Forest Laboratories, Inc. (FRX) reported earnings per share of 83 cents for the fourth quarter of fiscal 2010, in-line with the Zacks Consensus Estimate, and above the year-ago earnings of 76 cents. Full-year earnings came in at $3.51, up from fiscal 2009 earnings of $3.45.

While fourth quarter revenues increased 9.4% to $1.06 billion, full-year revenues increased 6.9% to $4.2 billion.

The Quarter in Detail

Fourth quarter product revenues increased 11% to $996 million. Although Lexapro revenues grew only 1.4% to $556.3 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $297.9 million, recording a growth of 22.2% from the year-ago period. Improved patient access and increased promotional efforts should help keep Namenda sales strong.

Bystolic, Forest’s beta-blocker for the treatment of hypertension, posted sales of $53.1 million. This was significantly higher than the year-ago sales of $29.7 million. Contract revenue declined 2.2% to $54 million due to a decline in Benicar co-promotion income.

Forest’s most recent product launch, Savella, which is approved for the management of fibromyalgia, posted sales of $17.4 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.

Selling, general and administrative expense declined 7.1% to $320.6 million. The company continues to focus on promoting its currently marketed products, especially Savella.

Research and development spend increased 46.1% during the quarter, excluding licensing payments.

Guides Below Consensus

Forest announced that it expects earnings in the range of $3.50 to $3.60 on total revenues of $4.4 billion. Earnings guidance provided by the company is well below the current Zacks Consensus Estimate of $3.77 for fiscal 2011. Guidance includes the impact of health care reform and research and development milestone payments for existing pipeline candidates.

The revenue guidance indicates that Forest expects revenues to grow 5% in fiscal 2011. Revenues will be driven primarily by Namenda (expected to grow 9%), Savella (guidance: $100 million), and Bystolic (expected to grow 60%). Forest is also guiding towards two product approvals in fiscal 2011: Daxas and ceftaroline. While Daxas is expected to contribute $25 million to revenues, ceftaroline is slated to contribute $6 million.

Lexapro revenues are expected to come in slightly below $2.3 billion in fiscal 2011. Forest expects Lexapro’s total prescription market share to decline by approximately 1.7 share points.

Benicar earnings are expected to decline 15.1% in fiscal 2011. Under its agreement with Daiichi Sankyo, Forest is now receiving a gradually declining royalty rate on Benicar until the end of March 2014.

Forest expects selling, general and administrative expense in the range of $1.3 billion. This includes spending related to the launch of Daxas and ceftaroline. Research and development expenses are expected to increase to $680 million as the company continues to invest in its late-stage pipeline.

Our Expectations

We currently have a Neutral recommendation on Forest. We are 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, which recently received a negative response from an advisory panel of the US Food and Drug Administration (FDA), we believe Forest will intensify its in-licensing and acquisition activities to grow its pipeline.

We expect investor focus to remain on the FDA’s decision in May regarding the approvability status of Daxas.
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