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FRX > SEC Filings for FRX > Form 10-Q on 9-Nov-2011All Recent SEC Filings

Show all filings for FOREST LABORATORIES INC

Form 10-Q for FOREST LABORATORIES INC


9-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

General

Total net revenues increased to $1.2 billion and $2.3 billion for the quarter and six months ended September 30, 2011 as compared to $1.1 billion and $2.2 billion for the same periods last year due to strong sales of our key marketed products which include Lexapro®, Namenda®, Bystolic®, Savella® and sales of our newest products, Teflaro®, Daliresp® and Viibryd®. Net income decreased 12.7% in the current quarter as compared to the same period last year primarily due to increased spending to support three new product launches. For the six-month period ended September 30, 2011 net income increased 25.9% primarily due to the impact in the June 2010 quarter of a charge of $148.4 million related to a settlement with the United States Department of Justice (DOJ). Excluding this one time charge, net income decreased 8.0% for the six-month period primarily due to product launch costs.

In August 2011, we entered into an agreement with Morgan Stanley & Co. LLC (MSCO) to repurchase $350 million of our common stock utilizing an accelerated share repurchase transaction. The shares were repurchased under the 2010 Repurchase Program approved by the Board of Directors (the Board) in May 2010. Pursuant to the transaction, we received 9.7 million shares during the September 30, 2011 quarter. The transaction is expected to settle no later than the second quarter of our fiscal year ending March 31, 2013. As of September 30, 2011, 17.3 million shares of the 50 million shares authorized under the 2010 Repurchase Program were available for repurchase.

Financial Condition and Liquidity

Net current assets decreased by $1.7 billion from March 31, 2011. Cash and cash equivalents and overall marketable securities and investments decreased by $1.5 billion primarily due to the acquisition of Clinical Data, Inc. (Clinical Data) in April 2011 totaling approximately $1.3 billion and the cumulative purchase of $850 million of our common stock, offset by cash generated by operating activities. Of our total cash and cash equivalents and marketable securities position at September 30, 2011, 7%, or approximately $207.5 million, was domiciled domestically with the remainder held by our international subsidiaries. Trade accounts receivable increased primarily due to higher sales of our key marketed products including our recently launched products. Also, as is common in the industry, to ensure broad availability of Daliresp and Viibryd in pharmacies, extended dating terms were offered to customers for their initial purchases of these products. Net inventories decreased $20.8 million. Raw materials and work in process inventories decreased as we continue to manage Lexapro inventory to levels necessary to support sales as it approaches its March 2012 patent expiration. Finished goods inventory increased in order to support continued demand for our products including our newest products, Teflaro, Daliresp and Viibryd. Other current assets decreased primarily due to a reduction in our current tax asset account that resulted from accruing the current period tax expense against tax overpayments made in prior periods and as a result of recognizing the Branded Prescription Drug Fee for the period. In connection with the acquisition of Clinical Data, license agreements, product rights and other intangibles before accumulated amortization increased approximately $1.0 billion due to the Viibryd intangible and goodwill increased $698.1 million. Accounts payable decreased primarily due to the payment to the Internal Revenue Service of the Branded Prescription Drug Fee for calendar year 2011 as well as normal operating activities. Accrued expenses increased primarily due to normal operating activities.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Property, plant and equipment before accumulated depreciation increased from March 31, 2011 as we continue to invest in our technology and facilities.

On May 18, 2010, the Board authorized the 2010 Repurchase Program for up to 50 million shares of our common stock. The authorization was effective immediately and has no set expiration date. We have entered into three separate agreements with MSCO to repurchase a cumulative total of $1.35 billion of our common stock utilizing accelerated share repurchase transactions (ASRs): A $500 million ASR entered into in June 2010, a $500 million ASR entered into in June 2011 and a $350 million ASR entered into in August 2011. Pursuant to these transactions, as of September 30, 2011, MSCO delivered to us a total of 38.4 million shares, 16.9 million shares during fiscal 2011 (5.7 million shares purchased under the 2007 Repurchase Program and 11.2 million shares purchased under the 2010 Repurchase Program) and 21.5 million shares during the six-month period ended September 30, 2011 (all under the 2010 Repurchase Program). As of September 30, 2011 we had the authority to repurchase an additional 17.3 million shares under the 2010 Repurchase Program.

Management believes that current cash levels, coupled with funds to be generated by ongoing operations, will continue to provide adequate liquidity to support operations and to facilitate potential acquisitions of products, payment of achieved milestones, capital investments and continued share repurchases.

Results of Operations

Net sales for the three and six-month periods ended September 30, 2011 increased 9.0% and 8.6% from the same periods last year to $1.1 billion and $2.2 billion, respectively, primarily due to continued growth of our principal promoted products.

Lexapro (escitalopram oxalate), a selective serotonin reuptake inhibitor (SSRI) indicated for the initial and maintenance treatment of major depressive disorder (MDD) in adults and adolescents and generalized anxiety disorder in adults, recorded sales of $596.1 million and $1.2 billion for the quarter and six months, respectively. Despite a modest decline in market share, Lexapro sales increased $26.8 million or 4.7% and $47.3 million or 4.2% for the three and six months, respectively, as compared with the same periods last year due to overall market growth and price increases. While we expect Lexapro sales to remain strong through the majority of fiscal 2012, Lexapro's patent is set to expire in March 2012 and we will face generic competition thereafter, which will immediately and significantly erode sales going forward.

Sales of Namenda (memantine HCl), our N-methyl-D-aspartate (NMDA) receptor antagonist for the treatment of moderate and severe Alzheimer's disease increased 8.6% and 6.3% for the current quarter and six months, respectively, to $336.8 million and $656.7 million. This represents increases of $26.7 million and $38.8 million as compared with the same periods last year, of which $20.9 million and $14.5 million was due to volume and $5.8 million and $24.3 million was due to price. Namenda's patent is set to expire in April 2015.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Bystolic (nebivolol), our beta-blocker indicated for the treatment of hypertension, grew 29.2% to $82.3 million and 30.1% to $160.3 million in the current three and six-month periods, respectively, as compared to $63.7 million and $123.2 million for the same periods last year due to increased sales volume.

Sales of Savella (milnacipran HCl), a selective serotonin and norepinephrine reuptake inhibitor (SNRI) for the management of fibromyalgia grew 19.2% and 22.4% for the three and six months, respectively, to $25.5 million and $51.3 million, respectively, as compared to $21.4 million and $41.9 million for the same periods last year primarily due to increased sales volume.

Teflaro (ceftaroline fosamil), a broad-spectrum hospital-based injectable cephalosporin antibiotic for the treatment of adults with community-acquired bacterial pneumonia and with acute bacterial skin and skin structure infections, which became available to patients during January 2011 and was formally launched in March of 2011, achieved sales of $5.3 million and $8.0 million for the three and six-month periods ended September 30, 2011, respectively.

Two of our newest products, Daliresp (roflumilast) and Viibryd (vilazodone HCl) became available to patients during the June 2011 quarter and were formally launched in late August 2011. Daliresp, a selective phosphodiesterase 4 (PDE4) enzyme inhibitor is approved to reduce the risk of exacerbations in patients with severe chronic obstructive pulmonary disease (COPD) associated with chronic bronchitis and a history of exacerbations. Daliresp recorded sales of $1.2 million and $9.7 million for the current three and six-month periods, respectively, due to wholesaler stocking during the June 2011 quarter. Viibryd, an SSRI and a 5-HT1A receptor partial agonist for the treatment of adults with MDD achieved sales of $5.3 million and $12.6 million for the three and six-month periods ended September 30, 2011, respectively, due to wholesaler stocking during the June 2011 quarter.

Contract revenue for the three and six months ended September 30, 2011 was $33.6 million and $74.2 million, respectively, compared to $42.4 million and $82.2 million in the same periods last year. The decreases of $8.8 million and $8.0 million year over year were primarily due to a gradually reducing residual royalty rate from Daiichi Sankyo, Inc. (Sankyo) for Benicar®.

Cost of sales as a percentage of net sales was 23.4% for the current quarter as compared with 23.7% for the same period last year. For the six-month periods ended September 30, 2011 and 2010, cost of sales as a percentage of net sales was 23.2%.

Selling, general and administrative expense (SG&A) increased to $388.7 million for the current quarter as compared to $316.4 million for the same period last year primarily due to launch costs for our newly marketed products, Teflaro, Daliresp and Viibryd. SG&A decreased $18.0 million for the six-month period ended September 30, 2011 as compared to the same period last year primarily due to the charge of $148.4 million in the June 2010 quarter in connection with the settlement with the DOJ. Excluding this charge, SG&A increased 21.2% primarily due to product launch costs. The current level of spending reflects the resources and activities required to support our currently marketed products, including our newest products, Teflaro, Daliresp and Viibryd.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Research and development expense (R&D) increased to $197.3 million and $391.8 million in the current three and six-month periods, respectively, as compared to $154.5 million and $374.2 million in the same periods last year. The current quarter included $30 million in milestone charges and the current six-month period included a $40 million upfront payment to Blue Ash Therapeutics, LLC (Blue Ash) for rights to azimilide. The September 2010 quarter included $3 million in milestone expenses and the June 2010 quarter included approximately $20 million in milestone expenses and a $50 million upfront license fee to TransTech Pharma, Inc. (TransTech) for a novel class of glucose-lowering agents in development for the treatment of type II diabetes. Excluding the upfront payments, R&D expense increased $27.6 million for the six-month period as compared with the same period last year. The current level of spending is required to advance our current pipeline of development products.

Research and development expense is comprised of third party development costs, internal and other development costs and milestone and upfront charges. For the three and six-month periods ended September 30, 2011 and 2010, research and development expense by category was as follows:

                                           Three Months Ended           Six Months Ended
(In thousands)                                September 30,               September 30,
                                              2011          2010          2011          2010
Category
Third party development costs            $  87,681     $  79,347     $ 168,417     $ 160,161
Internal and other development costs        79,650        72,164       153,357       140,957
Milestone and upfront charges               30,000         3,000        70,000        73,050
Total research and development expense   $ 197,331     $ 154,511     $ 391,774     $ 374,168

Third party development costs are incurred for clinical trials performed by third parties on our behalf with respect to products in various stages of development. In the quarter and six-month period ended September 30, 2011, these costs were largely related to clinical trials for cariprazine, levomilnacipran, aclidinium, apadenoson and LAS100977. Internal and other development costs are primarily associated with activities performed by internal research personnel. Milestone and upfront charges are incurred upon consummation of new licensing agreements and achievement of certain development milestones.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Research and development expense reflects the following:

· In December 2009, through an agreement with AstraZeneca, we amended our prior agreement with Novexel for the development, manufacture and commercialization of avibactam (formerly known as NXL104) in combination with ceftaroline, to include the combination of avibactam with all other products including ceftazidime. Avibactam is a novel broad-spectrum intravenous beta-lactamase inhibitor designed to be co-administered with select antibiotics to enhance their spectrum of activity by overcoming beta-lactamase-related antibacterial resistance. Avibactam is currently being developed in combination with ceftaroline (Teflaro) and ceftazidime. Ceftazidime is a cephalosporin antibiotic having a different spectrum of activity compared to ceftaroline. Data from two Phase II trials for ceftazidime/avibactam in patients with complicated intra-abdominal infections (cIAI) and complicated urinary tract infections (cUTI) demonstrated that ceftazidime/avibactam achieved high clinical cure rates and was well tolerated in patients with cIAI and cUTI. This data was presented at the European Congress of Clinical Microbiology and Infectious Diseases (ECCMID) conference in May 2011. Based on the results of these studies, we and AstraZeneca intend to initiate Phase III studies with the ceftazidime/avibactam program in the second half of calendar 2011.

· In April 2006, we entered into an agreement with Almirall, S.A. (Almirall) for the U.S. rights to aclidinium (aclidinium bromide), a novel long-acting muscarinic antagonist which is being developed as an inhaled therapy for the treatment of COPD. In January 2011, we reported positive top-line results from a Phase III ATTAIN (Aclidinium To Treat Airway obstruction In COPD patieNts) study. The ATTAIN study is the last of three Phase III clinical studies investigating the twice daily (BID) administration of aclidinium. The results from this study confirm the efficacy reported in the ACCORD COPD I study which we reported in January 2010. The data from both studies served as the core for the monotherapy U.S. New Drug Application (NDA) filing submitted to the U.S. Food and Drug Administration (FDA) in June 2011. In January 2011, we also reported positive results from two Phase II(b) dose-ranging studies comparing fixed-dose combinations of aclidinium and the long-acting beta-agonist formoterol to aclidinium alone, formoterol alone and placebo administered BID in patients with moderate to severe COPD. Both studies showed statistically significant differences for the fixed-dose combination on the primary endpoint versus placebo. The fixed-dose combinations also provided a numerically higher bronchodilation effect compared to aclidinium alone and formoterol alone. Phase III studies with the fixed-dose combination commenced in September 2011 and we anticipate top-line results from the trials during the first half of calendar 2013.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

· In September 2007, we entered into a partnership with Ironwood Pharmaceuticals, Inc. to co-develop and co-market the proprietary compound linaclotide in North America. Linaclotide is an agonist of the guanylate cyclase type-C (GC-C) receptor being developed for the treatment of constipation-predominant irritable bowel syndrome (IBS-C) and chronic constipation (CC). Linaclotide increases fluid secretion leading to increased bowel movement frequency and modulates the activity of local nerves to reduce abdominal pain. In November 2009, we reported positive top-line data for two Phase III trials in CC. In October 2010, we reported positive top-line results from the second of two Phase III trials in IBS-C. Data from the studies in both indications showed clinically meaningful and statistically significant symptom improvement in linaclotide-treated patients compared to placebo on all four primary efficacy endpoints. Based upon these results, we filed an NDA with the FDA for both indications in August 2011. Additional linaclotide results from the four pivotal Phase III trials and one Phase II(b) study in patients with either IBS-C or CC was presented at the American College of Gastroenterology 2011 Annual Scientific Meeting held in Washington, DC from October 29, 2011 to November 2, 2011.

· In December 2008, we entered into an agreement with Pierre Fabre Médicament to develop and commercialize levomilnacipran (F2695) in the United States and Canada. Levomilnacipran is a proprietary selective norepinephrine and serotonin reuptake inhibitor that is being developed for the treatment of depression. In July 2011, we reported top-line results from a randomized, double-blind, placebo-controlled, fixed-dose Phase III study of levomilnacipran for the treatment of adults with MDD. Data from this study indicated statistically significant improvement was achieved for levomilnacipran treated patients for all dose groups compared to placebo on the primary efficacy endpoint which was change from baseline to end of week 8 in the Montgomery-Asberg Depression Rating Scale-Clinician Rated (MADRS-CR) total score. Further analyses of the data are ongoing. This study is part of the ongoing development program for levomilnacipran for the treatment of MDD, which also includes a Phase III flexible-dose study reported in January 2011. Two additional placebo-controlled Phase III studies of levomilnacipran in patients with MDD are currently underway and results are expected to become available during the first half of 2012. If successful, we plan on filing an NDA with the FDA for F2695 in calendar 2012.

· In November 2004, we entered into an agreement with Gedeon Richter Ltd. (Richter) for the North American rights to cariprazine, an oral D2/D3 partial agonist, and related compounds, being developed as an atypical antipsychotic for the treatment of schizophrenia, bipolar mania and other psychiatric conditions. In October 2011, we reported preliminary top-line results from a Phase III study of cariprazine in patients with acute mania associated with bipolar I disorder. The data showed that cariprazine-treated patients with acute manic episodes experienced significant symptom improvement compared to placebo-treated patients at each subsequent time point studied. We expect to report top-line results from the second acute mania program and a Phase III schizophrenia program during the first half of calendar 2012. We expect to file an NDA for cariprazine for those two indications in calendar 2012. Cariprazine is also under development in Phase III studies for bipolar depression and as an adjunct treatment for MDD.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

· In December 2009, we entered into a license agreement with Almirall to develop, market and distribute LAS100977 in the United States. LAS100977 is Almirall's highly-potent, inhaled, once-daily administered long-acting beta-2 agonist being developed in combination with an undisclosed corticosteroid for the dual indications of both asthma and COPD. In Phase II testing, LAS100977 administered once-daily demonstrated that it has a fast onset of action and long-lasting efficacy and was well tolerated in patients with stable asthma. Additional Phase II studies are planned to begin in the second half of calendar 2011.

· In connection with our acquisition of Clinical Data completed in April 2011, we acquired apadenoson, a potent agonist of the adenosine A2A receptor subtype with improved selectivity for this receptor over other subtypes. Apadenoson is a coronary vasodilator in Phase III development as a pharmacologic stress agent for radionuclide myocardial perfusion. ASPECT 1 and ASPECT 2 are non-inferiority studies comparing apadenoson to Adenoscan™ and the primary endpoint is image concordance. Enrollment is underway for both studies.

· In December 2010, we entered into a license agreement with Grünenthal GmbH (Grünenthal) for the co-development and commercialization of GRT 6005 and its follow-on compound GRT 6006, small molecule analgesic compounds being developed by Grünenthal for the treatment of moderate to severe chronic pain. GRT 6005 and GRT 6006 are novel first-in-class compounds with unique pharmacological and pharmacokinetic profiles that may enhance their effect in certain pain conditions. The unique mode of action of these compounds builds on the ORL-1 receptor and, supported by the established mu opioid receptor, is particularly suitable for the treatment of moderate to severe chronic pain. GRT 6005 has successfully completed initial proof-of-concept studies in nociceptive and neuropathic pain with further Phase II studies planned prior to initiation of Phase III studies.

· In June 2010, we entered into a license agreement with TransTech for the development and commercialization of TTP399, a functionally liver selective glucokinase activator discovered and being developed by TransTech for the treatment of Type II diabetes. Early Phase I testing suggests that pharmacological enhancement of glucokinase activity may lower blood glucose in diabetic patients. We expect to initiate a Phase II clinical program during calendar 2011.

· In April 2011, we entered into an agreement with Blue Ash for the worldwide rights to azimilide, a novel class III antiarrhythmic agent. Azimilide has been studied in over 5,300 patients to investigate its potential as an antiarrhythmic agent. Based on its mechanism of action and results of clinical trials, azimilide was determined to be best suited for use in patients with a history of life-threatening ventricular arrhythmias and who have an implantable cardioverter defibrillator. In 2006, following submission of data from the SHIELD 1 Phase III clinical study, the FDA, under its then operable review practices, issued an Approvable Letter requesting an additional clinical trial for azimilide. In 2010, the FDA agreed to one additional Phase III study to support a regulatory submission for azimilide in the U.S. SHIELD 2 will be conducted under a Special Protocol Assessment with the FDA and we plan to start the study before the end of this calendar year.


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

We along with our partner Richter also continue to support the development of the mGLuR1/5 compounds, which involve a series of novel compounds that target group 1 metabotropic glutamate receptors. Many of our agreements require us to participate in joint activities and committees, the purpose of which is to make decisions along with our partners in the development of products. In addition, we have entered into several arrangements to conduct pre-clinical drug discovery.

Our effective tax rate was 21.7% and 23.6% for the three and six-month periods ended September 30, 2011, as compared to 22.9% and 25.0% for the same periods last year. The decreases in the current three and six-month periods compared to last year were primarily due to the impact, in the June 2010 quarter, of a charge of $148.4 million related to the settlement with the DOJ. Effective tax rates may be affected by ongoing tax audits. See Note 10 to the condensed consolidated financial statements.

We expect to continue our profitability in the current fiscal year with continued growth in our principal promoted products.

Inflation has not had a material effect on our operations for the periods presented.

Off-Balance Sheet Arrangements

At September 30, 2011, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

The following accounting policies are important in understanding our financial condition and results of operations and should be considered an integral part of the financial review. Refer to the notes to the condensed consolidated financial statements for additional policies.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting period. Estimates are made when accounting for sales allowances, returns, rebates and other pricing adjustments, depreciation, amortization, tax assets and liabilities, restructuring reserves and certain contingencies. Forest Laboratories, Inc. is subject to risks and uncertainties, which may include but are not limited to competition, federal or local legislation and regulations, litigation and overall changes in the healthcare environment that may cause actual results to vary from estimates. We review all significant estimates affecting the financial statements on a recurring basis and record the effects of any adjustments when necessary. Certain of these risks, uncertainties and assumptions are discussed further under the section entitled "Forward Looking Statements."


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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

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