Forest Raises Profit Targets

Second-quarter sales climb year over year.
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Forest Laboratories

(FRX)

issued a second-quarter financial report that easily beat Wall Street's expectations, prompting the company to raise its fiscal year earnings guidance.

Despite the strong numbers, Forest's stock fell as some analysts fretted about competition for the company's two biggest drugs and the prospects for two experimental drugs. By the afternoon, Forest's shares were off 64 cents, or 1.2%, to $52.50.

For the three months ended Sept. 30, the New York-based company earned $241.1 million, or 75 cents a share, on revenue of $847 million. The consensus expectation was for a profit of $212.8 million, or 65 cents a share, on revenue of $805.7 million.

Last year, Forest earned $204.9 million, or 59 cents a share, on revenue of $736.5 million.

As has been the case for many quarters, Forest was led by the antidepressant Lexapro, whose $522.7 million in sales rose 12% from the year-ago period. Namenda, for treating moderate and severe Alzheimer's disease, posted sales of $155.6 million, up 26%.

Citing strong-than-expected sales, stock buybacks and the shifting of $43 million in payments to a partner into the next fiscal year, Forest said it was raising its EPS target for the year ending March 31, 2007, to a range of $2.60 to $2.65. Previously, Forest had forecast $2.45 to $2.50. The company cautioned that its guidance excludes the potential impact from additional share buybacks. Analysts are looking for a profit of $2.54 a share.

"In our view, Forest Laboratories has been 'sandbagging' all year on guidance," says Tim Anderson of Prudential Equity Group in a research note. Anderson is neutral on the stock because of the "uncertain managed care environment" for Lexapro and his lack of confidence in the commercial potential for several products in late-stage clinical testing.

Anderson doesn't own shares, and his firm doesn't have an investment banking relationship.

He and other analysts are concerned about Lexapro because a major competitor, Zoloft from

Pfizer

(PFE) - Get Report

, lost U.S. patent protection in late June. They fear Lexapro sales growth will slow down as insurers press doctors to prescribe cheaper generics. Anderson said generic versions of Celexa, a cousin of Lexapro, also could affect Forest's future performance.

Ken Goodman, Forest's president and chief operating officer, said during a conference call that followed the earnings release that he hasn't seen any meaningful change in Lexapro's sales since Zoloft lost patent protection. Goodman added that there has been "no significant change" in how managed care organizations cover Lexapro.

However, he conceded that Lexapro's sales growth has been "a little behind" company estimates, but the effects have been offset by better growth in the overall antidepressant market.

Analysts also raised questions about whether sales of Namenda had been affected by the Food and Drug Administration's decision to clear Pfizer's Aricept as a treatment for severe Alzheimer's. Aricept was already available for mild to moderate forms of the disease, but Namenda had been the only drug approved for the most severe manifestations.

The FDA decision "will really not have significant impact" on Namenda's sales, Goodman said, because doctors frequently prescribe both drugs for patients with severe Alzheimer's. "The best care for patients is the combination of those two drugs," he said.

The next big challenge for Forest could come Friday, when the FDA is expected to rule on its application for the antibiotic faropenem. Goodman said the company wouldn't launch the drug unless the FDA endorses at least two respiratory-disease uses.

Forest is seeking approval for the drug to treat acute bacterial sinusitis, community-acquired pneumonia, acute exacerbation of chronic bronchitis, as well as for treating uncomplicated skin and skin-structure infections. Forest licenses the drug from

Replidyne

(RDYN)

.

The other near-term revenue prospect is

the experimental drug nebivolol, which is licensed from

Mylan Laboratories

(MYL) - Get Report

. Mylan received conditional approval from the FDA in May 2005 for the drug as a blood-pressure treatment. The agency asked for more tests before it would grant full clearance.

Forest also is compiling data on nebivolol as a potential treatment for congestive heart failure.