Earnings Preview: Forest Labs (FRX)

Forest Labs (FRX) is all set to announce its second quarter fiscal 2012 results on October 18. The Zacks Consensus Estimate for the second quarter is 98 cents, representing a year-over-year decline of 2%.

First Quarter Fiscal 2012 Highlights

Forest Labs reported strong earnings in the first quarter, beating the Zacks Consensus Estimate by a huge margin. Earnings came in at $1.04 for the first quarter of fiscal 2012, easily beating the Zacks Consensus Estimate of 96 cents and the year-earlier earnings of 95 cents. Results were boosted by higher revenues, lower R&D expenses and lower share count.

First quarter revenues increased 7.9% to $1.15 billion, with net sales increasing 8.2% to $1.1 billion. Total revenues topped the Zacks Consensus Estimate of $1.11 billion.

While Lexapro revenues increased 3.6% to $585.7 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered sales of $319.9 million, recording a year-over-year growth of 3.9%.

Other products like Bystolic and Savella also performed well. Savella posted sales of $25.8 million, up 25.6% from the year-earlier period. New products include Teflaro (treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia), Daliresp (treatment of chronic obstructive pulmonary disease), and Viibryd (for the treatment of major depressive disorder).

Agreement of Estimate Revisions

Over the past seven days, 2 of the 21 analysts covering Forest Labs have reduced their estimates for the second quarter of fiscal 2012. Only one analyst has moved in the opposite direction during this time-period.

Magnitude of Revisions & Earnings Surprise

Second quarter fiscal 2012 estimates have gone down by a penny in the last seven days. The Zacks Consensus Estimate for the second quarter currently stands at 98 cents.

Forest Labs has consistently surpassed expectations over the past four quarters with an average earnings surprise of 13.4%. Forest Labs is, however, expected to deliver below expectations in the second quarter of fiscal 2012. The company is expected to deliver a negative earnings surprise of 1.02%. Concerns remain that Namenda sales may lag expectations.

Recommendation

We currently have a Neutral recommendation on Forest Labs, which carries a Zacks #3 Rank (short-term “Hold” rating). We remain concerned about long-term growth at Forest Labs, especially from 2012 when Lexapro is exposed 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 in early 2015 this puts another $1+ billion at risk.

Given the situation, we believe that Forest will continue to seek in-licensing and acquisition activities to grow its pipeline. Forest Labs has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years. Products in Forest Labs’ portfolio face competition from companies like Pfizer (PFE) and Eli Lilly (LLY) among others.

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