable
cephalosporin antibiotic. Two Phase III studies of ceftaroline in
complicated skin and skin structure infections have completed
enrollment. The first of two Phase III studies in patients with
community acquired pneumonia (CAP) has begun enrollment. A second
Phase III study in CAP will begin enrollment shortly. We anticipate
the skin and skin structure results in calendar 2008 and the CAP
results in 2009.
·
In April 2006, we entered
into a collaboration agreement with Almirall for the U.S. rights to
aclidinium, a long-acting muscarinic antagonist which is being
developed as an inhaled therapy for the treatment of chronic
obstructive pulmonary disease (COPD). Enrollment of two large Phase
III international studies has been completed and we expect to have
top-line results for these studies in the second half of calendar
2008. We and Almirall are also pursuing the development of a
fixed-dose combination of aclidinium and the beta-agonist
formotorol, which is currently in Phase I testing.
·
A once-daily formulation of
Namenda is being evaluated in a Phase III Alzheimer’s disease
study which is now fully enrolled, and results are expected to be
available in early calendar 2008.
·
During the third quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Gedeon Richter Limited for the North American rights to RGH-188, a
compound which is being developed for the treatment of
schizophrenia, bipolar mania and other psychiatric conditions. A
review of top-line results of a Phase II study in schizophrenia
indicated that RGH-188 demonstrated a nominally statistically
significant (i.e., not adjusted for multiple comparisons)
therapeutic effect compared to placebo in the low-dose arm and a
numerical improvement compared to placebo in the high-dose arm that
did not reach nominal statistical significance. Based on these
results, and subject to a complete review of the full study
results, we intend to continue the development of RGH-188 as a
treatment of schizophrenia. A second Phase II study of RGH-188 for
the treatment of bipolar mania study was commenced in April 2007
and we expect results by the middle of calendar 2008.
·
We anticipate starting a
proof of concept study of neramexane in Alzheimer’s disease
in the first half of calendar 2008.
·
During the second quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Glenmark Pharmaceuticals S.A. for the North American development
and marketing of GRC3886, a PDE4 inhibitor for the treatment of
asthma and COPD. The FDA had requested additional preclinical work
which we completed and submitted. FDA has now reviewed this
additional data and has given us a response which allows us to move
forward with a larger Phase II proof of concept study in COPD, with
some limitations.
Other research and development projects we continue to support
include: RGH-896, a compound being developed for the treatment of
chronic pain and other CNS conditions; a group of novel compounds
that target the group 1 metabotropic glutamate receptors
(mGLUR1/5); and ME1036, an injectable antibiotic which has
demonstrated excellent pre-clinical activity against both
Gram-positive and Gram-negative bacteria. In addition, we have
entered into several collaborations to conduct pre-clinical drug
discovery.
Our effective tax rate was 19% and 21% for the respective three
and six-month periods ended September 30, 2007, as compared to 22%
for the same periods last year. The decrease was primarily
attributable to the Microbia licensing charge in September 2007.
Effective tax rates can be affected by ongoing tax audits. See Note
7 to the Condensed Consolidated Financial Statements
(Unaudited).
We expect to continue our profitability in the current fiscal
year with continued growth in our principal promoted products.
Inflation has not had a material effect on our operations for
the periods presented.
Critical Accounting Policies
The following accounting policies are important in understanding
our financial condition and results of operations and should be
considered an integral part of the financial review. Refer to the
notes to the consolidated financial statements for additional
policies.
Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the
reporting period. Estimates are made when accounting for sales
allowances, returns, rebates and other pricing adjustments,
depreciation, amortization and certain contingencies. Forest is
subject to risks and uncertainties, which may include but are not
limited to competition, federal or local legislation and
regulations, litigation and overall changes in the healthcare
environment that may cause actual results to vary from estimates.
We review all significant estimates affecting the financial
statements on a recurring basis and record the effect of any
adjustments when necessary. Certain of these risks, uncertainties
and assumptions are discussed further under the section entitled
"Forward Looking Statements".
Revenue Recognition
Revenues are recorded in the period the merchandise is shipped.
As is typical in the pharmaceutical industry, gross product sales
are subject to a variety of deductions, primarily representing
rebates and discounts to government agencies, wholesalers and
managed care organizations. These deductions represent estimates of
the related liabilities and, as such, judgment is required when
estimating the impact of these sales deductions on gross sales for
a reporting period. Historically, our adjustments for actual future
settlements have not been material, and have resulted in either a
net increase or a net decrease to net income. If estimates are not
representative of actual settlement, results could be materially
affected. Provisions for estimated sales allowances, returns,
rebates and other pricing adjustments are accrued at the time
revenues are recognized as a direct reduction of such revenue.
The accruals are estimated based on available information,
including third party data, regarding the portion of sales on which
rebates and discounts can be earned, adjusted as appropriate for
specific known events and the prevailing contractual discount rate.
Provisions are reflected either as a direct reduction to accounts
receivable or, to the extent that they are due to entities other
than customers, as accrued expense. Adjustments to estimates are
recorded when customer credits are issued or payments are made to
third parties.
The sensitivity of estimates can vary by program and type of
customer. However, estimates associated with Medicaid and contract
rebates are most at risk for adjustment because of the extensive
time delay between the recording of the accrual and its ultimate
settlement, an interval that can range up to one year. Because of
this time lag, in any given quarter, adjustments to actual may
incorporate revisions of prior quarters.
Provisions for Medicaid and contract rebates during a period are
recorded based upon the actual historical experience ratio of
rebates paid and actual prescriptions written. The experience ratio
is applied to the period's sales to determine the rebate accrual
and related expense. This experience ratio is evaluated regularly
to ensure that the historical trends are as current as practicable.
As appropriate, we will adjust the ratio to more closely match the
current experience or expected future experience. In assessing this
ratio, we consider current contract terms, such as the effect of
changes in formulary status, discount rate and utilization trends.
Periodically, the accrual is adjusted based upon actual payments
made for rebates. If the ratio is not indicative of future
experience, results could be affected. Rebate accruals for Medicaid
were $27,877 at September 30, 2007 and $31,642 at September 30,
2006. Commercial discounts and other rebate accruals were $146,203
at September 30, 2007 and $86,336 at September 30, 2006. These and
other rebate accruals are established in the period the related
revenue was recognized, resulting in a reduction to sales and the
establishment of a liability, which is included in accrued
expenses.
The following table summarizes the activity for the six-month
period in the accounts related to accrued rebates, sales returns
and discounts
(In thousands)
:
|
Beginning balance
Provision for rebates
Changes in estimates
Settlements
Provision for returns
Changes in estimates
Settlements
Provision for chargebacks and discounts
Changes in estimates
Settlements
Ending balance
|
September 30, 2007
$208,063
203,261
(
175,888
)
27,373
16,406
(
17,900
)
( 1,494)
168,801
( 7,700)
(
172,020
)
( 10,919)
$223,023
=======
|
September 30, 2006
$158,277
179,999
3,301
(
162,174
)
21,126
14,897
(
1,264)
(
11,027
)
2,606
193,994
( 4,000)
(
186,110
)
3,884
$185,893
=======
|
|
Deductions for chargebacks (primarily discounts to group
purchasing organizations and federal government agencies) are
generally settled within 2-3 weeks of incurring the liability.
Based on current contracting trends and chargeback activity, the
Company reduced the estimated liability at September 30, 2007 to
more closely reflect Management’s estimate of future
chargeback settlements.
Forest's policy relating to the supply of inventory at wholesalers
is to maintain stocking levels of up to three weeks and to keep
monthly levels consistent from year to year, based on patterns of
utilization. We have historically closely monitored wholesale
customer stocking levels by purchasing information directly from
customers and by obtaining other third party information. Unusual
or unexpected variations in buying patterns or utilizations are
investigated.
Sales incentives are generally given in connection with a new
product launch. These sales incentives are recorded as a reduction
of revenues and are based on terms fixed at the time goods are
shipped. New product launches may result in expected temporary
increases in wholesaler inventories, which as described above, are
closely monitored and have not resulted in increased product
returns.
|
Forward Looking Statements
Except for the historical information contained herein, the
Management Discussion and other portions of this Form 10-Q contain
forward looking statements that involve a number of risks and
uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products,
the impact of competitive products and pricing, the timely
development and launch of new products, changes in laws and
regulations affecting the healthcare industry, and the risk factors
listed from time to time in our filings with the SEC, including the
Annual Report on Form 10-K for the fiscal year ended March 31,
2007.