UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__________________________________________
(Mark One)
[X]
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended June 30,
2008
[ ]
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to
Commission File No. 1-5438
FOREST LABORATORIES,
INC.
(Exact name of registrant as specified in its
charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
11-1798614
(I.R.S. Employer
Identification Number)
|
|
|
|
909 Third Avenue
New York, New York
(Address of principal executive offices)
|
|
10022-4731
(Zip code)
|
(212) 421-7850
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
X
No
.
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer
X
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
(Do
not check if a smaller
reporting
company)
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange
Act). Yes
No
X
.
Number of shares outstanding of Registrant's
Common Stock as of August 7, 2008: 304,865,595.
TABLE OF CONTENTS
(Q
uick Links
)
PART I -
FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS
STATEMENTS OF INCOME
STATEMENTS OF COMPREHENSIVE INCOME
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II -
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF
PROCEEDS
AND ISSUER REPURCHASES OF EQUITY SECURITIES
ITEM 6. EXHIBITS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
PART I
- FINANCIAL INFORMATION
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
|
June 30, 2008
(Unaudited)
|
March 31, 2008
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
Cash (including cash equivalent
investments
of $986,990 in June
and $833,018 in March)
|
$ 992,687
|
$ 833,052
|
Marketable securities
|
840,085
|
943,972
|
Accounts receivable, less allowance for
doubtful accounts
of $19,185 in June
and $19,882 in March
|
400,120
|
445,987
|
Inventories, net
|
471,201
|
425,138
|
Deferred income taxes
|
230,129
|
226,095
|
Other current assets
|
46,747
|
33,260
|
Total current
assets
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2,980,969
|
2,907,504
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|
|
|
Marketable securities
|
687,300
|
663,625
|
|
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|
Property, plant and equipment
|
573,510
|
567,331
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Less: accumulated depreciation
|
230,394
|
217,294
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|
343,116
|
350,037
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Other assets:
Goodwill
|
14,965
|
14,965
|
License agreements, product rights and
other
intangibles, less
accumulated amortization
of $448,898 in June
and $421,719 in March
|
500,618
|
527,787
|
Deferred income taxes
|
60,360
|
59,778
|
Other assets
|
1,622
|
1,671
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Total other
assets
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577,565
|
604,201
|
|
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|
Total
assets
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$4,588,950
|
$4,525,367
|
|
========
|
========
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except for par values)
|
June 30, 2008
(Unaudited)
|
March 31, 2008
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|
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable
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$ 101,837
|
$ 223,720
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Accrued expenses
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500,841
|
387,105
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Income taxes payable
|
38,231
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|
Total current
liabilities
|
640,909
|
610,825
|
|
|
|
Long-term liabilities:
Income tax liabilities
|
210,361
|
198,410
|
Deferred income taxes
|
761
|
815
|
|
211,122
|
199,225
|
|
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Stockholders' equity:
Series preferred stock, $1.00 par; shares
authorized 1,000;
no shares issued or
outstanding
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Common stock, $.10 par; shares
authorized 1,000,000; issued
421,451 shares in
June and 421,421 shares in March
|
42,145
|
42,142
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Additional paid-in capital
|
1,444,958
|
1,434,172
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Retained earnings
|
5,854,413
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5,611,493
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Accumulated other comprehensive
income
|
33,670
|
34,592
|
Treasury stock, at cost
|
|
|
(116,668
shares in June and 110,014 shares in March)
|
(
3,638,267
)
|
(
3,407,082
)
|
Total
stockholders' equity
|
3,736,919
|
3,715,317
|
|
|
|
Total
liabilities and stockholders' equity
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$4,588,950
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$4,525,367
|
|
========
|
========
|
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
June
30,
|
|
|
|
2008
|
2007
|
|
|
|
|
|
Net sales
|
|
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$893,745
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$842,616
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Contract revenue
|
|
|
54,153
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53,377
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Interest income
|
|
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18,230
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26,738
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Other income
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|
716
|
5,543
|
|
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|
966,844
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928,274
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Costs and expenses:
Cost of sales
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197,340
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186,240
|
Selling, general and administrative
|
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342,955
|
261,328
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Research and development
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112,112
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136,908
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652,407
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584,476
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Income before income tax expense
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314,437
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343,798
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Income tax expense
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71,517
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75,636
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Net income
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$242,920
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$268,162
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=======
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=======
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Net income per common share:
|
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Basic
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$0.79
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$0.84
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|
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====
|
====
|
Diluted
|
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$0.79
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$0.83
|
|
|
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====
|
====
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Weighted average number of common
shares outstanding:
|
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Basic
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307,043
|
319,580
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======
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======
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Diluted
|
|
|
307,912
|
321,921
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|
======
|
======
|
See notes to condensed consolidated financial
statements.
FOREST LABORATORIES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
|
Three Months
Ended
June
30,
|
|
|
|
2008
|
2007
|
|
|
|
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|
Net income
|
|
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$242,920
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$268,162
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Other comprehensive (loss) income
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|
(922)
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1,979
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|
|
|
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Comprehensive income
|
|
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$241,998
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$270,141
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|
|
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=======
|
=======
|
See notes to condensed consolidated financial
statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
Three Months
Ended
|
(In thousands)
|
June
30,
|
|
2008
|
2007
|
Cash flows from operating activities:
|
|
|
Net income
|
$242,920
|
$268,162
|
Adjustments to reconcile net income to
|
|
|
net cash provided by operating
activities:
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Depreciation
|
13,126
|
11,317
|
Amortization and
impairments
|
27,179
|
9,165
|
Stock-based
compensation expense
|
10,587
|
10,676
|
Deferred income tax
(benefit) expense
|
( 4,670)
|
18,584
|
Foreign currency
transaction gain
|
( 545)
|
( 170)
|
Net change in
operating assets and liabilities:
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|
Decrease
(increase) in:
|
|
|
Accounts
receivable, net
|
45,867
|
( 16,047)
|
Inventories,
net
|
( 46,063)
|
( 32,613)
|
Other
current assets
|
( 13,487)
|
( 23,025)
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Other
assets
|
49
|
54
|
Increase
(decrease) in:
|
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|
Accounts
payable
|
( 121,883)
|
47,757
|
Accrued
expenses
|
113,736
|
39,211
|
Income
tax liabilities
|
50,182
|
16,448
|
Net
cash provided by operating activities
|
316,998
|
349,519
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property, plant and equipment
|
( 6,214)
|
( 9,604)
|
Purchase of marketable securities
|
( 502,398)
|
( 827,325)
|
Redemption of marketable securities
|
582,609
|
607,821
|
Net
cash provided by (used in) investing activities
|
73,997
|
(
229,108
)
|
|
|
|
Cash flows from financing activities:
|
|
|
Net proceeds from common stock options
exercised
by employees under stock option
plans
|
202
|
18,580
|
Tax benefit realized from the exercise of
stock
options by employees
|
|
3,372
|
Purchase of treasury stock
|
(
231,185
)
|
(
86,003
)
|
Net
cash used in financing activities
|
(
230,983
)
|
(
64,051
)
|
|
|
|
Effect of exchange rate changes on cash
|
(
377
)
|
1,874
|
Increase in cash and cash equivalents
|
159,635
|
58,234
|
Cash and cash equivalents, beginning of period
|
833,052
|
563,663
|
Cash and cash equivalents, end of period
|
$992,687
|
$621,897
|
|
=======
|
=======
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
Income taxes
|
$14,504
|
$37,517
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (or GAAP) 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 GAAP 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 three-month period ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending
March 31, 2009. 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, 2008.
2. Accounts
Receivable:
Accounts receivable, net, consists of the
following:
|
June 30, 2008
|
|
|
(In thousands)
|
(Unaudited)
|
|
March 31, 2008
|
|
|
|
|
Trade
|
$341,551
|
|
$377,779
|
Other
|
58,569
|
|
68,208
|
|
$400,120
|
|
$445,987
|
|
=======
|
|
=======
|
3. Inventories:
Inventories, net of reserves for obsolescence,
consist of the following:
|
June 30, 2008
|
|
|
(In thousands)
|
(Unaudited)
|
|
March 31, 2008
|
|
|
|
|
Raw materials
|
$195,250
|
|
$234,288
|
Work in process
|
625
|
|
1,360
|
Finished goods
|
275,326
|
|
189,490
|
|
$471,201
|
|
$425,138
|
|
=======
|
|
=======
|
4. Fair Value Measurements:
In the first quarter of fiscal 2009, the Company adopted SFAS
No. 157 (or SFAS 157), "Fair Value Measurements". This
pronouncement defines fair value, establishes a framework for
measuring fair value under GAAP and requires expanded disclosures
about fair value measurements. SFAS 157 does not require any new
fair value measurements, but rather generally applies to other
accounting pronouncements that require or permit fair value
measurements. SFAS 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement, and defines fair
value as the price that would be received to sell an asset or
transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 discusses valuation
techniques, such as the market approach (comparable market prices),
the income approach (present value of future income or cash flow)
and the cost approach (cost to replace the service capacity of an
asset or replacement cost). These valuation techniques are based
upon observable and unobservable inputs. Observable inputs reflect
market data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions. SFAS 157
utilizes a fair value hierarchy that prioritizes inputs to fair
value measurement techniques into three broad levels. The following
is a brief description of those three levels:
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or
liabilities in active markets.
|
|
|
|
|
Level 2:
|
Observable inputs other than quoted prices that are directly or
indirectly observable for the asset or liability, including quoted
prices for similar assets or liabilities in active markets; quoted
prices for similar or identical assets or liabilities in markets
that are not active; and model-derived valuations whose inputs are
observable or whose significant value drivers are observable.
|
|
|
|
|
Level 3:
|
Unobservable inputs that reflect the reporting entity’s
own assumptions.
|
The FASB issued FSP 157-2 which delayed the effective date of
SFAS 157 for all non-financial assets and liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, until the beginning of fiscal year
2010. The Company’s financial assets adjusted to fair value
at June 30, 2008 are its commercial paper investments included in
cash and cash equivalents, money market accounts, municipal bonds
and notes, variable rate demand notes, floating rate notes and
auction rate securities. These assets are subject to the
measurement and disclosure requirements of SFAS 157. The
Company adjusts the value of these instruments to fair value each
reporting period. No adjustment to retained earnings resulted
from the adoption of SFAS 157.
4. Fair Value Measurements:
(Continued)
The fair value hierarchy of the Company’s financial assets
carried at fair value and measured on a recurring basis is as
follows:
Fair Value of Financial Assets
(In thousands)
Description
|
|
Fair Value at
June 30, 2008
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level
1)
|
|
Significant
Other Observable
Market Inputs
(Level
2)
|
Money market accounts
|
|
$771,073
|
|
$771,073
|
|
|
Municipal bonds and notes
|
|
147,373
|
|
|
|
$147,373
|
Commercial paper
|
|
843,185
|
|
526,612
|
|
316,573
|
Variable rate demand notes
|
|
207,104
|
|
|
|
207,104
|
Floating rate notes
|
|
440,361
|
|
262,601
|
|
177,760
|
Auction rate securities
|
|
37,892
|
|
|
|
37,892
|
Money market accounts are included in cash and cash equivalents
on the accompanying balance sheets and are classified as Level 1
assets. Certain commercial paper and floating rate note
investments are also classified as Level 1 assets because they
consist of publicly traded securities which are priced and actively
traded on a daily basis.
The Company holds investments in auction rate securities (or
ARS) amounting to $37,892 (with underlying maturities from 23.5 to
33.9 years) of which $22,597 are collateralized by student loans.
Substantially all such collateral in the aggregate is guaranteed by
the U.S. government under the Federal Family Education Loan
Program. The balance of the ARS investments of $15,295 are
issued by local municipal governments. Liquidity for these
securities was normally dependent on an auction process that resets
the applicable interest rate at pre-determined intervals, ranging
from 7 to 35 days. Beginning in February 2008, the
auctions for the ARS held by the Company and others were
unsuccessful, requiring the Company to continue to hold them beyond
their typical auction reset dates. Auctions fail when there is
insufficient demand. However, this does not represent a
default by the issuer of the security. Upon an auction’s
failure, the interest rates reset based on a formula contained in
the security. The rate is generally equal to or higher than
the current market rate for similar securities. The
securities will continue to accrue interest and be auctioned until
one of the following occurs: the auction succeeds; the issuer calls
the securities; or the securities mature. The Company classifies
the ARS as non-current assets held for sale under the heading
"Marketable securities" in the Company’s balance sheets and
values them at purchase price free from impairment. The Company
determines the fair value of these ARS instruments based on Level 2
inputs in the SFAS 157 fair value hierarchy. Level 2 fair value
determinations are derived from directly or indirectly observable
market based information.
Certain of the Company’s commercial paper and floating
rate notes and all of the Company’s variable rate notes and
municipal bonds and notes are based on Level 2 inputs in the SFAS
157 fair value hierarchy.
5. Net Income Per Share
(In
thousands)
:
A reconciliation of shares used in calculating basic and diluted
net income per share follows:
|
Three Months Ended
June
30,
|
|
|
2008
|
2007
|
|
|
Basic
|
307,043
|
319,580
|
|
|
Effect of assumed conversion of employee
stock options and restricted
stock
|
869
|
2,341
|
|
|
Diluted
|
307,912
|
321,921
|
|
|
|
======
|
======
|
|
|
Options to purchase approximately 14,951 shares of common stock
at exercise prices ranging from $34.12 to $76.66 per share that
were outstanding during a portion of the three-month period ended
June 30, 2008 were not included in the computation of diluted net
income per share because they were anti-dilutive. These options
expire through 2018. Options to purchase approximately 8,059 shares
of common stock at exercise prices ranging from $38.94 to $76.66
per share that were outstanding during a portion of the three-month
period ended June 30, 2007 were not included in the computation of
diluted net income per share because they were anti-dilutive. These
options expire through 2017.
6. Stock-Based Compensation
(In
thousands)
:
In August 2007 the stockholders of the Company voted to adopt
the 2007 Equity Incentive Plan (or the 2007 Plan) which replaces
and supersedes all prior stock option plans. Under the 2007
Plan, 13,950 shares were authorized to be issued to employees of
the Company and its subsidiaries at prices not less than the fair
market value of the common stock at the date of grant. 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 June 30, 2008,
10,283 shares were available for grant.
Compensation expense of $10,587 ($8,817 net of tax) was recorded
for the three-month period ended June 30, 2008. 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
the provisions of Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment", (or SFAS 123R), takes into
consideration the compensation cost attributed to future services
not yet recognized.
7. 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
June
30,
|
|
|
2008
|
2007
|
|
|
|
|
|
|
|
Central nervous system (CNS)
|
$810,320
|
$747,508
|
|
|
Cardiovascular
|
9,815
|
8,419
|
|
|
Other
|
73,610
|
86,689
|
|
|
|
$893,745
|
$842,616
|
|
|
|
=======
|
=======
|
|
|
8. Long-Term Debt:
On December 7, 2007, the Company established a $500 million
revolving credit facility for the purpose of providing additional
financial liquidity for the financing of business development and
corporate strategic initiatives. The facility can be increased up
to $750 million based upon agreement with the participating lenders
and expires on December 7, 2012. As of August 7, 2008, the Company
has not drawn any funds from the available credit. The utilization
of the revolving credit facility is subject to the adherence to
certain financial covenants such as leverage and interest coverage
ratios.
9. Income Taxes
(In
thousands)
:
The Company files income tax returns in the United States and
certain foreign jurisdictions including Ireland. The
Company’s income tax returns for fiscal years prior to 1999
in most jurisdictions and prior to 2002 in Ireland 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 income tax returns for various
post-1999 fiscal years, including the Internal Revenue Service (or
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. In accordance with the Company’s taxpayer appeals
rights, a formal written protest of the proposed adjustment has
been filed with the IRS and the matter is in administrative
appeals.
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. income 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. However, at this time Management believes
that it is unlikely that the ultimate outcome will be determined
within the next 12 months. The Company’s continuing practice
is to recognize net interest related to income tax matters in
income tax expense. As of June 30, 2008, the Company had accrued an
additional $1,738 in interest for a total of $21,677 related to the
resolution of various income tax matters.
The Company’s effective tax rate was 22.7% for the
three-month period ended June 30, 2008, as compared to 22.0% for
the same period last year. The increase resulted primarily
from the net impact of one-time discrete tax adjustments related
principally to stock-based compensation in prior years offset for
the most part by the termination of our co-promotion agreement for
Azor™ and other tax matters. Effective tax rates may be
affected by ongoing tax audits.
10. Termination of Co-Promotion
Agreement
(In thousands)
:
During the current quarter, the Company and its licensing
partner Daiichi Sankyo, terminated their co-promotion agreement for
Azor. As a result of terminating the agreement, the Company
recorded a one-time charge of $44,100 to selling, general and
administrative expense which was composed of a termination fee of
approximately $26,600 and $17,500 related to the unamortized
portion of the initial upfront payment.
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 to $966,844 for the quarter ended
June 30, 2008 as compared to $928,274 for the June 30, 2007 quarter
due to the continued growth of our key marketed products
Lexapro® and Namenda® and sales of our newest product
Bystolic™, a novel beta-blocker for the treatment of
hypertension launched in January 2008. During the current quarter,
we and our licensing partner Daiichi Sankyo, (or Sankyo) terminated
our co-promotion agreement for Azor™. As a result of
terminating the agreement, we recorded a one-time charge of $44,100
to selling, general and administrative expenses which was composed
of a termination fee of approximately $26,600 and $17,500 related
to the unamortized portion of the initial upfront payment. As a
result of this charge, net income for the June 2008 quarter was
lower than the prior year’s June quarter.
Financial Condition and Liquidity
Net current assets increased by $43,381 from March 31, 2008.
Cash and cash equivalents and marketable securities increased from
ongoing operations. During the quarter ended June 30, 2008 and
pursuant to the 2007 Repurchase Program, we repurchased 6.6 million
shares of common stock at a cost of $231,185 leaving 9.2 million
shares available for repurchase under the program. Of our total
cash and cash equivalents and marketable securities position at
June 30, 2008, 34%, or about $850,000, was domiciled domestically
with the remainder held by our international subsidiaries. We
currently invest funds in variable rate demand notes, municipal
bonds and notes, commercial paper including money market
instruments, auction rate securities and European bank floating
rate notes that have major bank liquidity agreements. These
investments, which are subject to general credit, liquidity and
market risks, have not been materially affected by the U.S.
sub-prime mortgage defaults that have affected certain sectors of
the financial markets and caused credit and liquidity issues. Trade
and other accounts receivable decreased due to the timing of
receipts. Finished goods inventory increased in order to support
continued demand for our products including Bystolic, which was
launched in the fourth quarter of fiscal 2008. Raw material
inventories decreased as we are bringing these balances to more
normalized levels. We believe that current inventory levels are
adequate to support the growth of our ongoing business. License
agreements, product rights and other intangibles net of accumulated
amortization decreased from March 31, 2008 primarily due to the
write-off of the Azor license. Other current assets increased due
principally to the renewal of our insurance programs, which are
paid in full at the time of renewal and expensed over the life of
the policy years. Accounts payable and accrued expenses in the
aggregate decreased slightly while income taxes payable increased
due to normal operating activities.
Property, plant and equipment before accumulated depreciation
increased from March 31, 2008 as we continued to make technology
investments to expand our principal operating systems to enhance
supply chain and salesforce applications.
During fiscal 2007 our Board of Directors (or 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 2008 quarter, we repurchased a total of
6.6 million shares at a cost of $231,185. As of August 7, 2008,
under the 2007 Repurchase Program, we have cumulatively repurchased
a total of 25.8 million shares at a cost of $1,059,791, leaving us
the authority to purchase 9.2 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
continued share repurchases.
Results of Operations
Net sales increased $51,129 or 6.1% to $893,745 for the quarter
ended June 30, 2008 from $842,616 in the June 30, 2007 quarter
primarily due to strong sales of Lexapro, Namenda and Bystolic.
Lexapro, which is indicated for the treatment of major
depressive disorder and generalized anxiety disorder, and is our
most significant product, had sales of $583,097 in the quarter,
growing 5.6% and contributing $30,784 to the net sales change as
compared with last year, of which $30,277 was due to price and $507
was related to volume. During fiscal 2007 Caraco Pharmaceutical
Laboratories, Ltd. (or Caraco), filed an Abbreviated New Drug
Application (or ANDA) with a Paragraph IV Certification for a
generic equivalent to Lexapro. We along with our licensing partner
H. Lundbeck A/S have filed a lawsuit in the U.S. District Court for
the Eastern District of Michigan against Caraco for patent
infringement. Lexapro’s patent is set to expire in March
2012.
Sales of Namenda, our N-methyl-D-aspartate (or NMDA) receptor
antagonist for the treatment of moderate to severe Alzheimer's
disease grew 14%, an increase of
$26,899
to $218,618 in the quarter ended June 30,
2008 as compared with June 30, 2007, of which $17,986 was due to
price and $8,913 was due to volume. During the third quarter of
fiscal 2008, we received notification from several companies that
they filed ANDAs with Paragraph IV Certifications to obtain
approval to market generic equivalents of Namenda. In January 2008,
we along with our licensing partner Merz Pharma GmbH & Co. KgaA
filed lawsuits in the U.S. District Court of Delaware against
several companies for patent infringement. Namenda’s patent
is set to expire in April 2010. We have applied for patent term
restoration which, if granted, would extend Namenda’s patent
protection until September 2013.
Sales of Bystolic, launched in January 2008, achieved sales of
$4,374 in the quarter. Bystolic is our novel beta-blocker indicated
for the treatment of hypertension. The remainder of the net sales
change for the period presented was due principally to volume and
price fluctuations of our older and non-promoted product lines.
Contract revenue for the current quarter was $54,153 compared to
$53,377 in the same period last year, primarily due to co-promotion
income from our co-marketing agreement with Sankyo for Benicar.
Fiscal 2008 was the final year of our active co-promotion
activities and we will receive a reduced share of product profits
over the remaining six-year term of the agreement, as defined.
Going forward, we will not incur salesforce expenses for this
product.
Interest income for the current quarter decreased over the same
period last year primarily due to lower average rates of return
offset by higher levels of invested funds. Other income for the
current quarter decreased over the same period last year primarily
due to a milestone payment received in the prior year related to
our European program for an inhaled cystic fibrosis product.
Cost of sales as a percentage of net sales was 22.1% for the
June 2008 quarter, unchanged from the June 2007 quarter.
Selling, general and administrative expense increased to
$342,955 in the current quarter as compared to $261,328 in the same
period last year primarily due to the one-time charge of $44,100
relating to the termination of the Azor co-promotion agreement, as
well as increased salesforce activity and promotional support for
products currently marketed, launch costs for Bystolic and
pre-launch costs for milnacipran.
Research and development expense decreased to $112,112 in the
current quarter as compared to $136,908 in the same period last
year. During the June 2007 quarter we recorded approximately
$28,000 in milestone expenses related to the aclidinium and
milnacipran development programs.
Research and development expense also reflects the
following:
·
In May 2008, we filed an
sNDA for Lexapro for the additional indication of adolescent
depression. The filing was based on the results from a Phase III
study of Lexapro in the treatment of adolescents aged 12-17, with
Major Depressive Disorder, which indicate that patients treated
with Lexapro experienced statistically significant improvement in
symptoms of depression.
·
Regarding nebivolol
(Bystolic), we plan to file an sNDA in early calendar 2009 for a
new indication of congestive heart failure based on the results of
a previously completed Phase III study (the Seniors study).
·
In December 2007, we
submitted an NDA to the FDA for milnacipran in the treatment of
fibromyalgia syndrome based on data from two Phase III studies
which demonstrated significant therapeutic effects. We expect FDA
action with respect to this NDA by the end of October 2008. We also
expect results from a third randomized pivotal Phase III study in
late 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 with activity against gram-positive
bacteria such as MRSA and gram-negative bacteria. In June 2008, we
reported positive results from two globally conducted, multi-center
Phase III studies of ceftaroline for complicated skin and skin
structure infections. Enrollment continues for ceftaroline in two
Phase III studies for community acquired pneumonia and we
anticipate those results in calendar 2009. The data from these two
indications, if supportive, will serve as our planned submission
package to the FDA for initial marketing approval.
·
In April 2006, we entered
into a collaboration agreement with Laboratorios Almirall, S.A. (or
Almirall) for the U.S. rights to aclidinium, a novel long-acting
muscarinic antagonist which is being developed as an inhaled
therapy for the treatment of chronic obstructive pulmonary disease
(or COPD). An international Phase III program is currently being
conducted by us and Almirall. Enrollment has been completed and we
expect top-line results to be available 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
formoterol, which is currently in Phase II testing.
·
During the September 2007
quarter, we entered into a 50/50 partnership with Ironwood
Pharmaceuticals, Inc. (or Ironwood) to co-develop and co-market the
compound linaclotide. Linaclotide is currently being investigated
for the treatment of constipation-predominant irritable bowel
syndrome (or IBS-C) and chronic constipation (or CC). In March
2008, we and Ironwood announced positive top-line results from two
Phase II(b) randomized, double-blind, placebo-controlled studies
assessing the safety, therapeutic effect and dose response of four
different once-daily doses of linaclotide in the treatment of IBS-C
and CC. Linaclotide was well tolerated at all doses. Based on this
data we anticipate initiating Phase III studies in both indications
in the second half of calendar 2008.
·
In February 2008, we
received preliminary results of a Phase III study of memantine HCl
in a novel once-daily formulation of Namenda for the treatment of
moderate to severe Alzheimer’s disease. The results
indicate that patients treated with this formulation experienced
statistically significant benefits in cognition and clinical global
status compared to placebo. Based on the results of this
study, we intend to prepare and file an NDA for this new once-daily
formulation.
·
During the third quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Gedeon Richter Ltd. (or Richter) for the North American rights to
RGH-188, and related compounds, being developed as an atypical
antipsychotic 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 statistical significant (i.e., not adjusted for
multiple comparisons) therapeutic effect compared to placebo in a
low-dose arm and a numerical improvement compared to placebo in a
high-dose arm that did not reach nominal statistical significance.
Based on the review of the results, we and Richter initiated a
Phase II(b) dose-ranging study in schizophrenia patients. This
study is being performed in order to better determine an optimal
dose to take into the planned Phase III program. An additional
Phase II study of RGH-188 for the treatment of bipolar mania was
commenced in April 2007 and we expect results in the second half of
calendar 2008.
·
During the second quarter of
fiscal 2005, Forest entered into a collaboration agreement with
Glenmark Pharmaceuticals Ltd. for the North American development
and marketing of GRC 3886, a PDE4 inhibitor for the treatment of
asthma and COPD. We have commenced a Phase II study of this
compound for the COPD indication with results expected in the
second half of calendar 2009.
Among other research and development projects we continue to
support are the following: RGH-896, a compound being developed for
the treatment of chronic pain and other CNS conditions; a series of
novel compounds that target group 1 metabotropic glutamate
receptors (mGLUR1/5); NXL104, a novel intravenous beta-lactamase
inhibitor being developed in combination with ceftaroline; and
ME1036, an injectable carbapenem antibiotic which has demonstrated
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 22.7% for the three-month period
ended June 30, 2008, as compared to 22.0% for the same period last
year. The increase resulted primarily from the net impact of
one-time discrete tax adjustments related principally to
stock-based compensation in prior years offset for the most part by
the termination of our co-promotion agreement for Azor™ and
other tax matters. Effective tax rates may be affected by ongoing
tax audits.
In connection with our previously reported adoption of the
provisions of Financial Accounting Standards Board Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109", we accrued an additional
$1,738 in interest related to unrecognized tax benefits totaling
$21,677 for the resolution of various income tax matters.
We expect to continue our profitability in the current fiscal
year with continued sales 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 condensed 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 settlements, 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 expenses. 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 $37,861 at June 30, 2008 and $26,890 at June 30, 2007.
Commercial discounts and other rebate accruals were $143,688 at
June 30, 2008 and $137,111 at June 30, 2007. 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 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
|
June 30, 2008
$229,681
118,232
(
109,605
)
8,627
6,744
(
5,687
)
1,057
78,645
(
81,772
)
( 3,127)
$236,238
=======
|
|
June 30, 2007
$208,063
100,159
(
83,523
)
16,636
9,239
(
9,559
)
( 320)
81,501
( 7,700)
(
85,578
)
( 11,777)
$212,602
=======
|
Deductions for chargebacks (primarily discounts to group
purchasing organizations and federal government agencies) closely
approximate actual as these deductions are settled generally within
2-3 weeks of incurring the liability.
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 historically 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,
2008.
Quantitative and
Qualitative Disclosures about Market Risk
In the normal course of business, operations may be exposed to
fluctuations in currency values and interest rates. These
fluctuations can vary the costs of financing, investing and
operating transactions. Because we had no debt and only minimal
foreign currency transactions, there was no material impact on
earnings due to fluctuations in interest and currency exchange
rates.
Controls and
Procedures
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the
participation of the principal executive officer and principal
financial officer, of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)). Based on this
evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms. There was no change in the Company's
internal control over financial reporting during the Company's most
recently completed fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II -
Other Information
Item 1.
Legal
Proceedings
Forest
is a party to certain legal proceedings previously disclosed in our
Annual Report on Form
10-K
(Form 10-K) for the fiscal year ended March 31, 2008.
With
respect to the
Louisiana Wholesale Drug Company
matter
identified in the Form 10-K, the
U.S.
Circuit Court of Appeals for the District of Columbia Circuit, by
way of a decision dated
July
25, 2008, has affirmed the grant of summary judgment in favor of
Forest.
The
U.S. District Court for the Southern District of New York has set
the trial date in the action
In re Forest Laboratories, Inc. Securities Litigation,
as
further described in the Form 10-K, for
the
week of November 3, 2008.
We
are named in approximately 70 product liability lawsuits. More than
40 of the lawsuits
allege
that Celexa or Lexapro caused or contributed to a suicide or
suicide attempt. More than
25
of the lawsuits allege that Celexa or Lexapro caused or contributed
to birth defects. The suits
seek
substantial compensatory and punitive damages. We are defending all
the suits vigorously.
A
multidistrict proceeding (or MDL) has been established, and all of
the federal court cases
involving
suicide allegations have been transferred to Judge Rodney Sippel in
the United States
District
Court for the Eastern District of Missouri. The final venue of the
birth defect cases has
not
been determined. While litigation is inherently subject to
uncertainty and accordingly we
cannot
predict or determine the outcome of the lawsuits, we believe the
claims lack merit. We
currently
maintain $140 million of product liability coverage per
"occurrence" and in the
aggregate.
Item
1A.
Risk Factors
There
have been no material changes with respect to the risk factors
disclosed in our Annual
Report
on Form 10-K for the fiscal year ended March 31, 2008, except that
the risk factor
captioned
Our Business, and in Particular the Treatment of CNS Disorders,
Presents Risk of
Product Liability Claims
is hereby revised to read as
follows:
As
more fully discussed in "Item 1.
Legal Proceedings
", we are
a party to various legal
actions
asserting product liability claims relating to the use of Celexa or
Lexapro. These
cases
include claims for wrongful death from suicide, injury from suicide
attempts while
using
Celexa or Lexapro. We believe that suicide and related events are
inherent in the
symptoms
and consequences of major depressive disorder and therefore these
types of
occurrences
are not unexpected from patients who are being treated for such
condition,
including
patients who may be using our products. In addition, some of the
actions
allege
that Celexa or Lexapro cause or contribute to birth defects. While
we believe
there
is no merit to the cases which have been brought against us,
litigation is inherently
subject
to uncertainties and there can be no assurance that we will not be
required to
expend
substantial amounts in the defense or resolution of some of these
matters.
Item
2.
Unregistered Sales of Equity Securities, Use of
Proceeds and Issuer Repurchases of Equity
Securities
Purchase
of equity securities by Forest:
In
May 2006 our Board of Directors authorized a new share repurchase
program (the 2007
Repurchase
Program) for up to 25 million shares of our common stock. On August
13, 2007
the
Board authorized an additional 10 million shares to be available
for repurchase. As of
August
7, 2008, 9.2 million shares were available for repurchase under the
2007
Repurchase
Program.
The
following table summarizes the repurchase of common stock under the
2007 Repurchase
Program
during the quarter ended June 30, 2008.
|
Period
|
Total
number of
shares
purchased
(1)
|
Average
price paid
per share
|
Total number of
shares purchased as
part of publicly
announced plans or
programs
|
Maximum
number of
shares that may
yet be purchased
under the
program
|
|
4/1/08
through
4/30/08
|
3,087,000
|
$35.05
|
3,087,000
|
12,723,200
|
|
5/1/08
through
5/31/08
|
3,566,800
|
$34.48
|
3,566,800
|
9,156,400
|
|
6/1/08
through
6/30/08
|
-
|
-
|
-
|
-
|
(1) All shares were purchased pursuant to the
publicly announced 2007 Repurchase Program, which
was effective as of
May 18, 2006, amended on August 13, 2007, and has no set expiration
date. We
are authorized to
purchase up to 35 million shares of our common stock under the 2007
Repurchase
Program.
Item
6.
Exhibits
Exhibit
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit
32.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Date: August 8, 2008
Forest Laboratories, Inc.
(Registrant)
/s/ Howard
Solomon
Howard Solomon
Chief Executive Officer
/s/ Francis I. Perier,
Jr.
Francis I. Perier, Jr.
Senior Vice President - Finance and
Chief Financial Officer
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