Forest Laboratories, Inc. (FRX) reported earnings per share of $1.34 for the third quarter of fiscal 2011, easily beating the Zacks Consensus Estimate of 99 cents and the year-earlier earnings of 97 cents. Results were boosted by strong Namenda sales, lower expenses and lower share count. Including one-time items, earnings came in at $1.11 per share.
Third quarter revenues increased 5.8% to $1.13 billion, with net sales increasing 6.7% to $1.06 billion. Total revenues topped the Zacks Consensus Estimate of $1.09 billion. While contract revenues slipped 16.1% to $46.8 million, interest income declined 2.8% to $7.1 million.
The Quarter in Detail
Third quarter product revenues increased 6.7% to $1,063.9 million. Forest Labs reported that it continued to see strong growth for Bystolic and Savella. While Lexapro revenues increased slightly (up 0.7%) to $586.5 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $319.8 million, recording a growth of 13.2% 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 2010 for Namenda XR, a 28 mg once-daily extended-release formulation. 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 $68.1 million, up 43.4%.
Savella, which is approved for the management of fibromyalgia, posted sales of $24.6 million, up significantly from the year-earlier sales of $15.4 million. Sales are being driven by the company’s promotional efforts.
Savella was launched in late April 2009. We believe the product may have multi-hundred million dollar potential. In early October 2010, Savella was moved into tier II unrestricted coverage on several managed care organizations. Improved formulary access should help boost sales. Forest Labs entered into a collaboration and distribution agreement with Janssen to commercialize Bystolic and Savella in Canada.
Contract revenue declined 16.1% to $46.8 million due to a 17.1% 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.
Adjusted selling, general and administrative expense declined 6.9% to $285.7 million. The company continues to focus on promoting its currently marketed products, especially Savella and Bystolic. The launch of Teflaro, which gained approval in late October 2010, could lead to an increase in SG&A spend. Adjusted research and development spend declined 15.1% during the quarter.
Guidance Raised Again
Following the release of third quarter results, Forest Labs once again revised its earnings guidance for fiscal 2011. The company now expects earnings in the range of $4.20 – $4.30 per share, up from its earlier guidance of $3.80 – $3.90. The Zacks Consensus Estimate for fiscal 2011 currently stands at $3.88 per share, well below the new guidance issued by the company.
The guidance excludes charges related to the settlement with the US Department of Justice, the upfront licensing payments to TransTech Pharma and Gruenenthal. Guidance, however, includes the impact of the company’s accelerated share repurchase program.
Upcoming Catalysts
Forest Labs remains on track to file for approval of two pipeline candidates, linaclotide and aclinidinium, in 2011. The company along with its partner, Ironwood Pharmaceuticals, Inc. (IRWD), reported positive top-line results from a 26-week phase III study on linaclotide in early November 2010. With positive data from two phase III irritable bowel syndrome with constipation (IBS-C) trials and two phase III chronic constipation trials, the companies are looking to file a NDA for both indications in the third quarter of calendar year 2011.
Meanwhile, earlier this year, Forest Labs and Almirall announced positive top-line data on their chronic obstructive pulmonary disease (COPD) candidate, aclidinium bromide. The companies are on track to file for regulatory approval of aclidinium in both the US and the EU in mid-2011.
Aclidinum’s approval would be a major boost for Forest Labs. The COPD market represents huge commercial potential – according to the World Health Organization (WHO), about 210 million people suffer from COPD across the world. We note that Forest Labs is currently seeking FDA approval for another COPD candidate, Daxas.
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. With the uncertainty surrounding the approval of Daxas, we believe Forest Labs will continue pursuing in-licensing and acquisition activities to grow its pipeline.
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