Earnings Scorecard: Forest Labs

Following the release of third quarter fiscal 2011 results on January 18, 2010, almost all the analysts covering Forest Laboratories (FRX) have made upward revisions to their earnings estimates for 2011 and 2012. The upward revision in estimates is mainly in response to the company’s revised guidance for fiscal 2011.

Third Quarter Highlights

Forest Labs reported third quarter earnings per share of $1.34, beating the Zacks Consensus Estimate of 99 cents and the year-ago earnings of 97 cents. Results were boosted by strong Namenda sales, lower expenses and lower share count..

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.

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.

Detailed discussion of third quarter results is available here.

Agreement of Estimate Revisions

There is a significant positive bias in earnings estimate revisions for Forest Labs. Over the last 30 days, 24 of the 26 analysts following the stock raised their estimates for fiscal 2011. Meanwhile, 24 of the 29 analysts following Forest Labs have raised their estimates for fiscal 2012.

During this period, only 1 analyst moved in the opposite direction for fiscal 2011. Meanwhile, 2 analysts have reduced their estimates for fiscal 2012.

There have been no estimate revisions over the past 7 days.

Earnings estimates are up for the March quarter as well with 22 of the 28 analysts following Forest Labs raising their estimates following the release of third quarter results. Only one analyst has moved in the opposite direction during this time period. There have been no estimate revisions over the past 7 days.

Factors like slightly stronger sales, lower SG&A and R&D spending, favorable mix in lower tax jurisdictions and the reinstatement of the R&D tax credit are expected to drive fiscal 2011 earnings.

Magnitude of Revisions

Estimates for fiscal 2011 have gone up by 44 cents following the release of third quarter results. The current Zacks Consensus Estimate of $4.33 is above Forest Labs’ revised guidance of $4.20 – $4.30 per share. Fiscal 2012 estimates are up 20 cents.

Meanwhile, estimates for the March quarter are up 10 cents following the release of third quarter results.

Our Recommendation

We currently have a Neutral recommendation on Forest Labs, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Despite the better-than-expected third quarter earnings performance, 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 in early 2015 – 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, Forest Labs’ 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.The company currently has one candidate under FDA review, and expects to file for approval of two candidates each in 2011 and 2012.

FOREST LABS A (FRX): Free Stock Analysis Report

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