Zacks_Analysts' Blog : Forest Labs: Earnings Preview - Analyst Blog

Forest Labs (FRX) is set to announce its second quarter fiscal 2011 results on October 19. The Zacks Consensus Estimate is 93 cents, representing a year-over-year decline of 4.1%.

First Quarter Fiscal 2011 Highlights

Forest Labs reported strong earnings in the first quarter, beating the Zacks Consensus Estimate by 9 cents. Earnings came in at 95 cents a share. Strong Namenda sales, lower SG&A expenses and lower share count boosted earnings.

Total revenues increased 5.8% to $1.07 billion with product revenues increasing 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.

Other products like Bystolic and Savella also performed well. Savella, Forest Labs’ most recent product launch, is approved for the management of fibromyalgia and 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.

Following the release of first quarter results, Forest Labs revised its earnings guidance for fiscal 2011. Forest Labs expects earnings in the range of $3.67 - $3.77 per share, up from the earlier guidance of $3.50 to $3.60.

Agreement of Estimate Revisions

Over the past seven days, two of the 27 analysts covering Forest Labs have increased their earnings estimates for the third quarter, with no movements in the opposite direction.

Over the last seven days, only one of the 28 analysts covering the stock increased their earnings estimate for fiscal 2011 with no movements in the opposite direction. The Zacks Consensus Estimate of $3.77 for fiscal 2011 is towards the higher end of the guidance range provided by the company.

Magnitude of Revisions & Earnings Surprise

The magnitude of revisions is negligible over the past seven days for the second quarter as well as fiscal 2011. The Zacks Consensus Estimate for the second quarter currently stands at 93 cents.

Forest Labs has delivered a mixed performance over the past four quarters. While the company surpassed expectations by huge margins in the first quarter of fiscal 2011 and the third quarter of fiscal 2010, results were in-line with expectations in both the fourth and second quarters of fiscal 2010. The average earnings surprise for the last four quarters was a positive 11.63%.

For the second quarter, Forest Labs could deliver a positive surprise of 1.08%. Better-than-expected performance of products like Savella and Bystolic could help boost results.

Recommendation

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.