FRX Forest Road Acquisition Corp

Forest Laboratories, Inc. (FRX) reported earnings per share of 28 cents in the first quarter of fiscal 2013, 3 cents above the Zacks Consensus Estimate. First quarter fiscal 2013 earnings, however, came in well below the year-earlier earnings of $1.07 per share. Results were hit by the loss of exclusivity on Alzheimer's drug Lexapro.

First quarter revenues declined 28.7% to $821 million, with net sales falling 31.9% to $751.8 million. Total revenues missed the Zacks Consensus Estimate of $826 million.

The Quarter in Detail

First quarter product revenues declined 31.9% to $751.8 million. While Lexapro revenues fell 81.2% to $110.0 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $368.4 million, recording year-over-year growth of 15.2%.

The June quarter represents the first full quarter of generic competition for Lexapro. Lexapro sales will continue declining in fiscal 2013 with sales expected to come in at $215 million. The company had cut its sales guidance for Lexapro in June due to the higher-than-expected discounting in the market. Forest Labs said that it expects a generic substitution rate of 88% instead of 84%.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $107.8 million, up 38.2%. Savella, which is approved for the management of fibromyalgia, posted revenues of $26.7 million, up 3.5% from the year-ago period.

Forest Labs’ new product, Teflaro, posted revenues of $9.4 million, up from $7.9 million in the fourth 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 2011.

Two other new products, Daliresp and Viibryd, were launched in August 2011. While Daliresp, which is approved for the treatment of chronic obstructive pulmonary disease (COPD), recorded revenues of $17.8 million (up from $13.1 million in the fourth quarter), Viibryd (vilazodone HCl), approved for the treatment of major depressive disorder (MDD) recorded revenues of $37.4 million (up from $24.9 million in the third quarter).

Contract revenue came in at $65.8 million, up from $40.6 million in the year-ago period. Contract revenue included $29.4 million earned under the company’s agreement with Mylan (MYL) for the authorized generic version of Lexapro.

Benicar co-promotion income dropped 3.5% year-over-year to $35.4 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 will continue declining in fiscal 2013.

Adjusted SG&A expense increased 6.8% to $382.3 million in the reported quarter. Forest Labs continues to focus on promoting its new products. Adjusted R&D spend increased 26.4% during the quarter.

Fiscal 2013 Guidance Slashed in June

Forest Labs had slashed its outlook for fiscal 2013 in June mainly due to lower expectations from Lexapro. 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.

In addition to lower Lexapro sales, other factors expected to affect sales are lower than expected royalty income and the discontinuation of shipping of Levothroid.

Based on these factors, Forest Labs had cut its fiscal 2013 guidance to $0.95 - $1.10 per share. The Zacks Consensus Estimate currently stands at 74 cents per share.

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 fiscal 2013.

Forest Labs and its partner, Ironwood Pharmaceuticals, Inc. (IRWD) are seeking approval for the use of linaclotide for the treatment of irritable bowel syndrome with constipation (IBS-C) and chronic constipation (CC). A response from the FDA should be out this summer.

Meanwhile, 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. A response on aclidinium should be out shortly.

The company expects to file for approval of two more candidates in calendar 2012.

Neutral on Forest Labs

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 to 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.

 
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