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FRX > SEC Filings for FRX > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for FOREST LABORATORIES INC


7-Nov-2013

Quarterly Report


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

Forest Laboratories, Inc. (herein referred to as "the Company," "we" or "our") is a pharmaceutical company that develops, manufactures, and sells branded forms of ethical drug products, most of which require a physician's prescription. Our primary and most important products in the United States (U.S.) are marketed directly, or "detailed," to physicians by our salesforces. We emphasize detailing to physicians those branded ethical drugs which we believe have the most benefit to patients and potential for growth. We also focus on the development and introduction of new products, including products developed in collaboration with our licensing partners. Our products include those developed by us, those developed in conjunction with our partners and those acquired from other pharmaceutical companies and integrated into our marketing and distribution systems.

Financial Performance

The following table provides a summary of our financial performance:

                                             Three Months Ended             Six Months Ended
(In thousands, except per share amounts)        September 30,                 September 30,
                                             2013          2012           2013            2012

Total revenue                              $ 855,255     $ 760,637     $ 1,688,190     $ 1,581,764

Selling, general and administrative          408,564       374,889         852,427         757,198

Research and development                     191,358       202,839         376,782         398,005

Net income                                 $  69,987     $  20,777     $    93,265     $    76,062


Diluted income per share:                  $    0.26     $    0.08     $      0.35     $      0.28

· Total revenue: Total revenue increased $94.6 million and $106.4 million for the three and six months ended September 30, 2013, respectively, compared to prior year periods. The increase was driven by sales of our next generation products, Bystolic®, Viibryd ®, Linzess®, Savella®, Daliresp®, Tudorza®, Teflaro® and Namenda XRTM, which increased to $303.0 million and $597.1 million for the three and six months ended September 30, 2013, respectively, compared to $202.1 million and $401.2 million for the same periods last year. In addition, Namenda sales increased $28.8 million and $57.9 million for the three and six months ended September 30, 2013, respectively, compared to the same periods last year. These increases were partially offset by decreases in Lexapro® sales of $23.0 million and $104.7 million, respectively, and decreases in Lexapro contract revenue of $22.7 million and $52.1 million, respectively, for the three and six month periods ended September 30, 2013.

· Selling, general and administrative (SG&A): SG&A expense increased 9.0% to $408.6 million and 12.6% to $852.4 million for the three and six month periods ended September 30, 2013, respectively, compared to the same prior year periods. SG&A spending for the current period reflects those resources and activities required to support our currently marketed products, particularly our newest products: Namenda XR, Linzess, Tudorza, Viibryd, Daliresp and Teflaro.

· Research and development (R&D): R&D expense decreased 5.7% to $191.4 million and 5.3% to $376.8 million for the three and six months ended September 30, 2013, respectively, from the same periods last year. The decrease was due to lower third party development costs, partially offset by increased milestone payments in the current year periods. Excluding milestone payments, R&D expense decreased $21.5 million or 10.6% and $49.2 million or 12.4% for the three and six months ended September 30, 2013, respectively.

Business Environment

The pharmaceutical industry is highly competitive and subject to numerous government regulations. There is competition as to the sale of products, research for new or improved products and the development and application of competitive drug formulation and delivery technologies. There are many pharmaceutical companies in the U.S. and abroad engaged in the manufacture and sale of both proprietary and generic drugs of the kind which we sell, many of which have substantially greater financial resources than we do.

We also face competition for the acquisition or licensing of new product opportunities from other companies. In addition, the marketing of pharmaceutical products is increasingly affected by the growing role of managed care organizations in the provision of health services.

Further competitive challenges arise from generic pharmaceutical manufacturers. Upon the expiration or loss of patent protection for a product, we may lose a major portion of sales of such product in a very short period. Generic pharmaceutical manufacturers also challenge product patents before their expiry.

We are also subject to government regulation which substantially increases the difficulty and cost incurred in obtaining the approval to market newly proposed drug products and maintaining the approval to market existing drugs.

For additional information, refer to "Item 1- Competition" and "Item 1 - Government Regulations" in the Company's Annual Report on Form 10-K for the year ended March 31, 2013.


Results of Operations

Revenue

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Net sales increased $119.4 million or 17.3% to $811.4 million during the three months ended September 30, 2013 primarily due to increases in sales of our key marketed products including Bystolic, Viibryd, Linzess, Daliresp, Tudorza, Teflaro and Namenda XR, partially offset by the decline in Lexapro sales. Lexapro lost its marketing exclusivity in March 2012. Excluding Lexapro sales, net sales increased $142.4 million or 22.0% for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The following table and commentary presents net sales of our products compared to the prior year:

Three Months Ended

(In thousands)            September 30,
                         2013        2012        Change     % Change
Key Marketed Products
Namenda               $  396,336   $ 367,574   $   28,762        7.8%
Bystolic                 130,015     106,468       23,547        22.1
Viibryd                   47,427      39,904        7,523        18.9
Linzess                   34,444           -       34,444           -
Daliresp                  24,500      19,531        4,969        25.4
Savella                   23,505      26,245      (2,740)      (10.4)
Tudorza                   16,705           -       16,705           -
Teflaro                   14,854       9,977        4,877        48.9
Namenda XR                11,506           -       11,506           -

Lexapro                   21,739      44,693     (22,954)      (51.4)

Other Products            90,398      77,625       12,773        16.5

Total                 $  811,429   $ 692,017   $  119,412       17.3%

Sales of Namenda® (memantine HCl), our N-methyl-D-aspartate receptor antagonist for the treatment of moderate to severe dementia of the Alzheimer's type increased $28.8 million to $396.3 million for the three months ended September 30, 2013 as compared to $367.6 million in the same period last year. This increase was driven by price increases. Namenda's patent expires in April 2015 and agreements with multiple parties allow generic entry in January 2015.

In June 2013, we launched our newest product Namenda XR, a once-daily extended-release formulation of Namenda for the treatment of moderate to severe dementia of the Alzheimer's type. Namenda XR recorded sales of $11.5 million for the three months ended September 30, 2013.

Bystolic (nebivolol HCl), our beta-blocker indicated for the treatment of hypertension, had an increase in sales of 22.1% or $23.5 million for the three months ended September 30, 2013 compared to the same period last year. The increase was driven by price increases and modest volume growth.

Sales of Viibryd (vilazodone HCl), our selective serotonin reuptake inhibitor (SSRI) and a 5-HT1A receptor partial agonist for the treatment of adults with major depressive disorder (MDD) totaled $47.4 million for the three months ended September 30, 2013 and $39.9 million in the same period last year. The increase year over year was driven by increased sales volume.

Linzess (linaclotide), our guanylate cyclase agonist for the treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation in adults, recorded sales of $34.4 million for the three months ended September 30, 2013. Linzess was launched in December 2012 and recorded sales of $28.8 million during the first quarter of fiscal year 2014.

Daliresp (roflumilast), our selective phosphodiesterase 4 (PDE4) enzyme inhibitor indicated for the treatment to reduce the risk of exacerbations in patients with severe chronic obstructive pulmonary disease (COPD) associated with chronic bronchitis and a history of exacerbations, achieved sales of $24.5 million for the three months ended September 30, 2013 and $19.5 million in the same period last year. The increase year over year was driven by increased sales volume.

Tudorza (aclidinium bromide inhalation powder), a long-acting antimuscarinic agent indicated for the long-term maintenance treatment of bronchospasm associated with COPD, recorded sales of $16.7 million for the three months ended September 30, 2013. Tudorza was launched in December 2012 and recorded sales of $15.9 million during the first quarter of fiscal year 2014.

Teflaro (ceftaroline fosamil), a broad-spectrum hospital-based injectable cephalosporin antibiotic for the treatment of adults with acute bacterial skin and skin and skin structure infections (ABSSSI) and community-acquired bacterial pneumonia (CABP), achieved sales of $14.9 million and $10.0 million for the three months ended September 30, 2013 and September 30, 2012, respectively. The increase year over year was due primarily to increased sales volume.

Sales of Lexapro (escitalopram oxalate), our SSRI for the initial and maintenance treatment of MDD in adults and adolescents and generalized anxiety disorder in adults, totalled $21.7 million for the three months ended September 30, 2013, a decrease of $23.0 million from the same prior year period. The decrease in Lexapro sales was due to the expected continued deterioration of sales of the product after the expiration of its market exclusivity in March 2012.

Contract revenue for the three months ended September 30, 2013 decreased to $36.0 million as compared to $54.3 million in the same period last year. Contract revenue in the prior year quarter included $22.7 million of income from a distribution agreement with Mylan, Inc. (Mylan) pursuant to which Mylan was authorized to sell a generic version of Lexapro and we received a portion of profits on those sales. There was no contribution from generic Lexapro royalties this year due to the full genericization of Lexapro. Contract revenue also included Benicar® (olmesartan medoxomil) co-promotion income of $35.0 million for the three months ended September 30, 2013 and $30.2 million for the three months ended September 30, 2012. We will continue to earn Benicar co-promotion income through March 2014.

Revenue

Six months ended September 30, 2013 compared to six months ended September 30, 2012

Net sales increased $164.5 million or 11.4% to $1,608.3 million during the six months ended September 30, 2013 primarily due to increases in sales of our key marketed products including Bystolic, Viibryd, Linzess, Daliresp, Tudorza, Teflaro and Namenda XR, partially offset by the decline in Lexapro sales. Excluding Lexapro sales, net sales increased $269.2 million or 20.9% for the six months ended September 30, 2013 compared to the prior year period. The following table and commentary presents net sales of our products compared to the prior year:

                             Six Months Ended
(In thousands)                 September 30,
                           2013            2012           Change        % Change
Key Marketed Products
Namenda                 $   793,863     $   735,986     $   57,877            7.9 %
Bystolic                    255,999         214,304         41,695           19.5
Viibryd                      93,562          77,302         16,260           21.0
Linzess                      63,207               -         63,207              -
Savella                      48,549          52,900         (4,351 )         (8.2 )
Daliresp                     48,548          37,314         11,234           30.1
Tudorza                      32,640               -         32,640              -
Teflaro                      29,095          19,360          9,735           50.3
Namenda XR                   25,477               -         25,477              -

Lexapro                      49,987         154,707       (104,720 )        (67.7 )

Other Products              167,355         151,910         15,445           10.2

Total                   $ 1,608,282     $ 1,443,783     $  164,499           11.4 %

Sales of Namenda increased $57.9 million or 7.9% to $793.9 million for the six months ended September 30, 2013 as compared to same period last year. This increase was driven by price increases.

In June 2013 we launched our newest product Namenda XR, which recorded sales of $25.5 million for the six months ended September 30, 2013.

Bystolic sales increased 19.5% or $41.7 million for the six months ended September 30, 2013 compared to the same period last year, driven by price increases and modest volume growth.

Sales of Viibryd totaled $93.6 million for the six months ended September 30, 2013 and $77.3 million in the same period last year. The increase year over year was driven primarily by increased sales volume.

Linzess was launched in December 2012 and recorded sales of $63.2 million for the six months ended September 30, 2013.

Daliresp achieved sales of $48.5 million for the six months ended September 30, 2013 and $37.3 million in the same period last year. The increase year over year was driven by increased sales volume.

Tudorza was launched in December 2012 and recorded sales of $32.6 million for the six months ended September 30, 2013.

Teflaro achieved sales of $29.1 million and $19.4 million for the six months ended September 30, 2013 and September 30, 2012, respectively. The increase year over year was due to increased sales volume.

Sales of Lexapro were $50.0 million for the six months ended September 30, 2013, a decrease of $104.7 million from the same prior year period. The decrease in Lexapro sales was due to the expected continued deterioration of sales of the product after the expiration of its market exclusivity in March 2012.

Contract revenue for the six months ended September 30, 2013 decreased to $67.9 million as compared to $120.1 million in the same period last year. Contract revenue in the prior year included $52.1 million of income from a distribution agreement with Mylan pursuant to which Mylan was authorized to sell a generic version of Lexapro and we received a portion of profits on those sales. There was no contribution from generic Lexapro royalties this year due to the full genericization of Lexapro. Contract revenue also included Benicar co-promotion income of $63.1 million and $65.5 million for the six months ended September 30, 2013 and 2012, respectively.


Expenses

Three and six months ended September 30, 2013 compared to three and six months
ended September 30, 2012

(In thousands)
                                        Three Months Ended         Six Months Ended
                                          September 30,              September 30,
                                         2013        2012         2013          2012
Cost of sales                          $ 163,718   $ 149,723   $   329,085   $   317,946
Selling, general and administrative      408,564     374,889       852,427       757,198
Research and development                 191,358     202,839       376,782       398,005
Total                                  $ 763,640   $ 727,451   $ 1,558,294   $ 1,473,149

Cost of sales as a percentage of net sales was 20.2% and 20.5% for the three and six months ended September 30, 2013, respectively, as compared to 21.6% and 22.0% for the three and six months ended September 30, 2012. The decrease in the current year periods was due to the change in product mix and more favorable margins for certain products. Cost of sales includes royalties related to our products. In the case of our principal products subject to royalties, which includes the Namenda franchise, these royalties are in the range of 15% to 25%.

SG&A expense increased 9.0% to $408.6 million for the three months ended September 30, 2013 from $374.9 million for the same period last year. For the six months ended September 30, 2013, SG&A expense increased 12.6% to $852.4 million compared to $757.2 million for the same period last year. SG&A expense for the six months ended September 30, 2013 includes the write-off of the $26.2 million note receivable related to the termination of the Nabriva development program. Excluding this charge, total SG&A expense for the six months ended September 30, 2013 increased 9.1% compared to same period last year. Our current level of spending reflects the resources and activities required to support our currently marketed products, particularly our newest products, Namenda XR, Linzess, Tudorza, Viibryd, Daliresp and Teflaro.

R&D expense decreased 5.7% to $191.4 million and 5.3% to $376.8 million for the three and six months ended September 30, 2013, respectively, from $202.8 million and $398.0 million, respectively, for the same periods last year. R&D expense comprises third party development costs, internal and other development costs and milestone and upfront charges.

For the three and six months ended September 30, 2013 and 2012, R&D expense by category was as follows:

(In thousands)
                                           Three Months Ended           Six Months Ended
                                              September 30,               September 30,
                                           2013          2012          2013          2012
Category
Third party development costs            $  91,980     $ 114,727     $ 175,681     $ 220,746
Internal and other development costs        89,378        88,112       173,101       177,259
Milestone and upfront payments              10,000             -        28,000             -
Total research and development expense   $ 191,358     $ 202,839     $ 376,782     $ 398,005

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. For the three and six months ended September 30, 2013, third party development costs were largely related to clinical trials for nebivolol/valsartan, aclidinium/formoterol, vilazodone, memantine and ceftazidime/avibactam. For the same period last year, third party development costs were largely related to clinical trials for nebivolol, aclidinium/formoterol, vilazodone and roflumilast. 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. The three and six-month periods ended September 30, 2013 included $10.0 million and $28.0 million, respectively, in milestone payments and no upfront payments. There were no milestone or upfront payments in the same periods last year. Excluding milestone and upfront payments, total R&D expense decreased 10.6% and 12.4% for the three and six months ended September 30, 2013, respectively, compared to the prior year periods.

R&D expense reflects the following:

· In November 2004, we entered into an agreement with Gedeon Richter Ltd. for the North American rights to cariprazine, an oral D3/D2 partial agonist, and related compounds, being developed as an atypical antipsychotic for the treatment of schizophrenia, acute mania associated with bipolar disorder, bipolar depression and as an adjunct treatment for MDD. In October 2011 and February 2012, we reported preliminary top-line results from two Phase III studies of cariprazine in patients with acute mania associated with bipolar disorder. The data from both studies showed that cariprazine-treated patients with acute manic episodes experienced significant symptom improvement compared to placebo-treated patients. Also in February 2012, we reported the results of two Phase III studies of cariprazine in patients with schizophrenia showing that cariprazine-treated patients with schizophrenia experienced significant symptom improvement compared to placebo-treated patients. In November 2012, we filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) for cariprazine for those two indications and the Prescription Drug User Fee Act target action date is expected to occur during the fourth calendar quarter of 2013. Cariprazine is also in Phase II development for bipolar depression and as an adjunct treatment for MDD. We expect to report the top-line results of these Phase II studies during the first half of calendar 2014.

· We licensed the exclusive U.S. marketing rights to Tudorza from Almirall, S.A. (Almirall), a pharmaceutical company headquartered in Barcelona, Spain. Pursuant to our agreement, Almirall has also granted us certain rights of first negotiation for other Almirall respiratory products involving combinations with aclidinium (aclidinium bromide). Pursuant to such rights, we conducted the development of a fixed dose combination (FDC) of aclidinium and the long acting beta-agonist, formoterol, for the treatment of COPD. In the second quarter of calendar 2013, we announced positive top-line Phase III clinical trial results from two studies of two dosage forms of this FDC; a 400/6mcg FDC and a 400/12mcg FDC. Both doses of the FDC were well tolerated in the studies. Based on comments provided by the FDA at a pre-NDA meeting, we have delayed our planned submission of an NDA for the FDC which was anticipated in the fourth quarter of calendar 2013. A revised submission date has not yet been determined and we anticipate meeting with the FDA to respond to their comments.

· In June 2013, we reported positive topline results from an 8-week pivotal Phase III clinical trial evaluating the efficacy and safety of an FDC of Bystolic, our proprietary beta-blocker launched in January 2008, and the market's leading angiotensin II receptor blocker valsartan for the treatment of patients with hypertension. We anticipate filing an NDA with the FDA in the first quarter of calendar 2014.

· In November 2012, we entered into an agreement with Adamas Pharmaceuticals, Inc. (Adamas) for the development and commercialization of an FDC of Namenda XR (memantine HCl extended release) and donepezil HCl which will be a once a day daily therapy for the treatment of moderate to severe dementia of the Alzheimer's type. We anticipate filing an NDA with the FDA during the first half of calendar 2014 and contingent upon FDA approval, the FDC is expected to launch in calendar year 2015. In addition, the Company has conducted clinical studies to evaluate the safety and effectiveness of memantine in the treatment of autism pursuant to the requirements of a Pediatric Written Request from the FDA.

· In December 2009, we entered into an agreement with AstraZeneca AB (AstraZeneca) to acquire additional rights to avibactam including co-development and exclusive commercialization rights in the U.S. and Canada to products containing avibactam including the ceftazidime/avibactam combination. Avibactam is a novel broad-spectrum beta-lactamase inhibitor designed to be co-administered intravenously with select antibiotics to enhance their spectrum of activity by overcoming beta-lactamase related antibacterial resistance. Avibactam is currently being developed in combination with ceftazidime, a cephalosporin antibiotic. 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. Based on the results of these studies, we and AstraZeneca initiated Phase III studies for ceftazidime/avibactam in patients with cIAI in December 2011 and in patients with cUTI in July 2012 which are currently ongoing. We expect results from the Phase III studies during the middle of calendar year 2014. In September 2013, the FDA designated ceftazidime/avibactam as a qualified infectious disease product (QIDP). QIDP designation provides us certain incentives including priority review and eligibility with the FDA's fast track program, and a five-year extension of exclusivity under the Hatch-Waxman act.

· In December 2010, we entered into a license agreement with Grünenthal GmbH (Grünenthal) for the co-development and commercialization of GRT 6005 (cebranopadol) and its follow-on compound GRT 6006, both being small molecule analgesic compounds in development for the treatment of moderate to severe chronic pain conditions. Cebranopadol 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 nociceptin receptor (NOP, also known as ORL-1) and, supported by the established mu opioid receptor, is believed to be particularly suitable for the treatment of moderate to severe chronic pain. Cebranopadol has successfully completed initial proof-of-concept studies in nociceptive and neuropathic pain with further Phase II studies currently ongoing prior to initiation of Phase III studies.

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.

From time to time, the Company performs a review of all developmental projects and re-evaluates our development priorities based on the regulatory and commercial prospects of the products in development. The Company considers the commercial potential of the products as well as the development and commercialization costs necessary to achieve approval and successful launch. In certain situations we may discontinue a development program based on this review.

In June 2012, the Company entered into an agreement with Nabriva Therapeutics (Nabriva) for the development of Nabriva's novel antibacterial agent, BC-3781. Pursuant to this agreement, the Company conducted in collaboration with Nabriva, certain development activities related to BC-3781. During the first quarter of fiscal 2014 after a review of this development program, the Company discontinued its collaborative development with Nabriva.

Our effective tax rate was 23.6% and 28.2% for the three and six-month periods ended September 30, 2013, respectively, as compared to 37.4% and 30.0% for the same periods last year. The decrease in the current three and six-month periods compared to last year was primarily due to a change in the mix of earnings by jurisdiction and re-enactment of the U.S. Research and Experimentation Tax Credit on January 3, 2013 offset by the write-off of the Nabriva loan receivable.

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


Non-GAAP Financial Measures

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