Forest Labs Slashes Outlook - Analyst Blog
June 12 2012 - 5:45AM
Zacks
Forest Laboratories, Inc. (FRX) recently
slashed its outlook for fiscal 2013 mainly due to lower
expectations from Lexapro. Forest Labs’ shares fell about 3.5% on
the news.
Reason for the Downward Revision
Lexapro, which was a key revenue generator at Forest Labs, lost
exclusivity in March 2012. With the entry of generic competition,
Lexapro sales fell significantly (down 40.2% to $355.8 million in
the fourth quarter of fiscal 2012).
Forest Labs, which had been previously expecting branded Lexapro
sales of $250 million, now expects sales of $215 million. The
company said that it had to cut its estimate due to the
higher-than-expected discounting in the market. Forest Labs is
currently expecting a generic substitution rate of 88% instead of
84%. Pharmacy demand for the branded product lagged expectations
while a higher number of units are being sold at lower prices
through government healthcare programs.
Another factor that is expected to affect sales is lower than
expected royalty income. Forest Labs receives royalty income from
Mylan (MYL) on sales of its authorized generic
version of Lexapro. The company, which was previously expecting
$115 million, is now expecting $60 million. The downward revision
reflects a change in the company’s assumption regarding the brand
price discount rate and the authorized generic distributor’s market
share especially during the six-month exclusivity period.
Besides Mylan’s authorized generic version, Teva
Pharmaceutical Industries Ltd.’s (TEVA) generic version of
Lexapro is available in the market. Teva will enjoy six months of
marketing exclusivity as it was the first generic company to have
filed an Abbreviated New Drug Application (ANDA) for Lexapro with a
paragraph IV challenge.
Forest Labs had assumed that the generics would be sold at a 30%
discount to the branded price. However, generic Lexapro has been
priced at a 60-65% discount to the branded product. Besides this,
Forest Labs was expecting the authorized generic to maintain a 44%
share of the market through September 12, 2012. However, the
company said that the authorized generic’s market share is about
40%.
Another reason for the guidance cut is the discontinuation of
shipping of Levothroid. Forest Labs, which has a distribution
agreement for Levothroid, was informed that the manufacturer has
stopped producing and shipping the product from its facility due to
some regulatory and quality concerns voiced by the FDA regarding
the manufacturing facility.
Due to the manufacturing disruption, Forest Labs said that it
currently does not have any visibility on when supply will resume.
Prolonged disruption in supply could affect full year earnings by
about 3 cents.
New Guidance
Based on the above factors, Forest Labs cut its fiscal 2013
guidance by 25 cents to $0.95 - $1.10. The Zacks Consensus Estimate
of 96 cents is towards the lower end of this new guidance
range.
Our Take
The guidance revision is disappointing – Forest Labs had
initially provided a $1.20 floor for fiscal 2013 which was
subsequently reduced. However, we point out that the impact of the
guidance cut is near term and will primarily affect first half
fiscal 2013 results. Once the six month exclusivity period expires,
additional generics will enter the market and by that time investor
focus will have shifted from Lexapro to the other products in
Forest Labs’ portfolio, especially its pipeline candidates. We
currently have a Neutral recommendation on Forest Labs, which
carries a Zacks #3 Rank (short-term ‘Hold’ rating).
FOREST LABS A (FRX): Free Stock Analysis Report
MYLAN INC (MYL): Free Stock Analysis Report
TEVA PHARM ADR (TEVA): Free Stock Analysis Report
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