Forest Hit by Lexapro Generics (FRX) (IRWD) (MYL)

Zacks

Forest Laboratories, Inc . (FRX) reported earnings per share of 72 cents in the fourth quarter of fiscal 2012, 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 revenues, 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.

The Quarter in Detail

Fourth quarter product revenues declined 8.7% to $996.9 million. While Lexapro revenues fell 40.2% to $355.8 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $393.1 million, recording year-over-year growth of 19.5%.

Namenda sales are expected to increase 17% in fiscal 2013. Meanwhile, Lexapro sales will continue declining in fiscal 2013. The company is guiding towards Lexapro sales of $250 million.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $96.9 million, up 32.6%. Savella, which is approved for the management of fibromyalgia, posted revenues of $25.3 million, up 6.5% from the year-ago period. While Bystolic sales are expected to increase 29% in fiscal 2013, Savella sales are expected to grow 5%.

Forest Labs’ new product, Teflaro, posted revenues of $7.9 million, up from $6.5 million in the third 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. Teflaro sales are expected to come in at $65 million in fiscal 2013.

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 $13.1 million (up from $8.4 million in the third quarter), Viibryd (vilazodone HCl), approved for the treatment of major depressive disorder (MDD) recorded revenues of $24.9 (up from $18.9 million in the third quarter). Forest Labs expects Daliresp and Viibryd sales of $85 million and $175 million in fiscal 2013.

Contract revenue came in at $46.8 million, up from $36.9 million in the year-ago period. Contract revenue included $17 million earned under the company’s agreement with Mylan (MYL) for the authorized generic version of Lexapro. The company expects to earn $115 million from authorized generic Lexapro sales in fiscal 2013.

Benicar co-promotion income dropped 12.9% year-over-year to $29.6 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 (guidance: 10% decline).

Adjusted SG&A expense increased 16.7% to $410.5 million in the reported quarter. Forest Labs continues to focus on promoting its new products. Adjusted R&D spend increased 48.3% during the quarter. The company expects to spend $1.6 billion and $850 million on SG&A and R&D, respectively, in fiscal 2013.

Fiscal 2013 Guidance

Forest Labs provided its earnings guidance for fiscal 2013. The company expects earnings in the range of $0.90 – $1.05 per share ($1.20 – $1.35 excluding acquisition-related amortization) on total net revenue of $3.4 billion. The Zacks Consensus Estimate for fiscal 2013 currently stands at $1.09 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 calendar 2012. The company expects to launch both products in the fourth quarter of calendar 2012. While Forest Labs expects linaclotide sales of $60 million in fiscal 2013, aclidinium sales are expected to be $35 million.

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 in June 2012.

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 in July 2012.

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). Forest Labs is going through a major patent cliff now that lead product, Lexapro, has lost exclusivity. Namenda will face generic competition in early 2015 putting another $1+ billion at risk. In such a scenario, we are pleased to see the company delivering on the pipeline front. We believe that Forest Labs will continue to seek in-licensing and acquisition opportunities to grow its pipeline.

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