Earnings Preview: Forest Labs

Forest Labs (FRX) is all set to announce its third quarter fiscal 2011 results on Jan 18. The Zacks Consensus Estimate is 99 cents, representing a year-over-year increase of 2.1%.

Second Quarter Fiscal 2011 Highlights

Forest Labs reported strong earnings in the second quarter, beating the Zacks Consensus Estimate by 7 cents. Earnings came in at $1.00 per share. Strong Namenda sales, lower R&D spend and lower share count boosted earnings.

Total 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.

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 for the treatment of moderate to severe dementia of the Alzheimer’s type.

Other products like Bystolic and Savella also performed well. Savella, approved for the management of fibromyalgia, posted sales of $21.4 million. The product, which has been developed in collaboration with CypressBiosciences (CYPB), was launched in late April 2009. We believe Savella may have multi-hundred million dollar potential.

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.

Agreement of Estimate Revisions

Over the past seven days, one of the 28 analysts covering Forest Labs has increased their earnings estimate for the third quarter with no movements in the opposite direction.

Over the last seven days, only one of the 29 analysts covering the stock increased their earnings estimate for fiscal 2011 with no movements in the opposite direction. The Zacks Consensus Estimate of $3.89 for fiscal 2011 is towards the higher end of the guidance provided by the company.

Magnitude of Revisions & Earnings Surprise

The magnitude of revisions is negligible over the past seven days for the third quarter as well as fiscal 2011. The Zacks Consensus Estimate for the third quarter currently stands at 99 cents.

Forest Labs has delivered a mixed performance over the past four quarters. While the company surpassed expectations in the first half of fiscal 2011 and the third quarter of fiscal 2010, results were in-line with expectations in the fourth of fiscal 2010. The average earnings surprise for the last four quarters was a positive 9.88%.

For the third quarter, Forest Labs could deliver a positive surprise of 1.01%. Better-than-expected performance of products like Savella and Bystolic could help boost results. Forest Labs also delivered some positive news on its pipeline over the past few months. In addition to gaining FDA approval for Teflaro, the company also reported positive data on aclidinium and linaclotide.


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 intensify its in-licensing and acquisition activities to grow its pipeline.

FOREST LABS A (FRX): Free Stock Analysis Report

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