Following the release of second quarter fiscal 2011 results on October 19, 2010, almost all the analysts covering Forest Laboratories (FRX) have made upward revisions to their earnings estimates for 2011 and 2012. The upward revision in estimates is mainly in response to the company’s revised guidance for fiscal 2011.
Second Quarter Highlights
Forest Labs reported second quarter earnings per share of $1.00, beating the Zacks Consensus Estimate of 93 cents and the year-earlier earnings of 85 cents. Strong Namenda sales, lower R&D spend and lower share count boosted earnings.
Second quarter revenues increased 2.3% to $1.09 billion, with net sales increasing 7.7% to $1.04 billion. Total revenues topped the Zacks Consensus Estimate of $1.06 billion. While contract revenues slipped 16.2% to $42.4 million, interest income declined 9.8% to $8.5 million.
Following the release of second quarter results, Forest Labs once again revised its earnings guidance for fiscal 2011. The company now expects earnings in the range of $3.80 – $3.90 per share, up from its earlier guidance of $3.67 – $3.77.
Detailed discussion of second quarter results is available here.
Agreement of Estimate Revisions
There is a significant positive bias in earnings estimate revisions for Forest Labs. Over the last 30 days, 23 of the 28 analysts following the stock raised their estimates for fiscal 2011. Meanwhile, 20 of the 27 analysts following Forest Labs have raised their estimates for fiscal 2012.
During this period, only 3 analysts moved in the opposite direction for fiscal 2012.
There is a positive bias in earnings estimate revisions over the last 7 days as well. While 5 of the 28 analysts covering Forest Labs have raised their earnings estimates for fiscal 2011, 9 of the 27 analysts covering the stock have raised their estimates for fiscal 2012. Although there are no downward revisions for fiscal 2011, 2 analysts have reduced their estimates for fiscal 2012.
Earnings estimates are up for the December quarter as well with 11 of the 27 analysts following Forest Labs raising their estimates in the last 7 days. Only one analyst has moved in the opposite direction during this time period. Over the last 30 days, 21 analysts have raised their estimates with only 2 analysts moving in the opposite direction.
The upward revision in estimates for fiscal 2011 mainly reflects the impact of higher product sales expectations, a lower tax rate and a lower share count. The lower share count should also boost the bottom-line in fiscal 2012.
Magnitude of Revisions
Estimates for fiscal 2011 have gone up by 11 cents over the past 30 days and a penny over the last 7 days. The current Zacks Consensus Estimate of $3.88 is towards the higher end of Forest Labs’ revised guidance of $3.80 – $3.90 per share. Fiscal 2012 estimates are up 5 cents following the release of second quarter results.
Meanwhile, estimates for the December quarter are up 3 cents following the release of second quarter results.
Our Recommendation
We currently have a Neutral recommendation on Forest Labs, which is supported by a Zacks #3 Rank (short-term Hold rating). Despite the better-than-expected second quarter earnings performance, we remain concerned about the strength of the pipeline relative to the loss in sales that will come with the Lexapro (2012) and Namenda (2015) patent expirations. With Lexapro losing patent protection in March 2012, roughly half the company’s top-line will be at risk to generic competition.
While Bystolic and Savella should be very meaningful contributors by that time, we believe that their combined sales will not 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. In fact, Forest Labs’ goal is to double the commercial value of its late-stage pipeline by 2012 through in-licensing deals and acquisitions.
Forest Labs has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years.The company currently has two candidates under US Food and Drug Administration (FDA) review, and expects to file for approval of two candidates each in 2011 and 2012.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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