Maker of branded and generic prescription drugs, Forest Laboratories Inc. (NYSE: FRX) is expected to report its Q3 FY 2011 earnings on January 18, 2011. Forest Laboratories revenues come primarily from the sales of branded products Lexapro and Namenda, as well as various other branded and generic drugs and several over-the-counter products.
The company's earnings per share had beaten analysts' estimates in the first two quarters of FY 2011 by margins in the range of 7.50 percent and 10.50 percent. The company reported revenues of $3.9 billion in FY 2010. Product sales accounted for 93% of total revenues in FY2010, contract revenues at 5%, and other income at 2%. Lexapro had sales of $2.3 billion in FY 2010, unchanged from FY 2009. As of March 2010, Lexapro's share of the branded antidepressant market was estimated at about 11%. Forest in-licensed Lexapro from H. Lundbeck A/S, a Danish drug firm.
In the last three years, Forest Laboratories' sales have increased at a CAGR of 3.67 percent from $3.5 billion in FY 2008 to $3.9 in FY 2010. The net sales for FY 2009 stood at $3.6 billion. Cash or Cash equivalents have increased in the last three years at a CAGR of 30 percent to $1.8 billion in FY 2010 from $833 million in FY 2008. However, the company's diluted earnings per share have declined in the last three years at a CAGR of negative -9.74 percent to $2.25 per share from $3.06 per share.
On May 18, 2010, its Board of Directors authorized a new 2010 Repurchase Program for upto 50 million shares of common stock. On June 8, 2010, Forest entered into an agreement with Morgan Stanley & Co., Inc. to repurchase $500,000 of its common stock utilizing an accelerated share repurchase transaction. Pursuant to the ASR transaction, Morgan Stanley delivered the company 16.9 million shares in the June quarter and no shares were repurchased during the second quarter, leaving the company's authority to repurchase an additional 38.8 million shares from the 2010 Repurchase Program.
On 3rd March, 2010, the company closed the acquisition of Novexel, which eliminates its obligation to pay any royalties on sales of ceftaroline NXL104 in the United States and outside the United States.
Three companies make up the majority of FRX's purchasers, making FRX dependent on these major buyers. McKesson (NYSE: MCK), Cardinal Health (NYSE: CAH), and AmerisourceBergen Corporation (NYSE: ABC) made up 36%, 33%, and 20% of FRX's total sales in 2010. respectively. As a result, the loss of any one customer could have huge implications for FRX's revenues.
The health care industry depends on the care of health-related services by professionals for the benefit of patients. The drug manufacturing industry has a quarterly growth rate of 22.40 percent and a P/E ratio of 24.86, compared to Forest laboratories' quarterly growth rate of 2.40 percent and a P/E ratio of 14.74.
Forest Laboratories Inc. competes with companies like GlaxoSmithKline Plc. (NYSE: GSK) and Pfizer Inc. (NYSE: PFE). GlaxoSmithKline reported revenues of $45.54 billion, and an EPS of $2.40 per share in last fiscal. On the other hand, Pfizer Inc. reported earnings of $0.76 per share on revenues of $66.78 billion last fiscal.
The company has a P/E ratio of 14.74, which is lower than industrial average, and has a PEG of -5.71 years, which means that company has more cash and reserves to but back all of its outstanding shares. The price to sales ratio (P/S) indicates growth opportunity for Forest Laboratories.
For the third quarter ended December 31, 2010, analysts' estimates of earnings range from the low of $0.93 per share to the high of $1.04 per share, compared to the consensus estimate of $0.0.99 per share or $0.97 per share reported in the year ago quarter. Analysts' revenue estimates for the third quarter range from a low of $1.07 billion to a high of $1.14 billion, compared to a consensus estimate of $1.10 billion or $1.06 billion reported in the same quarter a year ago. For the quarter ended December 31, 2010, the consensus EPS forecast has remained unchanged at $0.99 per share in the last 60 days. In the last 52 weeks, the stock has been trading in the range of $24.17 and $33.10. The stock closed with gains of 0.08 points or 0.26 percent to settle at $31.41 on January 11. As Despite Lexapro's patent expires in March 2012, Forest's R&D pipeline is believed to be robust, with about a dozen new projects under development. Moreover, I believe, the company is in a position to capitalize on opportunities such as Daxas and aclidinium for chronic obstructive pulmonary disease, ceftaroline novel antibiotic, and linaclotide for chronic constipation. Based on my EPS estimates, the company's growth story, and the industry fundamentals, I see a one year target price of $35.6.
