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Forest Labs Impresses with Earnings Beat, View Up

Arpita Dutt

Forest Laboratories, Inc. (NYSE:FRX) reported third quarter fiscal 2014 earnings (excluding the impact of amortization and other one-time items) of 27 cents per share, well above the year-ago loss of 21 cents per share. The Zacks Consensus Estimate was 6 cents per share.

Third quarter revenues grew 22.6% to $878.4 million, well above the Zacks Consensus Estimate of $825 million.

The Quarter in Detail

Third quarter product revenues increased 24.9% to $846.8 million. Performance was primarily driven by new products which posted sales of $375.4 million, up 59.4% from the year-ago quarter.

Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $363.7 million, recording year-over-year growth of 5.2%. Namenda XR, which was launched in Jun 2013, delivered sales of $37.8 million, up from $11.5 million in the second quarter.

Earlier this month, Forest Labs said that it ended calendar year 2013 with about 50% of XR managed care coverage. The company reported additional wins in early 2014.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $130.7 million, up 20.1% from the year-ago period. Forest Labs is looking to drive Bystolic's growth by providing additional data on the appropriate use of the product.

Forest Labs is also working on extending the product’s lifecycle and reported positive data from a phase III study on a fixed dose combination of Bystolic and valsartan for hypertension. The company intends to file for FDA approval of this combination. A fixed dose combination product would expand the patient population for Bystolic.

Savella, which is approved for the management of fibromyalgia, posted revenues of $25.6 million, up 0.2% from the year-ago period. Savella’s performance remains lackluster.

Teflaro, launched in Mar 2011 for the treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia, posted revenues of $22.3 million, well above $14.9 million posted in the second quarter.

Two other new products, Daliresp and Viibryd, were launched in Aug 2011. While Daliresp, approved for the treatment of chronic obstructive pulmonary disease (:COPD), recorded revenues of $26.8 million (up 53.4% from the year-ago period), Viibryd, approved for the treatment of major depressive disorder (MDD), recorded revenues of $52.7 million (up 29.7% from the year-ago period).

Two more products were launched in Dec 2012 – Tudorza (:COPD) and Linzess (treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation in adults). While Tudorza delivered sales of $20.4 million (up from $16.7 million in the second quarter), Linzess sales were $51.0 million (up from $34.4 million in the second quarter).

Fetzima, launched in Dec 2013 for the treatment of adults with major depressive disorder recorded initial trade stocking of $8.0 million.

Contract revenues came in at $31.6 million, down from $38.3 million in the year-ago period. Benicar co-promotion income declined 16.1% year-over-year to $30.2 million in third quarter fiscal 2014.

Adjusted SG&A expense increased 2.0% to $437.0 million in the reported quarter. Forest Labs continues to focus on promoting its new products. Adjusted R&D spend declined 25.5% during the quarter.

Guidance Updated Again

Forest Labs is now guiding towards fiscal 2014 earnings of $1.25 - $1.35 per share. Earlier, at the time of releasing second quarter results, the company had guided towards fiscal 2014 earnings of 95 cents - $1.15 per share. The Zacks Consensus Estimate of $1.09 per share is well below the new guidance range.

Our Take

Forest Labs's third quarter results were impressive and the company raised its guidance for the year again. We are also positive on the new CEO’s attempts to make Forest Labs a nimbler and more streamlined organization. Sometime back, the CEO had announced a strategic initiative, a share buyback program and some accretive deals. All three actions should boost the bottom line and help lessen the impact of the Namenda patent expiry, slow new product ramp, and pipeline setbacks.

The Aptalis acquisition, if it goes through, will boost sales by $700 million and fiscal 2015 earnings by 78 cents per share.

Forest Labs currently carries a Zacks Rank #2 (Buy). Some better-ranked stocks include Endocyte, Inc. (NASD:ECYT), Grifols, S.A. (NASD:GRFS) and Lannett Company, Inc. (NYSE:LCI). All three are Zacks Rank #1 (Strong Buy) stocks.

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