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 September 30, 2008
o
|
|
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
o
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
o
|
Non-accelerated
filer
o
|
Smaller
reporting company
o
|
|
|
(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
o
No
x
Number of
shares outstanding of Registrant's Common Stock as of November 7, 2008:
301,380,292.
(Q
uick Links
)
PART I - FINANCIAL
INFORMATION
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
(In
thousands)
|
|
September
30, 2008
(Unaudited)
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
(including cash equivalent investments of $1,069,005 in September and
$833,018 in March)
|
|
$
|
1,069,842
|
|
|
$
|
833,052
|
|
Marketable
securities
|
|
|
820,025
|
|
|
|
943,972
|
|
Accounts
receivable, less allowance for doubtful accounts of $18,880 in September
and $19,882 in March
|
|
|
423,023
|
|
|
|
445,987
|
|
Inventories,
net
|
|
|
450,834
|
|
|
|
425,138
|
|
Deferred
income taxes
|
|
|
219,875
|
|
|
|
226,095
|
|
Other
current assets
|
|
|
75,574
|
|
|
|
33,260
|
|
Total
current assets
|
|
|
3,059,173
|
|
|
|
2,907,504
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
725,275
|
|
|
|
663,625
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
584,470
|
|
|
|
567,331
|
|
Less:
accumulated depreciation
|
|
|
238,776
|
|
|
|
217,294
|
|
|
|
|
345,694
|
|
|
|
350,037
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
14,965
|
|
|
|
14,965
|
|
License
agreements, product rights and other intangibles, less accumulated
amortization of $457,614 in September and $421,719 in
March
|
|
|
491,248
|
|
|
|
527,787
|
|
Deferred
income taxes
|
|
|
60,065
|
|
|
|
59,778
|
|
Other
assets
|
|
|
1,681
|
|
|
|
1,671
|
|
Total
other assets
|
|
|
567,959
|
|
|
|
604,201
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,698,101
|
|
|
$
|
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)
|
|
September
30, 2008
(Unaudited)
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
72,695
|
|
|
$
|
223,720
|
|
Accrued
expenses
|
|
|
538,238
|
|
|
|
387,105
|
|
Total
current liabilities
|
|
|
610,933
|
|
|
|
610,825
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Income
taxes liabilities
|
|
|
221,514
|
|
|
|
198,410
|
|
Deferred
income taxes
|
|
|
809
|
|
|
|
815
|
|
|
|
|
222,323
|
|
|
|
199,225
|
|
|
|
|
|
|
|
|
|
|
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 421,562 shares in
September and 421,421 shares in March
|
|
|
42,156
|
|
|
|
42,142
|
|
Additional
paid-in capital
|
|
|
1,458,025
|
|
|
|
1,434,172
|
|
Retained
earnings
|
|
|
6,098,499
|
|
|
|
5,611,493
|
|
Accumulated
other comprehensive income
|
|
|
5,706
|
|
|
|
34,592
|
|
Treasury
stock, at cost (120,182 shares in September and 110,014 shares in
March)
|
|
|
(
3,739,541
|
)
|
|
|
(
3,407,082
|
)
|
Total
stockholders' equity
|
|
|
3,864,845
|
|
|
|
3,715,317
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
4,698,101
|
|
|
$
|
4,525,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
Condensed
Consolidated Statements of Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands, except per share amounts)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
925,570
|
|
|
$
|
842,337
|
|
|
$
|
1,819,315
|
|
|
$
|
1,684,953
|
|
Contract
revenue
|
|
|
47,210
|
|
|
|
50,313
|
|
|
|
101,363
|
|
|
|
103,690
|
|
Interest
income
|
|
|
19,194
|
|
|
|
24,932
|
|
|
|
37,424
|
|
|
|
51,670
|
|
Other
income
|
|
|
532
|
|
|
|
1,378
|
|
|
|
1,248
|
|
|
|
6,921
|
|
|
|
|
992,506
|
|
|
|
918,960
|
|
|
|
1,959,350
|
|
|
|
1,847,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
205,001
|
|
|
|
189,992
|
|
|
|
402,342
|
|
|
|
376,232
|
|
Selling,
general and administrative
|
|
|
326,261
|
|
|
|
280,439
|
|
|
|
669,215
|
|
|
|
541,767
|
|
Research
and development
|
|
|
146,357
|
|
|
|
170,738
|
|
|
|
258,469
|
|
|
|
307,646
|
|
|
|
|
677,619
|
|
|
|
641,169
|
|
|
|
1,330,026
|
|
|
|
1,225,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
314,887
|
|
|
|
277,791
|
|
|
|
629,324
|
|
|
|
621,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
70,801
|
|
|
|
52,547
|
|
|
|
142,318
|
|
|
|
128,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
244,086
|
|
|
$
|
225,244
|
|
|
$
|
487,006
|
|
|
$
|
493,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.71
|
|
|
$
|
1.59
|
|
|
$
|
1.55
|
|
Diluted
|
|
$
|
0.80
|
|
|
$
|
0.71
|
|
|
$
|
1.59
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
304,346
|
|
|
|
315,510
|
|
|
|
305,687
|
|
|
|
317,534
|
|
Diluted
|
|
|
305,505
|
|
|
|
316,852
|
|
|
|
306,701
|
|
|
|
319,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREST LABORATORIES, INC. AND
SUBSIDIARIES
Condensed
Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
244,086
|
|
|
$
|
225,244
|
|
|
$
|
487,006
|
|
|
$
|
493,406
|
|
Other
comprehensive (loss) income
|
|
|
(
27,964
|
)
|
|
|
6,498
|
|
|
|
(
28,886
|
)
|
|
|
8,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
216,122
|
|
|
$
|
231,742
|
|
|
$
|
458,120
|
|
|
$
|
501,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
487,006
|
|
|
$
|
493,406
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
22,754
|
|
|
|
23,075
|
|
Amortization
and impairments
|
|
|
35,895
|
|
|
|
21,588
|
|
Stock-based
compensation expense
|
|
|
20,254
|
|
|
|
20,078
|
|
Deferred
income tax expense (benefit)
|
|
|
5,927
|
|
|
|
( 5,304
|
)
|
Foreign
currency transaction gain
|
|
|
( 630
|
)
|
|
|
( 137
|
)
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
22,964
|
|
|
|
( 40,287
|
)
|
Inventories,
net
|
|
|
( 25,696
|
)
|
|
|
( 13,161
|
)
|
Other
current assets
|
|
|
( 42,314
|
)
|
|
|
( 18,629
|
)
|
Other
assets
|
|
|
( 10
|
)
|
|
|
8,382
|
|
Increase
(decrease) in
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
( 151,025
|
)
|
|
|
26,977
|
|
Accrued
expenses
|
|
|
151,133
|
|
|
|
60,751
|
|
Income
taxes liabilities
|
|
|
23,104
|
|
|
|
24,330
|
|
Net
cash provided by operating activities
|
|
|
549,362
|
|
|
|
601,069
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
( 19,240
|
)
|
|
|
( 17,791
|
)
|
Purchase
of marketable securities
|
|
|
( 1,247,144
|
)
|
|
|
( 1,244,988
|
)
|
Redemption
of marketable securities
|
|
|
1,309,441
|
|
|
|
1,295,045
|
|
Net
cash provided by investing activities
|
|
|
43,057
|
|
|
|
32,266
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from common stock options exercised by employees under stock
option plans
|
|
|
3,378
|
|
|
|
24,856
|
|
Tax
benefit realized from the exercise of stock options by
employees
|
|
|
236
|
|
|
|
5,071
|
|
Purchase
of treasury stock
|
|
|
(
332,459
|
)
|
|
|
(
274,804
|
)
|
Net
cash used in financing activities
|
|
|
(
328,845
|
)
|
|
|
(
244,877
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(
26,784
|
)
|
|
|
7,642
|
|
Increase
in cash and cash equivalents
|
|
|
236,790
|
|
|
|
396,100
|
|
Cash
and cash equivalents, beginning of period
|
|
|
833,052
|
|
|
|
563,663
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,069,842
|
|
|
$
|
959,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
135,342
|
|
|
$
|
104,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six-month period ended
September 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:
|
|
|
|
|
|
|
(In
thousands)
|
|
September
30, 2008
(Unaudited)
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
326,202
|
|
|
$
|
377,779
|
|
Other
|
|
|
96,821
|
|
|
|
68,208
|
|
|
|
$
|
423,023
|
|
|
$
|
445,987
|
|
3. Inventories:
Inventories,
net of reserves for obsolescence, consist of the following:
|
|
|
|
|
|
|
(In
thousands)
|
|
September
30, 2008
(Unaudited)
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
178,108
|
|
|
$
|
234,288
|
|
Work
in process
|
|
|
1,711
|
|
|
|
1,360
|
|
Finished
goods
|
|
|
271,015
|
|
|
|
189,490
|
|
|
|
$
|
450,834
|
|
|
$
|
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
Financial Accounting Standards Board (or 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
2010. In October 2008, the FASB issued FSP 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” FSP 157-3 clarifies the application of SFAS 157 in a market that
is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 is effective upon issuance,
including prior periods for which financial statements have not been
issued. The Company’s financial assets adjusted to fair value
at September 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.
The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets are carried at fair value and measured on a recurring
basis:
(In
thousands)
Description
|
|
Fair
Value at
September
30,
2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Market Inputs
(Level
2)
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
$
|
830,263
|
|
|
$
|
830,263
|
|
|
|
|
Municipal
bonds and notes
|
|
|
191,965
|
|
|
|
|
|
|
$
|
191,965
|
|
Commercial
paper
|
|
|
775,765
|
|
|
|
383,709
|
|
|
|
392,056
|
|
Variable
rate demand notes
|
|
|
214,659
|
|
|
|
|
|
|
|
214,659
|
|
Floating
rate notes
|
|
|
437,271
|
|
|
|
265,387
|
|
|
|
171,884
|
|
Auction
rate securities
|
|
|
38,795
|
|
|
|
|
|
|
|
38,795
|
|
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
$38,795 (with underlying maturities from 23.3 to 33.7 years) of which $23,500
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
|
|
|
Six
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
|
|
|
304,346
|
|
|
|
315,510
|
|
|
|
305,687
|
|
|
|
317,534
|
|
Effect
of assumed conversion of employee stock options and restricted
stock
|
|
|
1,159
|
|
|
|
1,342
|
|
|
|
1,014
|
|
|
|
1,841
|
|
Diluted
|
|
|
305,505
|
|
|
|
316,852
|
|
|
|
306,701
|
|
|
|
319,375
|
|
Options
to purchase approximately 14,996 shares of common stock at exercise prices
ranging from $34.12 to $76.66 per share and options to purchase approximately
14,974 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 and six-month
periods ended September 30, 2008, respectively, 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 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.
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
September 30, 2008, 9,288 shares were available for grant.
Compensation
expense of $9,667 ($8,227 net of tax) and $20,254 ($17,044 net of tax) was
recorded for the three and six-month periods ended September 30, 2008,
respectively. For the three and six-month periods ended September 30,
2007, compensation expense of $9,402 ($8,104 net of tax) and $20,078 ($16,996
net of tax) was recorded. This expense was charged to cost of sales,
selling, general and administrative and research and development expense, as
appropriate.
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:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
nervous system
|
|
$
|
833,112
|
|
|
$
|
756,969
|
|
|
$
|
1,643,432
|
|
|
$
|
1,504,477
|
|
Cardiovascular
|
|
|
19,593
|
|
|
|
6,849
|
|
|
|
29,408
|
|
|
|
15,268
|
|
Other
|
|
|
72,865
|
|
|
|
78,519
|
|
|
|
146,475
|
|
|
|
165,208
|
|
|
|
$
|
925,570
|
|
|
$
|
842,337
|
|
|
$
|
1,819,315
|
|
|
$
|
1,684,953
|
|
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 November 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 $207 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
September 30, 2008, the Company had accrued an additional $3,223 in interest for
a total of $23,162 related to the resolution of various income tax
matters.
The
Company’s effective tax rate was 22.5% and 22.6% for the three and six-month
periods ended September 30, 2008, as compared to 18.9% and 20.6% for the same
periods 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 including the expiration
of the U.S. Federal research and experimentation tax credit on December 31,
2007, which was re-enacted on October 3, 2008 and will have a favorable impact
on the Company's third and fourth quarter effective tax
rates. Effective tax rates may be affected by ongoing tax
audits.
10. Termination of
Co-Promotion Agreement
(In thousands)
:
During
the quarter ended June 30, 2008, 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.
11. Contingencies -
Securities Litigation
(In thousands
):
The
Company and certain of its officers have been named as defendants in
consolidated securities cases brought in the U.S. District Court for the
Southern District of New York on behalf of a class of all purchasers of the
Company’s securities from August 15, 2002 through July 2, 2004 and consolidated
under the caption “
In re
Forest Laboratories, Inc. Securities Litigation
.” On September
22, 2008, the Company entered into a Memorandum of Understanding (or MOU)
setting forth an agreement in principle to settle all claims against all
defendants for $65,000. While the Company expects such settlement to
be fully funded by insurance and is engaged in discussions with the carriers
concerning their liability for the payment, during the September 2008 quarter
the Company recorded a reserve of $25,000 in connection with the
MOU.
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 2008 due to
the continued growth of our key marketed products Lexapro® and Namenda® and
sales of our newest product Bystolic™, a beta-blocker for the treatment of
hypertension launched in January 2008. Net income increased 8.4% for
the September 2008 quarter as compared to the same period last
year. While increases in net revenues account for a portion of such
increase, the increase was primarily due to the effect in September 2007 of
a $70,000 licensing fee to Ironwood Pharmaceuticals, Inc. (or Ironwood), to
co-develop and co-market the compound linaclotide. The current
quarter included approximately $36,500 in development milestone
expenses. For the six months ended September 2008 net income
decreased 1.3% principally due to the termination of the Azor™ co-promotion
agreement. As a result of terminating the agreement in the June
quarter, we recorded a one-time charge of $44,100. This charge was
comprised of a termination fee of approximately $26,600 to our licensing partner
Daiichi Sankyo, (or Sankyo) and $17,500 related to the unamortized portion of
the initial upfront payment.
In
October 2008, we entered into a collaboration agreement with Phenomix
Corporation (or Phenomix) to co-develop and co-promote dutogliptin
(PHX1149). Dutogliptin is Phenomix’ proprietary orally administered,
small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor currently in Phase III
clinical development in Type 2 diabetes. Under the terms of the
agreement, we made a $75,000 upfront payment to Phenomix and may be obligated to
pay up to $340,000 in milestone payments for the successful development and
commercialization of dutogliptin in the United States over the term of the
collaboration. The $75,000 payment will be expensed in our third
fiscal quarter to research and development expense.
Financial Condition and
Liquidity
Net
current assets increased by $151,561 from March 31, 2008. Cash and
cash equivalents increased from ongoing operations while short-term marketable
securities decreased in order to fund the 2007 Repurchase
Program. During the June 2008 quarter, we repurchased 6.6 million
shares of common stock at a cost of $231,185 and in the September 2008 quarter
we repurchased 3.5 million shares of common stock at a cost of $100,917, leaving
5.7 million shares still available for repurchase under the
program. Of our total cash and marketable securities position at
September 30, 2008, 25%, or about $641,000, is 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 accounts receivable decreased primarily due
to the timing of receipts. Finished goods inventory increased in
order to support continued demand for our products, including our recently
launched beta-blocker, Bystolic. License agreements, product rights
and other intangibles net of accumulated amortization decreased primarily due to
the write-off of the Azor license in the June quarter as well as normal
amortization. Other current assets increased principally due to the
renewal of insurance programs in the June 2008 quarter, which are paid in full
at the time of renewal and expensed over the life of the policy. The
change in current liabilities was primarily due to the timing of escitalopram
inventory purchases from Lundbeck.
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 and in the current quarter we
repurchased 3.5 million shares at a cost of $100,917. As of November
7, 2008, under the 2007 Repurchase Program, we have cumulatively repurchased a
total of 29.3 million shares at a cost of $1,160,708, leaving us the authority
to purchase 5.7 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, 2008 increased 10% and
8%, respectively, from the same periods last year to $925,570 and $1,819,315,
primarily due to strong sales of Lexapro, Namenda and Bystolic.
Lexapro,
our SSRI for the treatment of major depressive disorder and generalized anxiety
disorder, and our most significant product, had sales of $583,896 and $1,166,993
for the quarter and six months, grew 4% and 5%, respectively, and contributed
$24,833 and $55,617 to the net sales change, of which $26,480 and $56,757 was
due to price increases slightly offset by $1,647 and $1,140 of volume
decreases. 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, an N-methyl-D-aspartate (or NMDA) receptor antagonist for the treatment
of moderate and severe Alzheimer's disease, grew 28% and 21% in the current
quarter and six months, respectively, and totaled $246,061 and
$464,679. This represents an increase of $53,189 and $80,088 as
compared to the same periods last year, of which $40,172 and $49,085 was due to
volume and $13,017 and $31,003 was due to price. 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.
Bystolic
(nebivolol hydrochloride), a beta-blocker indicated for the treatment of
hypertension, launched in January 2008, achieved sales of $14,163 and $18,537 in
the current quarter and six months, respectively. The U.S.
composition of matter patent covering nebivolol hydrochloride is licensed from
Mylan Inc. and expires in 2020 (Forest has submitted a patent term extension
application to extend this patent until 2021). On January 26, 2007,
Janssen Pharmaceutica N.V. (or Janssen), the owner of the patent, filed a
request with the U.S. Patent and Trademark Office (or USPTO) for re-examination
of the patent covering nebivolol hydrochloride. In September 2008,
Janssen received an Office Action from the USPTO rejecting all of the pending
claims as unpatentable in view of the cited prior art. We will
continue to prosecute the re-examination application and although there can be
no assurance we will prevail in this matter, we remain confident in the strength
of the patent covering nebivolol.
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 three and six months ended September 30, 2008 was $47,210 and
$101,363 respectively, compared to $50,313 and $103,690 in the same periods last
year primarily due to a decrease in 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 three and six-month periods ended September 30, 2008 decreased as
compared to the same periods last year primarily due to lower average rates of
return offset by higher levels of invested funds. Other income in
last year’s 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 22.1% for the three and six-month periods
of the current year as compared with 22.6% and 22.3% for the prior year’s three
and six-month periods.
Selling,
general and administrative expenses increased $45,822 and $127,448 for the three
and six-month periods ended September 30, 2008 as compared to the same periods
last year. The increase was primarily due to launch costs for
Bystolic and pre-launch costs for milnacipran, as well as the one-time charge of
$44,100 relating to the termination of the Azor co-promotion agreement in the
June 2008 quarter. Also during the September 2008 quarter, we entered
into a Memorandum of Understanding (or MOU) setting forth an agreement in
principle to settle all claims against all defendants in securities litigation
pending against the Company and certain of our officers, for
$65,000. While we expect such settlement to be fully funded by
insurance, we have reserved $25,000 in connection with this
MOU.
Research
and development expense decreased $24,381 and $49,177 in the three and six-month
periods ended September 30, 2008. In September 2007 we recorded a
$70,000 licensing charge in connection with the collaboration agreement with
Ironwood for the right to co-develop and co-market
linaclotide. Linaclotide, which recently began Phase III 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. For the September 2008 quarter,
we recorded approximately $36,500 in developmental milestone expenses related to
aclidinium and linaclotide.
Research
and development expense also reflects the following:
|
·
|
In
May 2008, we filed a supplemental New Drug Application (or 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. The FDA has set an action date for March 2009 for
this sNDA.
|
|
·
|
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 the
Phase III Seniors study.
|
|
·
|
In
December 2007, we submitted a New Drug Application (or 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. In October 2008, the FDA advised us and our partner
Cypress Bioscience, Inc. (or Cypress) that is was not able to take final
action by the scheduled Prescription Drug User Fee Act action date of
October 18, 2008. The FDA has not requested any additional
information from Forest or Cypress but did indicate that a clinical data
question related to the NDA submission required
confirmation. The FDA further indicated that its assessment
could be completed in a matter of weeks, but could not confirm specific
timing. The FDA could not provide further information regarding
the reason for the delay. We and Cypress continue to plan for a
product launch meeting in the first quarter of calendar
2009. We also expect results from a third randomized Phase III
study in late calendar 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. We have initiated two Phase III studies for
community acquired pneumonia and we anticipate those results by the second
quarter of 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). In September 2008 we received positive results from two
Phase III studies assessing the safety and efficacy of aclidinium in
moderate to severe COPD. We expect to meet with the FDA in
early calendar 2009 to review these results. Pending FDA
feedback, we plan to file an NDA in late calendar 2009 or early calendar
2010. 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 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). Based on positive
results of a Phase II(b) randomized, double-blind, placebo-controlled
study assessing the safety and efficacy of linaclotide in patients with CC
and IBS-C, we have initiated a comprehensive Phase III clinical
program. The CC studies have been initiated and the IBS-C
trials are anticipated to begin in January
2009.
|
|
·
|
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
indicated 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 cariprazine (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 cariprazine
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. In September 2008 we received
positive preliminary top-line results from an additional Phase II study of
cariprazine in patients with acute mania associated with bipolar
disorder.
|
|
·
|
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 22.5% and 22.6% for the respective three and six-month
periods ended September 30, 2008, as compared to 18.9% and 20.6% for the same
periods 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 including the
expiration of the U.S. Federal research and experimentation tax credit on
December 31, 2007. The federal tax credit was re-enacted on October
3, 2008 and will have a favorable impact on our third and fourth quarter
effective tax rates. Effective tax rates can 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 $3,223 in interest related to unrecognized tax benefits totaling
$23,162 for the resolution of various income tax matters.
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 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 $36,394 at September 30, 2008 and $27,877 at September 30,
2007. Commercial discounts and other rebate accruals were $150,319 at
September 30, 2008 and $146,203 at September 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 for the six-month period in the accounts
related to accrued rebates, sales returns and discounts
(In thousands)
:
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
229,681
|
|
|
$
|
208,063
|
|
|
|
|
|
|
|
|
|
|
Provision
for rebates
|
|
|
247,957
|
|
|
|
203,261
|
|
Changes
in estimates
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(
233,276
|
)
|
|
|
(
175,888
|
)
|
|
|
|
14,681
|
|
|
|
27,373
|
|
|
|
|
|
|
|
|
|
|
Provision
for returns
|
|
|
13,720
|
|
|
|
16,406
|
|
Changes
in estimates
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(
11,904
|
)
|
|
|
(
17,900
|
)
|
|
|
|
1,816
|
|
|
|
( 1,494
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for chargebacks and discounts
|
|
|
151,700
|
|
|
|
168,801
|
|
Changes
in estimates
|
|
|
|
|
|
|
( 7,700
|
)
|
Settlements
|
|
|
(
153,747
|
)
|
|
|
(
172,020
|
)
|
|
|
|
( 2,047
|
)
|
|
|
( 10,919
|
)
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
244,131
|
|
|
$
|
223,023
|
|
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
party to certain legal proceedings described in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2008 and our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2008.
With
respect to the
In re
Pharmaceutical Industry AWP Litigations
identified in our Form 10-K,
Forest has now also been sued by the State of Kansas (action commenced October
23, 2008). In addition, the State of Alabama has indicated that it
will seek to consolidate a trial involving Forest with the trial of certain
other defendants scheduled for June 2009.
As
reported in our prior periodic reports, the United States Attorney’s Office for
the District of Massachusetts (or USAO) is investigating whether we may have
committed civil or criminal violations of the federal "Anti-Kickback" laws and
laws and regulations related to "off-label" promotional activities in connection
with our marketing of Celexa, Lexapro and other products. As part of
this investigation, we received a subpoena from the Office of Inspector General
of the Federal Office of Personnel Management requesting documents relating to
Celexa and have subsequently received further subpoenas from the USAO concerning
Lexapro and other products, including Namenda and Combunox. The
subpoenas request documents relating to a broad range of our marketing,
promotional and other activities during the period from January 1, 1997 to the
present. In April 2006, we received an additional subpoena from the
USAO requesting documents concerning our manufacture and marketing of
Levothroid, our levothyroxine supplement for the treatment of hypothyroidism,
and since April 2006 we have received further subpoenas concerning
Levothroid. We understand that these subpoenas have been issued in
connection with the USAO’s investigation of potential civil or criminal
violations of federal health care laws in connection with
Levothroid.
While we
have been advised recently that the government’s current intention is to assert
claims against the Company under the False Claims Act based on facts arising out
of these investigations, we are continuing to cooperate with these
investigations and to discuss these issues with the USAO.
With
respect to the litigation described in our prior periodic reports and captioned
In re Forest Laboratories,
Inc. Securities Litigation
, we have entered into a Memorandum of
Understanding (or MOU), dated September 22, 2008, setting forth an agreement in
principle to settle all claims against all defendants for $65
million. The settlement contemplated by the MOU is subject to
negotiation and signing of a stipulation of settlement and related papers,
followed by court approval after notice of the proposed settlement is provided
to class members.
While we
believe the settlement is covered by our insurance and we are engaged in
discussions with the carriers concerning their liability for the payment, during
the September 2008 quarter we recorded a $25 million reserve in connection with
the MOU.
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 and our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2008.
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 share repurchase program (or 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 November 7,
2008, 5.7 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 second quarter of the fiscal year covered by this
report:
|
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
|
|
|
|
|
|
|
|
|
|
|
|
7/1/08
through
7/31/08
|
|
-
|
|
-
|
|
-
|
|
9,156,400
|
|
8/1/08
through
8/31/08
|
|
-
|
|
-
|
|
-
|
|
9,156,400
|
|
9/1/08
through
9/30/08
|
|
3,503,100
|
|
$28.81
|
|
3,503,100
|
|
5,653,300
|
(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
4.
Submission of Matters to a
Vote of Security Holders
(a) The
Company held its Annual Meeting of Stockholders on August 11,
2008.
(c) At
the annual meeting, holders of the Company's Common Stock voted for the election
of eight members of the Company's Board of Directors to serve until the next
annual meeting and until their successors are duly elected and
qualified. Holders of the Company's Common Stock voted to adopt the
Amended and Restated Certificate of Incorporation and for the ratification of
BDO Seidman, LLP to serve as the Company's independent registered public
accounting firm for the fiscal year ending March 31, 2009.
At the
meeting, the following votes for and against, as well as the number of
abstentions and broker non-votes were recorded for each matter as set forth
below:
|
Matter
|
For
|
Against
|
Abstain
|
Withhold
authority
|
Broker
non-votes
|
|
Election
of Directors:
|
|
|
|
|
|
|
Howard
Solomon
|
264,011,723
|
|
|
11,400,904
|
|
|
Lawrence
S. Olanoff, M.D., Ph.D.
|
264,906,938
|
|
|
10,505,689
|
|
|
Nesli
Basgoz, M.D.
|
267,758,788
|
|
|
7,653,839
|
|
|
William
J. Candee, III
|
259,567,444
|
|
|
15,845,183
|
|
|
George
S. Cohan
|
265,866,448
|
|
|
9,546,179
|
|
|
Dan
L. Goldwasser
|
266,013,808
|
|
|
9,398,819
|
|
|
Kenneth
E. Goodman
|
259,102,274
|
|
|
16,310,353
|
|
|
Lester
B. Salans, M.D.
|
267,624,601
|
|
|
7,788,026
|
|
|
|
|
|
|
|
|
|
Adoption
of the Amended and Restated Certificate of Incorporation
|
232,812,374
|
40,197,915
|
2,402,338
|
|
|
|
|
|
|
|
|
|
|
Ratification
of Independent Registered Public Accounting Firm
|
271,642,547
|
1,486,698
|
2,283,381
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
|
|
Amended
and Restated Certificate of Incorporation of Forest Laboratories,
Inc.
|
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
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: November
10, 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