FRX Forest Road Acquisition Corp

Forest Laboratories, Inc. (FRX) reported fourth quarter fiscal 2013 earnings of 25 cents per share, down from the year-ago earnings of 77 cents per share but above the Zacks Consensus Estimate of 19 cents per share. The year-over-year decline reflected the impact of the genericization of Lexapro.

Fourth quarter revenues declined 22.2% to $821.7 million, with net sales falling 21.4% to $783.2 million. Total revenues were above the Zacks Consensus Estimate of $812 million.

Full year earnings came in at 45 cents per share, down from the year-ago earnings of $3.88 per share but above the Zacks Consensus Estimate of 41 cents per share.

Fiscal 2013 revenues declined 31.8% to $3.1 billion, with net sales falling 33.9% to $2.9 billion. Total revenues were in line with the Zacks Consensus Estimate.

The Quarter in Detail

Fourth quarter product revenues declined 21.4% to $783.2 million. Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $438.8 million, recording year-over-year growth of 11.6%.

Namenda, which had been performing below expectations over the past few quarters, improved on a sequential basis as well. Forest Labs intends to launch Namenda XR this year and expects fiscal 2014 Namenda sales, including Namenda XR, of about $1.625 billion, up from $1.5 billion in fiscal 2013.

Lexapro sales were negatively impacted by the entry of additional generics in the market following the expiry of the Hatch-Waxman six-month exclusivity period on Sep 13.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $132.0 million, up 36.2% from the year-ago period. Bystolic’s current run-rate indicates annual sales of more than $500 million in fiscal 2014. Forest Labs expects sales of about $535 million in fiscal 2014 (up from $455 million in fiscal 2013). Forest Labs is looking to drive Bystolic's growth by providing additional data on the appropriate use of the product.

Forest Labs is also working on extending the product’s lifecycle and is conducting a phase III study with a fixed dose combination of Bystolic and valsartan (the market leader) for hypertension. A fixed dose combination product would expand the patient population for Bystolic. Top-line data should be out in the June quarter.

Positive results would allow Forest Labs to move ahead with its plans of filing for US approval in early calendar 2014. Approval as a first-line treatment would boost sales significantly.

Savella, which is approved for the management of fibromyalgia, posted revenues of $26.1 million, up 3.2% from the year-ago period. Savella’s performance remains lackluster. Forest Labs expects fiscal 2014 Savella sales of $106 million, barely above fiscal 2013 sales of $105 million.

Teflaro, launched in Mar 2011 for the treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia, posted revenues of $13.1 million, slightly above $11.5 million posted in the third quarter of fiscal 2013. Teflaro’s performance continues to disappoint. Fiscal 2014 sales are expected to increase 36.4% to $60 million.

Two other new products, Daliresp and Viibryd, were launched in Aug 2011. While Daliresp, which is approved for the treatment of chronic obstructive pulmonary disease (COPD), recorded revenues of $23.2 million (up from $17.5 million in the third quarter of fiscal 2013), Viibryd, approved for the treatment of major depressive disorder (MDD), recorded revenues of $44.6 million (up from $40.6 million in the third quarter of fiscal 2013).

The improvement in Daliresp sales was due to the severe flu season. While fiscal 2014 Viibryd sales are expected to increase 35% to $220 million, Daliresp sales are expected to increase about 41% to $110 million.

Two more products were launched in Dec 2012 – Tudorza (COPD) and Linzess (treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation in adults). While Tudorza delivered sales of $10.8 million, Linzess sales were $4.5 million.

Forest Labs expects Tudorza sales to increase to about $90 million in fiscal 2014 (up from $23 million in fiscal 2013). Meanwhile, Linzess sales are expected to be about $170 million in fiscal 2014 (up from $24 million in fiscal 2013).

Contract revenues came in at $30.6 million, down from $46.8 million in the year-ago period. Benicar co-promotion income declined 17.2% year-over-year to $24.5 million in fourth quarter fiscal 2013 and is expected to decline 32% in fiscal 2014.

SG&A expense decreased 9.2% to $372.7 million in the reported quarter. Forest Labs continues to focus on promoting its new products. Adjusted R&D spend increased 6.9% during the quarter. While Forest Labs expects to spend $1.75 billion on SG&A in fiscal 2014, R&D spend is expected to be about $835 million.

Fiscal 2014 Guidance

Forest Labs provided its outlook for fiscal 2014. The company expects earnings of $0.80 - $1.00 per share (excluding acquisition-related amortization) on total net revenues of about $3.5 billion. The Zacks Consensus Estimate for earnings currently stands above the guidance range at $1.04 per share. The revenue guidance is in-line with the Zacks Consensus Estimate.

Forest Labs expects total product sales of $3.3 billion, up from $2.9 billion in fiscal 2013. Guidance includes the impact of the launch of Namenda XR as well as levomilnacipran, which is currently under FDA review. Forest Labs is currently guiding towards levomilnacipran sales of about $13 million.

The company expects its next generation products (Bystolic, Savella, Teflaro, Daliresp, Viibryd, Tudorza and Linzess) to deliver sales of $1.32 billion in fiscal 2014.

Our Take

Forest Labs’ fourth quarter fiscal 2013 results were better-than-expected. Importantly, Namenda, which had been performing below expectations, improved on a sequential basis. However, the company’s earnings guidance for fiscal 2014 was below expectations.

Meanwhile, we remain encouraged by Forest Labs’ progress with its pipeline candidates. The company has launched several new products over the past couple of years and is looking to launch additional products going forward.

Forest Labs has two important regulatory events coming up in the second half of calendar 2013 – levomilnacipran (treatment of major depressive disorder) and cariprazine (treatment of schizophrenia and acute mania associated with bipolar 1 disorder).

Forest Labs currently carries a Zacks Rank #3 (Hold). Companies that currently look better-positioned include UCB (UCBJF), QLT Inc. (QLTI) and Catalyst Pharmaceutical Partners Inc. (CPRX). All three are Zacks Rank #1 (Strong Buy) stocks.

 
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