FRX Forest Road Acquisition Corp

Forest Labs (FRX) is expected to announce its third quarter fiscal 2012 results on January 17. The Zacks Consensus Estimate for the third quarter is $1.00 per share, representing a year-over-year decline of 25.4%.

Second Quarter Fiscal 2012 Highlights

Forest Labs, which had kicked off fiscal 2012 with strong earnings, posted disappointing results in the second quarter. Second quarter fiscal 2012 earnings per share came in at 91 cents, 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.

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%.

Other products like Bystolic performed well with sales increasing 29.2% to $82.3 million. 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.

New products include Teflaro (treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia), Daliresp (treatment of chronic obstructive pulmonary disease), and Viibryd (for the treatment of major depressive disorder).

Teflaro revenues came in at $5.3 million in the second quarter of fiscal 2012, up from $2.7 million in the first quarter of fiscal 2012. While Daliresp recorded revenues of $1.2 million, Viibryd recorded revenues of $5.3 million.

Agreement of Estimate Revisions

Over the past seven days, there have been no revisions in earnings estimates for Forest Labs for the third quarter of fiscal 2012 and fiscal 2012. However, we note that there was a significant downward revision in earnings estimates for fiscal 2012 and 2013 following the release of second quarter fiscal 2012 results.

Magnitude of Revisions & Earnings Surprise

With none of the 24 analysts covering the stock revising their estimates for the third quarter of fiscal 2012, the Zacks Consensus Estimate remains unchanged at $1.00.

Excluding the second quarter of fiscal 2012, Forest Labs has usually surpassed expectations with an average earnings surprise of 9.8% over the last four quarters. Forest Labs is, however, expected to deliver below expectations again in the third quarter of fiscal 2012. The company is expected to deliver a negative earnings surprise of 2.00%.

Although Forest Labs had several regulatory wins in the past few quarters, the ramp up of new products, especially Daliresp, has been slow. If sales do not pick up according to expectations, Forest Labs could find it challenging to achieve its guidance. We are also concerned that Forest Labs will keep spending at high levels in support of new product launches.

Recommendation

We currently have a Neutral recommendation on Forest Labs, which carries a Zacks #3 Rank (short-term Hold rating). We remain concerned about long-term growth at Forest Labs, especially from March 2012 when Lexapro is exposed to generic competition. While Forest Labs has been working on getting new products approved, we don’t expect new product sales will be enough to compensate for the loss of Lexapro sales. 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. Forest Labs has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years. Products in Forest Labs' portfolio face competition from companies like Pfizer (PFE) and Eli Lilly (LLY) among others.

 
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