Forest Laboratories, Inc. (FRX) reported earnings per share of $1.00 for the second quarter of fiscal 2011, 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. Including one-time items, earnings came in at 61 cents per share.

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.

The Quarter in Detail

Second quarter product revenues increased 7.7% to $1,037.3 million. Although Lexapro revenues remained flat at $569.3 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $310.1 million, recording a growth of 12.7% from the year-earlier period.

Improved patient access and increased promotional efforts should help keep Namenda sales strong. Moreover, Forest Labs gained US Food and Drug Administration (FDA) approval in June for Namenda XR, a 28 mg once-daily extended-release formulation of memantine. Namenda XR received approval for the treatment of moderate to severe dementia of the Alzheimer’s type.

Bystolic, Forest Labs beta-blocker for the treatment of hypertension, posted sales of $63.7 million, up 56.5%. Contract revenue declined 16.2% to $42.4 million due to a drop in Benicar co-promotion income. Under its agreement with Daiichi Sankyo, Forest Labs is now receiving a gradually declining royalty rate on Benicar until the end of March 2014.

Interest income declined mainly due to lower interest rates on Forest Labs short duration portfolio.

Forest Labs’ most recent product launch, Savella, which is approved for the management of fibromyalgia, posted sales of $21.4 million, up significantly from the year-earlier sales of $10.2 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.

Adjusted selling, general and administrative expense increased 3.8% to $316.4 million. The company continues to focus on promoting its currently marketed products, especially Savella and Bystolic. Adjusted research and development spend declined 5.3% during the quarter.

Guidance Raised Again

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. The Zacks Consensus Estimate for fiscal 2011 currently stands at $3.77.

Upcoming Catalysts

Forest Labs currently has two pipeline candidates, ceftaroline and Daxas, under FDA review. While the company is looking to get ceftaroline approved for the treatment of community acquired bacterial pneumonia (CABP) and the treatment of acute bacterial skin and skin structure infections (ABSSSI), Daxas is being reviewed as a potential treatment for the reduction of chronic obstructive pulmonary disease (COPD) exacerbations associated with chronic bronchitis in patients at risk for exacerbations.

A positive response from the FDA would allow the company to launch both products in calendar year 2011.

Another positive catalyst could come later this month in the form of favorable results on the company’s phase III COPD candidate, aclidinium. Positive results would allow Forest Labs to file for FDA approval in 2011.

Forest Labs could also be in a position to file another NDA in 2011, provided it reports positive phase III results on its chronic constipation candidate, linaclotide.

Neutral on Forest Labs

We currently have a Neutral recommendation on Forest Labs, which is supported by a Zacks #3 Rank (short-term Hold rating). While products like Namenda, Bystolic and Savella should continue performing well, we remain concerned about long-term growth at Forest Labs, especially from 2012 when Lexapro is exposed to generic competition. That puts a lot of pressure on the pipeline to come through. We believe Forest Labs will intensify its in-licensing and acquisition activities to grow its pipeline.

 
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