Forest Laboratories, Inc. (FRX) reported
earnings per share of $1.12 for the fourth quarter of fiscal 2011,
easily beating the Zacks Consensus Estimate of $1.08 and the
year-earlier earnings of 83 cents.
Results were boosted by strong Namenda sales, lower R&D
expenses and lower share count. Fiscal 2011 earnings came in at
$4.41 per share, well above the Zacks Consensus Estimate of $4.35
and the year-ago earnings of $3.51.
Fourth quarter revenues increased 7.8% to $1.14 billion, with
net sales increasing 9.7% to $1.09 billion. Total revenues topped
the Zacks Consensus Estimate of $1.10 billion.
While contract revenues slipped 31.6% to $36.9 million, interest
income increased 6.2% to $6.9 million. Fiscal 2011 sales increased
5.4% to $4.4 billion. Revenues exceeded the Zacks Consensus
Estimate of $4.3 billion.
The Quarter in Detail
Fourth quarter product revenues increased 9.7% to $1.09 billion.
While Lexapro revenues increased 6.9% to $594.8 million, Namenda,
which is approved for the treatment of moderate and severe
Alzheimer’s disease, delivered sales of $329 million, recording a
growth of 10.5% from the year-earlier period.
Improved patient access and increased promotional efforts should
help keep Namenda sales strong. Moreover, Forest Labs gained FDA
approval in June 2010 for Namenda XR, a 28 mg once-daily
extended-release formulation. Namenda XR received approval for the
treatment of moderate to severe dementia of the Alzheimer’s type.
Namenda sales are expected to grow 10% in fiscal 2012.
Bystolic, Forest Labs’ beta-blocker for the treatment of
hypertension, posted sales of $73.1 million, up 37.7%.Savella,
which is approved for the management of fibromyalgia, posted sales
of $23.7 million, up significantly from the year-earlier sales of
$17.4 million.
Savella was launched in late April 2009. We believe the product
may have multi-hundred million dollar potential. In early October
2010, Savella was moved into tier II unrestricted coverage on
several managed care organizations. Improved formulary access
should help boost sales. Forest Labs entered into a collaboration
and distribution agreement with Janssen to commercialize Bystolic
and Savella in Canada.
While Bystolic sales are expected to grow 35% in fiscal 2012,
Savella sales are expected to grow 31%.
Forest Labs’ newest product, Teflaro, posted sales of $2.7
million. The FDA granted approval to Teflaro for the treatment of
patients suffering from acute bacterial skin and skin structure
infection and community acquired bacterial pneumonia in October
2010. Forest Labs launched the product in March and fourth quarter
sales represent initial wholesaler stocking. The company expects
Teflaro sales to reach $40 million in fiscal 2012.
Contract revenue declined 31.6% to $36.9 million due to a 30.3%
drop in Benicar co-promotion income. Under its agreement with
Daiichi Sankyo, Forest Labs is now receiving a gradually declining
royalty rate on Benicar until the end of March 2014. Benicar
earnings are expected to decline 23% in fiscal 2012.
Adjusted SG&A expense increased 9.7% to $351.7 million. The
company continues to focus on promoting its currently marketed
products, especially Savella, Bystolic and Teflaro. Adjusted
R&D spend declined 22.1% during the quarter.
Provides Visibility Beyond Lexapro
With Lexapro slated to lose exclusivity on March 14, 2012,
Forest Labs provided much-awaited guidance for fiscal 2012. The
company expects earnings in the range of $3.60 to $3.70 on total
revenues of $4.5 billion (up 3%). Net sales are expected to grow
4.5% in fiscal 2012.
Lexapro sales are expected to decline 10% to just over $2
billion in fiscal 2012. The Zacks Consensus Estimate currently
stands at $4.10 per share.
The guidance includes the impact of health care reform,
increased investments for supporting the launch of new products,
Daliresp and Viibryd, and continued investment in the pipeline.
While the guidance includes the impact of planned research and
development milestone payments, it does include any licensing or
milestone payments related to new deals that may be entered into
during fiscal 2012.
While SG&A spend is expected to be $1.5 billion, R&D
spend is expected to be $740 million. Forest Labs will continue
repurchasing shares in fiscal 2012, which should drive the
bottom-line.
The company also provided guidance for fiscal 2013. Forest Labs
expects earnings of at least $1.20 per share in fiscal 2013. Fiscal
2013 will see the full impact of the loss of exclusivity on
Lexapro. Forest Labs expects the loss of Lexapro sales to be
partially offset by contributions from products like Namenda,
Bystolic, Savella, Teflaro, Daliresp and Viibryd.
Aclidinium and linaclotide, if approved, are also expected to
contribute to fiscal 2013 revenues. Meanwhile, both SG&A and
R&D spend are expected to grow in the 5% to 6% range in fiscal
2013.
In addition to providing guidance, Forest Labs announced an
agreement with Blue Ash Therapeutics whereby Forest Labs acquired
worldwide rights to azimilide, a novel anti-arrhythmic agent.
Azimilide, if developed successfully, would be a nice fit with
Forest Labs’ Bystolic.
Upcoming Catalysts
Forest Labs remains on track to file for approval of two
pipeline candidates, linaclotide and aclinidinium, in 2011. The
company along with its partner, Ironwood Pharmaceuticals,
Inc. (IRWD), reported positive top-line results from a
26-week phase III study on linaclotide in early November 2010.
With positive data from two phase III irritable bowel syndrome
with constipation (IBS-C) trials and two phase III chronic
constipation trials, the companies are looking to file a new drug
application (NDA) for both indications in the third quarter of
calendar year 2011.
Meanwhile, earlier this year, Forest Labs and Almirall announced
positive top-line data on their chronic obstructive pulmonary
disease (COPD) candidate, aclidinium bromide. The companies are on
track to file for regulatory approval of aclidinium in the US in
mid-2011. Aclidinum’s approval would be a major boost for Forest
Labs with the COPD market representing huge commercial
potential.
Two new products, Daliresp and Viibryd, will be launched in
August 2011. While Daliresp sales are expected to reach $60 million
in fiscal 2012, the company is guiding towards Viibryd sales of $45
million.
Neutral on Forest Labs
We currently have a Neutral recommendation on Forest Labs,
supported by a Zacks #3 Rank (short-term Hold rating). With Lexapro
losing patent protection in March 2012, roughly half the company’s
top-line will be exposed to generic competition. Namenda will face
generic competition in early 2015 - this puts another $1+ billion
at risk.
Given the situation, we believe that Forest Labs will continue
to seek in-licensing and acquisition activities to grow its
pipeline. In fact, the company’s goal is to double the commercial
value of its late-stage pipeline by 2012 through in-licensing deals
and acquisitions. Forest Labs has made significant progress in this
regard and should be on the lookout for additional deals in the
next couple of years. Forest Labs currently expects to file for
approval of two candidates in calendar 2011.
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