FRX Forest Road Acquisition Corp

Forest Laboratories, Inc. (FRX) reported earnings per share of 91 cents in the second quarter of fiscal 2012, well below the Zacks Consensus Estimate of 99 cents and the year-earlier earnings of $1.00. Despite an increase in revenues, higher costs led to the decline in earnings.

Second quarter revenues increased 7.4% to $1.17 billion, with net sales increasing 9.0% to $1.1 billion. Total revenues topped the Zacks Consensus Estimate of $1.15 billion.

The Quarter in Detail

Second quarter product revenues increased 9.0% to $1.1 billion. While Lexapro revenues increased 4.7% to $596.1 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $336.8 million, recording year-over-year growth of 8.6%. Improved patient access and increased promotional efforts should help keep Namenda sales strong.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $82.3 million, up 29.2%. Savella, which is approved for the management of fibromyalgia, posted revenues of $25.5 million, up 19.1% from the year-ago period. However, revenues remained flat on a sequential basis.

Forest Labs’ new product, Teflaro, posted revenues of $5.3 million, up from $2.7 million in the first quarter of fiscal 2012. 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.

The company is targeting 2,200 key hospitals and hospital systems. The Center for Medicaid and Medicare Services (CMS) has added Teflaro to the Specifications Manual for National Hospital Inpatient Quality Measures as a recommended initial antibiotic (applicable to hospital discharges on or after January 1, 2012). This should increase the use of Teflaro as a first-line agent, particularly in community-acquired bacterial pneumonia.

Two other products, Daliresp and Viibryd, were launched in August. While Daliresp, which is approved for the treatment of chronic obstructive pulmonary disease (COPD), recorded revenues of $1.2 million, Viibryd (vilazodone HCl), approved for the treatment of major depressive disorder (MDD) recorded revenues of $5.3 million.

Contract revenue came in at $33.6 million, down from $42.4 million in the year-ago period. Benicar co-promotion income dropped 21% year-over-year to $31.5 million. 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 in fiscal 2012.

Adjusted SG&A expense increased 22.9% to $388.7 million in the reported quarter. The company continues to focus on promoting its new products. Adjusted R&D spend increased 10.4% during the quarter.

Pipeline Update

The company provided an update on its pipeline and expects to have two new products (linaclotide and aclidinium) in its marketed product portfolio in calendar 2012.

Forest Labs and  its partner, Ironwood Pharmaceuticals, Inc. (IRWD) filed a new drug application (NDA) for linaclotide. The companies are seeking approval for the use of linaclotide for the treatment of irritable bowel syndrome with constipation (IBS-C) and chronic constipation (CC).

Another candidate, aclidinium, is currently under regulatory review. Forest Labs and its partner Almirall are looking to gain approval for aclidinium for the treatment of COPD. Aclidinum’s approval would be a major boost for Forest Labs with the COPD market representing huge commercial potential.

Meanwhile, Forest Labs and partner Gedeon Richter recently presented positive preliminary top-line phase III results on cariprazine which is being developed for the treatment of patients with acute mania associated with bipolar I disorder. The candidate is also being studied for schizophrenia – two phase III studies are currently ongoing with results due in the fourth quarter of fiscal 2012. Positive results from these studies would allow Forest Labs to file for both indications in calendar 2012.

The company could also be in a position to file for approval of another late-stage candidate – levomilnacipran. Levomilnacipran is being developed in collaboration with Pierre Fabre for the treatment of adults with major depressive disorder. The regulatory filing could take place in calendar 2012.

Guidance Maintained

Forest Labs maintained its earnings guidance for fiscal 2012. The company continues to expect earnings in the range of $3.60 to $3.70. The Zacks Consensus Estimate for fiscal 2012 currently stands at $3.73 per share.

Neutral on Forest Labs

We currently have a Neutral recommendation on Forest Labs, which carries a Zacks #3 Rank (short-term Hold rating). Roughly half the company’s top-line will be exposed to generic competition from March 2012 with the loss of exclusivity on Lexapro. 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.

 
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