Earnings Preview: Forest Labs - Analyst Blog
July 16 2012 - 5:00AM
Zacks
Forest Labs (FRX) is expected to announce its
first quarter fiscal 2013 results on July 17. The Zacks Consensus
Estimate for the first quarter is 26 cents per share, representing
a year-over-year decline of 75%. The June quarter represents the
first full quarter of generic competition for Lexapro. According to
the Zacks Consensus Estimate, revenues are expected to fall 28.2%
to $826 million in first quarter fiscal 2013.
Fourth Quarter and Fiscal 2012 Highlights
Forest Labs reported fourth quarter fiscal 2012 earnings per
share of 72 cents, a penny above the Zacks Consensus Estimate.
Fourth quarter fiscal 2012 earnings, however, came in below the
year-earlier earnings of $1.12 per share. Results were hit by the
loss of exclusivity on Lexapro.
Fourth quarter revenues declined 7.3% to $1.01 billion, with net
sales falling 8.7% to $996 million. Total revenue, however, topped
the Zacks Consensus Estimate of $980 million.
Full year earnings came in at $3.72 per share, a penny above the
Zacks Consensus Estimate. Earnings, however, declined 15.6% from
the year-ago period. Revenues, which topped the Zacks Consensus
Estimate of $4.5 billion, increased 3.8% to $4.6 billion.
(Read our full coverage of the fourth quarter and fiscal 2012
earnings report at Forest Hit by Lexapro Generics)
Agreement of Estimate Revisions
Over the past 7 days, 4 of the 20 analysts covering Forest Labs
have reduced their first quarter 2013 earnings estimates with no
movement in the opposite direction. Over the last 30 days too,
there is a significant negative bias in estimate revisions with 6
analysts cutting their estimates. Only one analyst raised their
estimate during this time period.
Fiscal 2013 estimates have been revised downwards over the last
7 days by 2 of the 20 analysts covering the stock with no movement
in the opposite direction. Meanwhile, over the last 30 days, 2 of
the 20 analysts covering the stock have cut their estimates for
fiscal 2013 over the last 30 days with one analyst moving in the
opposite direction.
Estimates for Forest Labs have been declining ever since the
company came out with updated guidance in June 2012. The company
slashed its outlook for fiscal 2013 mainly due to lower
expectations from Lexapro. Lexapro, which was a key revenue
generator at Forest Labs, lost exclusivity in March 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.
Another factor that is expected to affect sales is lower than
expected royalty income from Mylan (MYL) on sales
of its authorized generic version of Lexapro.
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.
Based on the above factors, Forest Labs cut its fiscal 2013
guidance by 25 cents to $0.95 - $1.10. The Zacks Consensus Estimate
for fiscal 2013 currently stands at 75 cents per share.
Magnitude of Revisions & Earnings
Surprise
With earnings estimate revisions showing a negative trend, first
quarter fiscal 2013 estimates have gone down by 2 cents and 3 cents
over the last 7 and 30 days, respectively. However, fiscal 2013
estimates remain unchanged over the last 7 days and have gone up by
4 cents over the last 30 days.
Excluding the second quarter of fiscal 2012, Forest Labs has
usually surpassed expectations with an average earnings surprise of
3.4% over the last four quarters. Forest Labs is, however, expected
to deliver below expectations in the first quarter of fiscal 2013.
The company is expected to deliver a negative earnings surprise of
7.7%.
Although Forest Labs had several regulatory wins in the past few
quarters, the ramp up of new products, especially Daliresp and
Teflaro, has been slow. 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 now
that Lexapro is facing stiff 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.
FOREST LABS A (FRX): Free Stock Analysis Report
MYLAN INC (MYL): Free Stock Analysis Report
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