Forest Laboratories, Inc. (FRX) reported earnings per share of 95 cents for the first quarter of fiscal 2011, well above the Zacks Consensus Estimate of 86 cents and the year-earlier earnings of 87 cents. Including the impact of a charge related to investigations being carried out by the US Department of Justice (DoJ) and a new product licensing fee, earnings came in at 39 cents per share.
First quarter revenues increased 5.8% to $1.07 billion, with net sales increasing 7.6% to $1 billion. While contract revenues slipped 16.6% to $39.8 million, interest income declined 42.5% to $7 million.
The Quarter in Detail
First quarter product revenues increased 7.6% to $1,020.1 million. Although Lexapro revenues remained flat at $565.2 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $307.8 million, recording a growth of 18.7% 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 $59.5 million, up 58%. Contract revenue declined 16.6% to $39.8 million due to a decline 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 $20.5 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 3.8% to $300 million. The company continues to focus on promoting its currently marketed products, especially Savella and Bystolic. Research and development spend increased 15.3% during the quarter, including milestone payments of $20.1 million.
Share Repurchase
Forest Labs’ Board of Directors recently announced a new share repurchase program for up to 50 million shares. As part of the program, the company also signed an agreement with Morgan Stanley & Co. (MS) for the repurchase of shares worth $500 million under an accelerated share repurchase (ASR) transaction. Forest Labs said that Morgan Stanley repurchased about 16.9 million shares under this transaction.
Revised Guidance & Update on Daxas
Following the release of first quarter results, Forest Labs revised its earnings guidance for fiscal 2011. The company now expects earnings in the range of $3.67 - $3.77 per share, up from the earlier guidance of $3.50 to $3.60. The revised guidance is above the current Zacks Consensus Estimate of $3.63.
Meanwhile, Forest Labs said that it intends to submit a response to the complete response letter issued by the FDA on Daxas. As a reminder, Forest Labs failed to gain first-round approval for Daxas for the reduction of chronic obstructive pulmonary disease (COPD) exacerbations associated with chronic bronchitis in patients at risk for exacerbations. In its complete response letter, the FDA asked the company to submit additional information and analysis. Forest Labs expects to submit a response by Sep 2010.
Our Take
We currently have a Neutral recommendation on Forest Labs. 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 by 2015 at the latest; 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, the company’s 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.
Read the full analyst report on "FRX"
Read the full analyst report on "CYPB"
Read the full analyst report on "MS"
Zacks Investment Research
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The Quarter in Detail
First quarter product revenues increased 7.6% to $1,020.1 million. Although Lexapro revenues remained flat at $565.2 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $307.8 million, recording a growth of 18.7% 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 $59.5 million, up 58%. Contract revenue declined 16.6% to $39.8 million due to a decline 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 $20.5 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 3.8% to $300 million. The company continues to focus on promoting its currently marketed products, especially Savella and Bystolic. Research and development spend increased 15.3% during the quarter, including milestone payments of $20.1 million.
Share Repurchase
Forest Labs’ Board of Directors recently announced a new share repurchase program for up to 50 million shares. As part of the program, the company also signed an agreement with Morgan Stanley & Co. (MS) for the repurchase of shares worth $500 million under an accelerated share repurchase (ASR) transaction. Forest Labs said that Morgan Stanley repurchased about 16.9 million shares under this transaction.
Revised Guidance & Update on Daxas
Following the release of first quarter results, Forest Labs revised its earnings guidance for fiscal 2011. The company now expects earnings in the range of $3.67 - $3.77 per share, up from the earlier guidance of $3.50 to $3.60. The revised guidance is above the current Zacks Consensus Estimate of $3.63.
Meanwhile, Forest Labs said that it intends to submit a response to the complete response letter issued by the FDA on Daxas. As a reminder, Forest Labs failed to gain first-round approval for Daxas for the reduction of chronic obstructive pulmonary disease (COPD) exacerbations associated with chronic bronchitis in patients at risk for exacerbations. In its complete response letter, the FDA asked the company to submit additional information and analysis. Forest Labs expects to submit a response by Sep 2010.
Our Take
We currently have a Neutral recommendation on Forest Labs. 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 by 2015 at the latest; 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, the company’s 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.
Read the full analyst report on "FRX"
Read the full analyst report on "CYPB"
Read the full analyst report on "MS"
Zacks Investment Research
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