Forest Labs' Shares Climb as Investors Digest Guidance - TheStreet

Updated from 1:09 p.m. EDT

Forest Laboratories


posted a 29% jump in earnings for the quarter ended Sept. 30, but the company noted that a faster-than-expected regulatory approval process for a new drug will raise expenses and temporarily reduce earnings earlier than had been anticipated.

The news pushed the stock down in early trading. But as investors reviewed the prospects for Namenda, a treatment for moderate to severe Alzheimer's disease, they decided that the drug's long-term prospects were worth the short-term marketing costs. The stock climbed steadily during the day, closing up 1.1%, or 53 cents, at $47.81.

New York-based Forest said it expects to hear from the Food and Drug Administration in a few days on its application to market the drug, which was endorsed last month by an FDA advisory committee. Although the agency doesn't have to follow its advisory panel recommendations, it usually does so.

Assuming there are no hitches, the company said, it expects to begin shipping Namenda late this year, making the drug available to patients in early 2004. A national marketing campaign -- bolstered by adding 500 sales representatives -- will begin in March 2004.

Because the regulatory approval process has moved faster than the company anticipated, Forest executives said the company will incur higher-than-expected expenses later in the year. The Namenda launch will coincide with a new marketing initiative for the antidepressant Lexapro, which recently gained approval from the FDA for treating generalized anxiety disorder.

Forest modified its earnings guidance for the quarter ending Dec. 31 to a range of 50 cents to 55 cents per share. The consensus view of analysts polled by Thomson First Call had been 50 cents.

The big hit from marketing expenses will come in the quarter ending March 31, 2004. Analysts had predicted earnings per share of 52 cents, but Forest said the revised estimate will be 35 cents to 40 cents.

For the fiscal year ending March 31, 2004, the company said the EPS range will be $1.82 to $1.92, lower than the Wall Street consensus of $1.99. Forest also predicted that EPS for the 2005 fiscal year would grow 25% to 35% over the revised fiscal 2004 base.

Looking at the most recent quarter, Forest said profit reached 49 cents a share, or $184.5 million, for the three months ended Sept. 30, an increase over the 38 cents per share, or $142.8 million, for the same period last year. The 49 cents met the consensus estimate of 27 analysts polled by Thomson First Call.

Revenue for the company's second quarter of its 2004 fiscal year was $619.2 million, up 16% from the $531.6 million for the same period last year. Most of the company's revenue -- 83% -- comes from two antidepressants, Celexa and Lexapro.

Despite the prospects for Namenda and the extra indication for Lexapro, some analysts said Forest's stock is headed for a volatile few months.

For Timothy D. Coan, of U.S. Bancorp Piper Jaffray, the company is selling too much Celexa and not enough Lexapro, which is the successor to the older Celexa. A strong reliance on Celexa sales could hurt the company when Celexa loses patent protection and is attacked by generics in early 2005, Coan said in a research note to clients Tuesday.

"Although we are very optimistic about the long-term prospects for Forest Labs, we continue to believe that the next 12 months are likely to be very choppy," said Coan, who rates the stock as market perform. He doesn't own shares; his firm is a market maker in Forest's stock.

Wells Fargo Securities analyst Robert H. Uhl looked at the same data as did Coan, but Uhl kept his buy rating on Forest. He told clients in a research report Tuesday that he believed Forest was on track to wean "the bulk" of patients from Celexa to Lexapro before Celexa loses patent protection. He doesn't own shares; his firm doesn't have an investment banking relationship with Forest.