Forest Labs ( FRX ) is expected to announce its first quarter fiscal 2013 results on July 17. The Zacks Consensus Estimate for the first quarter is 26 cents per share, representing a year-over-year decline of 75%. The June quarter represents the first full quarter of generic competition for Lexapro. According to the Zacks Consensus Estimate, revenues are expected to fall 28.2% to $826 million in first quarter fiscal 2013.
Fourth Quarter and Fiscal 2012 Highlights
Forest Labs reported fourth quarter fiscal 2012 earnings per share of 72 cents, a penny above the Zacks Consensus Estimate. Fourth quarter fiscal 2012 earnings, however, came in below the year-earlier earnings of $1.12 per share. Results were hit by the loss of exclusivity on Lexapro.
Fourth quarter revenues declined 7.3% to $1.01 billion, with net sales falling 8.7% to $996 million. Total revenue, however, topped the Zacks Consensus Estimate of $980 million.
Full year earnings came in at $3.72 per share, a penny above the Zacks Consensus Estimate. Earnings, however, declined 15.6% from the year-ago period. Revenues, which topped the Zacks Consensus Estimate of $4.5 billion, increased 3.8% to $4.6 billion.
(Read our full coverage of the fourth quarter and fiscal 2012 earnings report at Forest Hit by Lexapro Generics )
Agreement of Estimate Revisions
Over the past 7 days, 4 of the 20 analysts covering Forest Labs have reduced their first quarter 2013 earnings estimates with no movement in the opposite direction. Over the last 30 days too, there is a significant negative bias in estimate revisions with 6 analysts cutting their estimates. Only one analyst raised their estimate during this time period.
Fiscal 2013 estimates have been revised downwards over the last 7 days by 2 of the 20 analysts covering the stock with no movement in the opposite direction. Meanwhile, over the last 30 days, 2 of the 20 analysts covering the stock have cut their estimates for fiscal 2013 over the last 30 days with one analyst moving in the opposite direction.
Estimates for Forest Labs have been declining ever since the company came out with updated guidance in June 2012. The company slashed its outlook for fiscal 2013 mainly due to lower expectations from Lexapro. Lexapro, which was a key revenue generator at Forest Labs, lost exclusivity in March 2012. Forest Labs, which had been previously expecting branded Lexapro sales of $250 million, now expects sales of $215 million. The company said that it had to cut its estimate due to the higher-than-expected discounting in the market.
Another factor that is expected to affect sales is lower than expected royalty income from Mylan ( MYL ) on sales of its authorized generic version of Lexapro.
Another reason for the guidance cut is the discontinuation of shipping of Levothroid. Forest Labs, which has a distribution agreement for Levothroid, was informed that the manufacturer has stopped producing and shipping the product from its facility due to some regulatory and quality concerns voiced by the FDA regarding the manufacturing facility. Due to the manufacturing disruption, Forest Labs said that it currently does not have any visibility on when supply will resume. Prolonged disruption in supply could affect full year earnings by about 3 cents.
Based on the above factors, Forest Labs cut its fiscal 2013 guidance by 25 cents to $0.95 - $1.10. The Zacks Consensus Estimate for fiscal 2013 currently stands at 75 cents per share.
Magnitude of Revisions & Earnings Surprise
With earnings estimate revisions showing a negative trend, first quarter fiscal 2013 estimates have gone down by 2 cents and 3 cents over the last 7 and 30 days, respectively. However, fiscal 2013 estimates remain unchanged over the last 7 days and have gone up by 4 cents over the last 30 days.
Excluding the second quarter of fiscal 2012, Forest Labs has usually surpassed expectations with an average earnings surprise of 3.4% over the last four quarters. Forest Labs is, however, expected to deliver below expectations in the first quarter of fiscal 2013. The company is expected to deliver a negative earnings surprise of 7.7%.
Although Forest Labs had several regulatory wins in the past few quarters, the ramp up of new products, especially Daliresp and Teflaro, has been slow. We are also concerned that Forest Labs will keep spending at high levels in support of new product launches.
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 now that Lexapro is facing stiff generic competition. While Forest Labs has been working on getting new products approved, we don't expect new product sales will 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. Forest Labs has made significant progress in this regard and should be on the lookout for additional deals in the next couple of years.