Forest Labs Slides Despite Solid Quarter

The company says its earnings growth target could be hurt by a slowdown in prescriptions for antidepressant drugs.
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Updated from 1:14 p.m. EST

Shares of

Forest Laboratories

(FRX)

slid 9.4% Tuesday, despite the company's having reported strong profit and revenue for the quarter ended June 30.

The reason for the plunging stock price was the company's suggestion that its 20% earnings-per-share growth target for the current fiscal year could be imperiled by a slowdown in expansion of total prescriptions for antidepressant drugs known as selective serotonin uptake inhibitors (SSRI). The stock closed at $49.25, down from Monday's close of $54.33. The shares had fallen as low as $48.60 during the day.

Howard Solomon, the company's chairman and chief executive, said in a prepared statement that reduced prescription growth in the SSRI category -- in which Forest Laboratories' Celexa and Lexapro hold a 22.85% market share -- "could impact our ability to achieve that

20% rate of earnings growth. We are responding to slower market growth by reviewing discretionary spending items for the balance of the year."

The announcement by Forest, which is based in New York City, prompted brokerage S.G. Cowen to cut its rating on the company to outperform from strong buy. However, Robert H. Uhl of Wells Fargo Securities raised his rating on Forest to buy from hold.

S.G. Cowen analyst Ian C. Sanderson expressed concern that the recent sales trend for Lexapro -- which is newer and faster-growing than its cousin Celexa -- is falling slightly below his projections. "Lexapro is not growing as fast as we'd like," he said.

Nonetheless, he said he still believes Forest could achieve its 20% EPS goal for this fiscal year. "I think they still have plenty of flexibility to manage the bottom line," he said. "They can control expenses." Sanderson doesn't own shares of Forest and said he knows of no investment-banking business between his firm and Forest.

The concern over SSRI growth overshadowed a strong showing for the first quarter of the company's fiscal year, in which earnings jumped 45% to $179.8 million from $123.8 million in the same period last year. Earnings per share climbed to 48 cents a share from 33 cents a share. Sales advanced 30% to $605.7 million from $467.2 million last year.

The company said major profit and sales contributors for the quarter were Celexa, with sales of $284.7 million, and Lexapro, with revenue of $191 million. Forest licenses both drugs from the Danish pharmaceutical company H. Lundbeck A/S.

The U.S. Food and Drug Administration approved Celexa for treatment of depression in June 1998. The agency approved Lexapro for treating depression in August 2002. Forest also has submitted an application to the FDA seeking approval to market Lexapro as a treatment for generalized anxiety disorder and panic disorder.

"During the quarter, our antidepressant franchise -- Celexa and Lexapro -- achieved the leading market share of both new and total prescriptions for SSRIs," said Solomon. The company recorded a higher SSRI market share, even though its total SSRI sales fell by $9.2 million from the quarter ended March 31, 2003.

Drug wholesalers also reduced their inventories of the two drugs from an average 11.2 days' supply to an average 7.6 days' supply. The most dramatic inventory reduction was for Celexa.

Kenneth E. Goodman, the company's chief operating officer and president, told analysts in a Tuesday morning conference call that he could only speculate that wholesalers were trying to keep all drug inventories relatively low in an uncertain economy.

Goodman said Forest didn't do anything with its pricing practices to stimulate any dramatic changes in inventories. He said a 4% increase in Lexapro's price was initiated in the middle of the previous quarter, adding that the company avoids targeting price increases at the beginning of a quarter. That strategy prevents wholesalers from stocking up on the lower-priced products before the price increase takes effect.

Goodman said the earnings per share guidance of 20% growth assumes that total prescriptions for all SSRIs -- not just Forest's -- would grow at a rate of 8% and also assumes no changes in wholesalers' inventories. Recently, the total prescription growth rate has been in the 4% to 5% range, he added.

Goodman also noted that an FDA advisory panel is scheduled to meet in late September to review memantine, the company's experimental drug for treating moderate and severe Alzheimer's disease. Goodman reaffirmed his company's belief that the FDA could approve the drug for marketing during the first half of next year.