FRX Forest Road Acquisition Corp

Forest Labs (FRX) is all set to announce its fourth quarter and fiscal 2011 results on April 19. The Zacks Consensus Estimate for the fourth quarter is $1.07, representing a year-over-year increase of 28.9%. Meanwhile, the Zacks Consensus Estimate for fiscal 2011 is $4.35, representing a year-over-year increase of 23.9%.

Third Quarter Fiscal 2011 Highlights

Forest Labs reported strong earnings in the third quarter, beating the Zacks Consensus Estimate by a huge margin. Earnings came in at $1.34 for the third quarter of fiscal 2011, easily beating the Zacks Consensus Estimate of $0.99 and the year-earlier earnings of $0.97. Strong Namenda sales, lower expenses and lower share count boosted earnings.

Total revenues increased 5.8% to $1.13 billion with net sales increasing 6.7% to $1.06 billion. Total revenues topped the Zacks Consensus Estimate of $1.09 billion.

While Lexapro revenues increased slightly (up 0.7%) to $586.5 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $319.8 million, recording a growth of 13.2% from the year-earlier period. Improved patient access and increased promotional efforts should help keep Namenda sales strong.

Other products like Bystolic and Savella also performed well. Savella posted sales of $24.6 million, up significantly from the year-earlier sales of $15.4 million. Sales are being driven by Forest Labs’ promotional efforts.

Following the release of third quarter results, Forest Labs once again revised its earnings guidance for fiscal 2011. Forest Labs now expects earnings in the range of $4.20 - $4.30 per share, up from its earlier guidance of $3.80 - $3.90.

Agreement of Estimate Revisions

Over the past seven days, there have been no earnings estimate revisions for Forest Labs. However, over the past 30 days, one of the 26 analysts covering the stock has raised their estimates for the fourth quarter as well as fiscal 2011. There have been no movements in the opposite direction.

The Zacks Consensus Estimate of $4.35 for fiscal 2011 is above the high end of the guidance range provided by the company.

Magnitude of Revisions & Earnings Surprise

The magnitude of revisions is negligible over the past thirty days for the fourth quarter as well as fiscal 2011. The Zacks Consensus Estimate for the fourth quarter currently stands at $1.07.

Forest Labs has delivered a mixed performance over the past four quarters. While the company surpassed expectations in the first nine months of fiscal 2011, results for the fourth quarter of fiscal 2010 were in-line with expectations. The average earnings surprise for the last four quarters was a positive 17.4%.

For the fourth quarter and fiscal 2010, Forest Labs is expected to deliver in-line results. Factors like slightly stronger sales, lower SG&A and R&D spending, favorable mix in lower tax jurisdictions and the reinstatement of the R&D tax credit are expected to drive earnings.

Recommendation

We currently have a Neutral recommendation on Forest Labs, which translates into a Zacks #3 Rank (short-term “Hold” rating). While products like Namenda, Bystolic and Savella should continue performing well, we remain concerned about long-term growth at Forest Labs, especially from 2012 when Lexapro is exposed to generic competition. That puts a lot of pressure on the pipeline to come through. With the uncertainty surrounding the approval of Daxas, we believe Forest Labs will intensify its in-licensing and acquisition activities to grow its pipeline. Products in Forest Labs' portfolio face competition from companies like Pfizer (PFE) and Eli Lilly (LLY) among others.

 
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