Forest Labs (FRX) is all set to announce its fourth quarter and full year fiscal 2010 results on Apr 20. The company expects to report fiscal 2010 earnings towards the higher end of its guidance range of $3.40 – $3.50 per share on revenues of $4.1 billion.
Third Quarter Highlights
Forest reported strong earnings of 97 cents per share in the third quarter, which topped the Zacks Consensus Estimate by 11 cents.
Total revenues increased 6.7% to $1.06 billion with product revenues increasing 8.4% to $997 million. Although Lexapro sales declined 0.5% to $582.6 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $282.5 million, recording a growth of 17.3% from the year-ago period. Improved patient access and increased promotional efforts should help keep Namenda sales strong.
Other products like Bystolic and Savella also performed well. Savella, Forest’s most recent product launch, is approved for the management of fibromyalgia and posted sales of $15.4 million. The product, which has been developed in collaboration with Cypress Biosciences (CYPB), was launched in late April 2009. We believe Savella may have multi-hundred million dollar potential.
Agreement
Over the past seven days, several analysts have reduced their earnings estimates for fiscal 2011. Forest recently suffered a blow when the US Food and Drug Administration’s (FDA) advisory panel voted against approval of an important pipeline candidate, Daxas. This resulted in several analysts reducing their estimates for fiscal 2011 as most of them do not expect the candidate to gain approval at the May 2010 FDA action date.
Over the last seven days, 10 of 25 analysts covering the stock reduced their estimates for fiscal 2011 with no movements in the opposite direction. Meanwhile, 2 of 25 analysts covering the stock raised their estimates for fiscal 2010, with 1 analyst moving in the opposite direction over the past week.
The Zacks Consensus Estimate of $3.51 for fiscal 2010 is a penny above the higher end of the guidance provided by the company.
Magnitude
The magnitude of revisions is modest over the past week. Overall, estimates for the upcoming fiscal 2010 have declined a cent over the same period.
For fiscal 2011, estimates have gone down a couple of cents over the past 7 days as analysts have lowered their revenue estimates for the year based on the advisory panel’s review of Daxas. We believe that most analysts are expecting a delay in the approval of Daxas and have adjusted their estimates accordingly.
Recommendation
We currently have a Neutral recommendation on Forest. While products like Namenda, Bystolic and Savella should continue performing well, we remain concerned about long-term growth at Forest, especially from 2012 when Lexapro is exposed to generic competition. That puts a lot of pressure on the pipeline to come through.
With the uncertainty surrounding the approval of Daxas, we believe Forest will intensify its in-licensing and acquisition activities to grow its pipeline.
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