FRX Forest Road Acquisition Corp

Forest Labs (FRX) will be announcing its second quarter fiscal 2013 results on October 16. The Zacks Consensus Estimate for the second quarter is 2 cents per share, representing a year-over-year decline of 98%. The company is facing stiff generic competition for its depression drug, Lexapro. According to the Zacks Consensus Estimate, revenues are expected to fall 33.4% to $779 million in second quarter of fiscal 2013.

First Quarter Fiscal 2013 Highlights

Forest Labs reported first quarter fiscal 2013 earnings per share of 21 cents, well below the year-earlier earnings of $1.04 per share. Results were hit by the loss of exclusivity on Lexapro. Excluding acquisition-related amortization costs, first quarter fiscal 2013 earnings came in at $0.28. The Zacks Consensus Estimate was $0.25 per share.

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

Agreement of Estimate Revisions

Over the past 7 days, only 1 analyst raised their estimate for second quarter 2013 earnings with no movement in the opposite direction. However, over the last 30 days, there is a significant negative bias in estimate revisions with 5 analysts cutting their estimates. Only two analysts raised their estimates during this time period.

Over the past 7 days, 3 of the 21 analysts providing estimates have cut their fiscal 2013 estimates with no movement in the opposite direction. Meanwhile, over the last 30 days, 5 of 21 analysts have cut their estimates for fiscal 2013 over the last 30 days with 2 analysts 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.

Magnitude of Revisions & Earnings Surprise

With earnings estimate revisions showing a negative trend over the last 30 days, second quarter fiscal 2013 estimates have gone down by 2 cents. Meanwhile, fiscal 2013 estimates declined 3 cents over the last 30 days. Fiscal 2013 estimates are down by a penny over the last 7 days.

Forest Labs’ performance has been mixed over the last four quarters. While the company surpassed expectations in the third and fourth quarters of fiscal 2012, Forest Labs missed expectations in the second quarter of fiscal 2012 and the first quarter of fiscal 2013. The average earnings surprise over the last four quarters is a negative 2.56%.

Forest Labs is expected to deliver below expectations in the third quarter of fiscal 2013. The company is expected to deliver a negative earnings surprise of 150%.

Although Forest Labs had several regulatory wins in the past few quarters, the ramp up of new products, especially 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.

 
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