Forest Laboratories, Inc.'s (
NYSE: FRX) financial results for 2009 were inline with our expectations. EPS fell 3% on revenue growth of 2% as operating cost growth outpaced that of revenue. SG&A expenses grew 10%, reflecting increased costs related to the launch of Bystolic and pre-launch costs of Savella. Fourth quarter results showed some softening in Lexapro sales, but were also largely inline with our forecast.
Management's guidance for 2010 is EPS of $3.45 - $3.55 on revenue of approximately $4.1 billion. This implies relatively flat EPS from 2009 and revenue growth of about 5%. EPS guidance is inline with our previous expectations while revenue is about 2% lower as a result of lower sales guidance of Savella.
Longer-term, we remain concerned about the strength of the pipeline relative to the loss in sales that will come with the Lexapro and Namenda patent expirations. We model Lexapro to account for over 48% of total revenue in fiscal 2012. With the drug losing patent protection in March 2012, that means roughly half the company's top-line will be at risk to generic competition.
While Bystolic and Savella should be very meaningful contributors by that time, we expect their combined sales in 2012 to be only about 22% of Lexapro's at that time.
Namenda will face generic competition by 2015, at the latest -- this puts another $1+ billion at risk.
Forest has a number of other candidates in their pipeline that have the potential to be very big contributors -- but none likely to make a meaningful impact by the time Lexapro goes generic. Management's most recent goal is to double their current pipeline by 2012 -- a lofty goal in just three years time, although one that is necessary to fill the enormous hole that key drugs will leave beginning in 2012.
The recent disappointment with aclidinium makes this goal seem even more difficult to reach. We also expect Forest to look to for additional licensing and partnering deals as well outright acquisitions to help fill its pipeline gaps. We believe the company is actively seeking outside sources of revenue and expect Forest to do something in the near future to address the enormous patent cliff in early 2012.
We model sales to grow at a
CAGR (compound annual growth rate) of 5.9% from fiscal 2009 through 2012, with EPS growing at 7% over the same period. However, we expect sales to fall 25% in 2013 following the Lexapro patent expiration and model EPS of $2.51 in 2013, down 33% from our 2012 estimate. We look for sales of $4.1 billion and EPS of $3.50 in 2010.
We have a Hold recommendation on the shares of Forest Labs. While the Lexapro patent is of significant concern, given the relatively cheap valuation (6.7x 2010 EPS versus peer group of 12.1x) and the potential for Forest to beef up its pipeline through additional licensing deals or an acquisition, we think the shares remain attractive as a core-holding. We rate the shares a Hold with a $27 price target.
