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FRX > SEC Filings for FRX > Form 10-Q on 6-Feb-2014All Recent SEC Filings

Show all filings for FOREST LABORATORIES INC

Form 10-Q for FOREST LABORATORIES INC


6-Feb-2014

Quarterly Report


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

Executive Summary

Forest Laboratories, Inc. (herein referred to as "the Company," "we" or "our") is a leading, fully integrated, speciality 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.

The following is a summary of transactions and key events that occurred during fiscal 2014:

· On January 7, 2014, we entered into a definitive agreement to acquire Aptalis Holdings, Inc. (Aptalis) for $2.9 billion minus Aptalis' existing debt and related fees and costs, minus certain of Aptalis' expenses, plus the aggregate exercise price applicable to Aptalis' outstanding options immediately prior to effective time of the Aptalis Acquisition and plus certain cash amounts. Aptalis is a privately held leading specialty pharmaceutical company largely focused on the gastrointestinal and cystic fibrosis markets. Aptalis has manufacturing and commercial operations in the U.S., Europe and Canada. The products acquired will diversify and advance the Company's strategies within the respective therapeutic classes. On January 31, 2014, the Company consummated the acquisition using a combination of cash on hand and the proceeds from the issuance of an aggregate $1.8 billion principal amount of senior unsecured notes (the $1.8 billion Senior Notes).

· In December 2013, we announced Project Rejuvenate, a $500 million cost savings initiative with the goal of streamlining operations and reducing our operating cost base. Project Rejuvenate is focused on three areas: flattening and broadening the organization to reduce layers and increase spans of control, increase our productivity and profitability by decreasing costs, and streamlining work to reduce low value activities. The Company expects the total cost of Project Rejuvenate to be in the range of $150 million to $200 million. For the three months ended December 31, 2013, we recorded $45 million in pre-tax restructuring expenses related to post-employment benefits.

· In December 2013 the Company issued $1.2 billion of 5.00% Senior Notes (the 5.00% Senior Notes), which mature on December 15, 2021. In January 2014, in conjunction with the acquisition of Aptalis, the Company issued the $1.8 billion Senior Notes, comprised of $1.05 billion aggregate principal amount of its 4.375% senior unsecured notes due 2019 and $750 million aggregate principal amount of its 4.875% senior unsecured notes due 2021.

· In November 2013, we entered into an Asset Purchase Agreement (APA) with Merck Sharp & Dohme B.V., a wholly owned subsidiary of Merck & Co., Inc. (Merck) to purchase exclusive rights in the U.S. for Saphris® (asenapine) sublingual tablets, a treatment for adult patients with schizophrenia and, as monotherapy or adjunctive therapy, of manic or mixed episodes associated with bipolar I disorder. Upon the closing of the transaction on January 10, 2014, the Company made a payment of $155 million and entered into a supply agreement pursuant to which it will purchase the product from Merck at an agreed purchase price. The Company is obligated to pay up to an additional $85 million to Merck for costs and expenses incurred in connection with post-marketing clinical trials for Saphris conducted during calendar 2013 and the agreement also includes certain sales milestone payments to Merck upon the achievement of certain net sales thresholds.

· During November 2013, we and our partner Gedeon Richter Ltd. received a complete response letter from the U.S. Food and Drug Administration (FDA) regarding our New Drug Application (NDA) for cariprazine, an atypical antipsychotic for the treatment of schizophrenia and acute mania associated with bipolar disorder, bipolar depression and as an adjunct treatment for Major Depressive Disorder (MDD). The FDA acknowledged that cariprazine demonstrated effectiveness in the treatment of schizophrenia and mania associated with bipolar disorder and requested further information on the drug, including additional clinical trial data to better define the optimal dosing regimen to maintain the demonstrated efficacy, while minimizing the potential for the development of adverse events generally associated with this class of drug.

· In October 2013, Brenton L. Saunders replaced Howard Solomon as President and Chief Executive Officer of Forest Laboratories pursuant to a letter agreement he signed with the Company on September 11, 2013. Mr. Saunders has been a member of our Board since August 2011 and was formerly the Chief Executive Officer of Bausch + Lomb.

· In July 2013, we and our partner Pierre Fabre Laboratories received FDA approval for FetzimaTM (levomilnacipran extended-release capsules), a once-daily serotonin and norepinephrine reuptake inhibitor for the treatment of MDD in adults. Fetzima was launched during the third quarter of fiscal 2014 and recorded sales of $8.0 million of initial trade stocking in the period.


Financial Performance

The Company modified the presentation of its Consolidated Statements of
Operations effective for all periods presented. Interest income, interest
expense and other miscellaneous income/expense is now presented in the Interest
and other income (expense) caption below Operating income (loss).

The following table provides a summary of our financial performance:

                                              Three Months Ended             Nine Months Ended
(In thousands, except per share amounts)         December 31,                  December 31,
                                             2013           2012           2013            2012

Total revenue                              $ 878,396     $  716,281     $ 2,554,621     $ 2,280,176

Selling, general and administrative          454,981        428,380       1,307,408       1,185,578

Research and development                     219,506        325,290         596,288         723,295

Net income (loss)                          $  17,961     $ (153,608 )   $   111,226     $   (77,546 )


Diluted income (loss) per share:           $    0.07     $    (0.58 )   $      0.41     $     (0.29 )

· Total revenue: Total revenue increased $162.1 million and $274.4 million for the three and nine months ended December 31, 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®, Namenda XR® and Fetzima, which increased to $375.4 million and $972.4 million for the three and nine months ended December 31, 2013, respectively, compared to $235.4 million and $636.6 million for the same periods last year. In addition, Namenda® sales increased $17.9 million and $75.8 million for the three and nine months ended December 31, 2013, respectively, compared to the same periods last year. The increases for the nine months ended December 31, 2013 were partially offset by decreases in Lexapro® sales of $104.0 million and decreases in Lexapro contract revenue of $51.3 million.

· Selling, general and administrative (SG&A): SG&A expense increased 6.2% to $455.0 million and 10.3% to $1,307.4 million for the three and nine months ended December 31, 2013, respectively, compared to the prior year periods. The three and nine months ended December 31, 2013 included $18 million of expenses related to Project Rejuvenate for post-employment benefits. SG&A spending for the current period reflects those resources and activities required to support our currently marketed products, particularly our newest products: Fetzima, Namenda XR, Linzess, Tudorza, Viibryd, Daliresp and Teflaro.

· Research and development (R&D): R&D expense decreased 32.5% to $219.5 million and 17.6% to $596.3 million for the three and nine months ended December 31, 2013, respectively, from the same periods last year. The three and nine months ended December 31, 2013 included $27 million of expenses related to Project Rejuvenate for post-employment benefits. The decrease was due to lower third party development costs and milestone and upfront payments in the current year periods. Excluding the milestone payments, upfront licensing payments, and Project Rejuvenate, R&D expense decreased $52.3 million or 25.5% and $101.5 million or 16.8% for the three and nine months ended December 31, 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.


R Results of Operations

Revenue
Three months ended December 31, 2013 compared to three months ended December 31, 2012

Net sales increased $168.8 million or 24.9% to $846.8 million for the three months ended December 31, 2013 primarily due to increases in sales of our next generation products and Namenda®. Our next generation products include Bystolic, Viibryd, Linzess, Namenda XR, Daliresp, Savella, Teflaro, Tudorza, and Fetzima. The following table and commentary presents net sales of our products compared to the prior year:

                          Three Months Ended
(In thousands)               December 31,
                          2013          2012         Change        % Change
Key Marketed Products
Namenda                 $ 363,718     $ 345,832     $  17,886            5.2 %
Bystolic                  130,741       108,828        21,913           20.1
Viibryd                    52,689        40,628        12,061           29.7
Linzess                    51,044        19,227        31,817          165.5
Namenda XR                 37,752             -        37,752              -
Daliresp                   26,771        17,456         9,315           53.4
Savella                    25,604        25,559            45            0.2
Teflaro                    22,303        11,546        10,757           93.2
Tudorza                    20,422        12,191         8,231           67.5
Fetzima                     8,036             -         8,036              -

Lexapro                    21,073        20,332           741            3.6

Other Products             86,631        76,368        10,263           13.4

Total                   $ 846,784     $ 677,967     $ 168,817           24.9 %

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 $17.9 million to $363.7 million for the three months ended December 31, 2013 as compared to $345.8 million in the same period last year. This increase was driven by price increases partially offset by a decline in volume attributable to patient conversion to Namenda XR. Namenda's patent expires in April 2015 and agreements with multiple parties allow generic entry in January 2015. In January 2014, the Company submitted to the FDA data from its pediatric program to extend the Namenda patent. If the FDA finds the submission meets the requirements of the Pediatric Written Request, the Company would be entitled to a six-month extension of marketing exclusivity for Namenda. The new patent expiration date would be October 2015 with generic entry in July 2015.

Namenda XR, a once-daily extended-release formulation of Namenda for the treatment of moderate to severe dementia of the Alzheimer's type, recorded sales of $37.8 million for the three months ended December 31, 2013. Namenda XR was launched in June 2013 and recorded sales of $11.5 million during the second quarter of fiscal year 2014.

Bystolic (nebivolol HCl), our beta-blocker indicated for the treatment of hypertension, had an increase in sales of 20.1% or $21.9 million for the three months ended December 31, 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 MDD totaled $52.7 million for the three months ended December 31, 2013 and $40.6 million in the same period last year. The increase year over year was driven by increased volume and price increases.

Linzess (linaclotide), our guanylate cyclase agonist for the treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation in adults, recorded sales of $51.0 million for the three months ended December 31, 2013 and $19.2 million in the same period last year. The increase was due to increased volume. Linzess was launched in December 2012.

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 $26.8 million for the three months ended December 31, 2013 and $17.5 million in the same period last year. The increase year over year was driven by increased volume and price increases.

Teflaro (ceftaroline fosamil), a broad-spectrum hospital-based injectable cephalosporin antibiotic for the treatment of adults with acute bacterial skin and skin structure infections and community acquired bacterial pneumonia, achieved sales of $22.3 million and $11.5 million for the three months ended December 31, 2013 and December 31, 2012, respectively. The increase year over year was due primarily to increased 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 $20.4 million for the three months ended December 31, 2013 and $12.2 million in the same period last year. The increase was due to increased volume. Tudorza was launched in December 2012.

In December 2013, we launched our newest product Fetzima, a once-daily serotonin and norepinephrine reuptake inhibitor for the treatment of MDD. Fetzima recorded initial trade stocking of $8.0 million for the three months ended December 31, 2013. Contract revenue for the three months ended December 31, 2013 decreased to $31.6 million as compared to $38.3 million in the same period last year.

Contract revenue included Benicar® (olmesartan medoxomil) co-promotion income of $30.2 million for the three months ended December 31, 2013 and $36.0 million for the three months ended December 31, 2012. We will continue to earn Benicar co-promotion income through March 2014.


Revenue

Nine months ended December 31, 2013 compared to nine months ended December 31, 2012

Net sales increased $333.3 million or 15.7% to $2,455.1 million during the nine months ended December 31, 2013 primarily due to increases in sales of our next generation products including Bystolic, Viibryd, Linzess, Daliresp, Namenda XR, Tudorza, Teflaro and Fetzima, partially offset by the decline in Lexapro sales. Excluding Lexapro sales, net sales increased $437.3 million or 22.5% for the nine months ended December 31, 2013 compared to the prior year period. The following table and commentary presents net sales of our products compared to the prior year:

                             Nine Months Ended
(In thousands)                 December 31,
                           2013            2012           Change        % Change
Key Marketed Products
Namenda                 $ 1,157,581     $ 1,081,818     $   75,763            7.0 %
Bystolic                    386,740         323,132         63,608           19.7
Viibryd                     146,251         117,930         28,321           24.0
Linzess                     114,251          19,227         95,024          494.2
Daliresp                     75,319          54,770         20,549           37.5
Savella                      74,153          78,459         (4,306 )         (5.5 )
Namenda XR                   63,229               -         63,229              -
Tudorza                      53,062          12,191         40,871          335.3
Teflaro                      51,398          30,906         20,492           66.3
Fetzima                       8,036               -          8,036              -

Lexapro                      71,060         175,039       (103,979 )        (59.4 )

Other Products              253,986         228,278         25,708           11.3

Total                   $ 2,455,066     $ 2,121,750     $  333,316           15.7 %

Sales of Namenda increased $75.8 million or 7.0% to $1,157.6 million for the nine months ended December 31, 2013 as compared to same period last year. This increase was driven by price increases partially offset by a decline in volume attributable to the conversion to Namenda XR.

In June 2013 we launched our newest product Namenda XR, which recorded sales of $63.2 million for the nine months ended December 31, 2013.

Bystolic sales increased 19.7% or $63.6 million for the nine months ended December 31, 2013 compared to the same period last year, driven by price increases and modest volume growth.

Sales of Viibryd totaled $146.3 million for the nine months ended December 31, 2013 and $117.9 million in the same period last year. The increase year over year was driven primarily by increased volume.

Linzess recorded sales of $114.3 million for the nine months ended December 31, 2013 compared to $19.2 million in the same period last year. The increase year over year was driven by increased volume. Linzess launched in December 2012.

Daliresp achieved sales of $75.3 million for the nine months ended December 31, 2013 and $54.8 million in the same period last year. The increase year over year was driven by increased volume.

Tudorza achieved sales of $53.1 million for the nine months ended December 31, 2013 and $12.2 million in the same prior year period. The increase year over year was driven by increased volume. Tudorza launched in December 2012.

Teflaro achieved sales of $51.4 million and $30.9 million for the nine months ended December 31, 2013 and December 31, 2012, respectively. The increase year over year was due to increased volume.

Fetzima was launched during the current period and recorded sales of $8.0 million of initial trade stocking.

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 $71.1 million for the nine months ended December 31, 2013, a decrease of $104.0 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 nine months ended December 31, 2013 decreased to $99.6 million as compared to $158.4 million in the same period last year. Contract revenue in the prior year included $51.3 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 $93.2 million and $101.6 million for the nine months ended December 31, 2013 and 2012, respectively. We will continue to earn Benicar co-promotion income through March 2014.

Cost of Goods Sold / Gross Margin

Three and nine months ended December 31, 2013 compared to three and nine months ended December 31, 2012

Cost of goods sold was $182.3 million and $511.4 million for the three and nine months ended December 31, 2013, respectively, as compared to $153.3 million and $471.3 million for the three and nine months ended December 31, 2012, respectively. Cost of sales as a percentage of total revenue was 20.8% and 20.0% for the three and nine months ended December 31, 2013, respectively, as compared to 21.4% and 20.7% for the three and nine months ended December 31, 2012. The decrease in the current year periods was due to a 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%.


Expenses

Three and nine months ended December 31, 2013 compared to three and nine months
ended December 31, 2012

   (In thousands)

                                            Three Months Ended             Nine Months Ended
                                               December 31,                  December 31,
                                            2013          2012           2013            2012
  Selling, general and administrative      $ 454,981     $ 428,380     $ 1,307,408     $ 1,185,578
  Research and development                   219,506       325,290         596,288         723,295
  Total                                    $ 674,487     $ 753,670     $ 1,903,696     $ 1,908,873

SG&A expense increased 6.2% to $455.0 million for the three months ended December 31, 2013 from $428.4 million for the same period last year. For the nine months ended December 31, 2013, SG&A expense increased 10.3% to $1,307.4 million compared to $1,185.6 million for the same prior year period. During December 2013 we commenced Project Rejuvenate, a cost savings initiative with a goal of streamlining operations and reducing operating expenses. For the three and nine month periods, the Company recorded $18 million of expenses in SG&A related to Project Rejuvenate for post-employment benefits. SG&A expense for the nine months ended December 31, 2013 also includes the write-off of the $26.2 million note receivable related to the termination of the Nabriva development program. Excluding these charges, total SG&A expense for the three and nine months ended December 31, 2013 increased 2.0% and 6.5%, respectively, compared to same periods last year. Our current level of spending reflects the resources and activities required to support our currently marketed products, particularly our newest products, Fetzima, Namenda XR, Linzess, Tudorza, Viibryd, Daliresp and Teflaro.

R&D expense decreased 32.5% to $219.5 million and 17.6% to $596.3 million for the three and nine months ended December 31, 2013, respectively, from $325.3 million and $723.3 million, respectively, for the same periods last year. R&D expense includes $27 million in expense associated with Project Rejuvenate for the three and nine months ended December 31, 2013. R&D expense comprises third party development costs, internal and other development costs and milestone and upfront charges. Excluding milestone payments, upfront licensing payments, and Project Rejuvenate, R&D expense decreased $52.3 million or 25.5% and $101.5 million or 16.8% for the three and nine months ended December 31, 2013, respectively, compared to the prior year periods.


For the three and nine months ended December 31, 2013 and 2012, R&D expense by category was as follows:

(In thousands)
                                           Three Months Ended           Nine Months Ended
                                              December 31,                December 31,
                                           2013          2012          2013          2012
Category
Third party development costs            $  71,809     $ 114,600     $ 247,490     $ 335,347
Internal and other development costs        80,697        90,221       253,798       267,479
Milestone and upfront payments              40,000       120,469        68,000       120,469
Project Rejuvenate                          27,000             -        27,000             -
Total research and development expense   $ 219,506     $ 325,290     $ 596,288     $ 723,295

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 nine months ended December 31, 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/valsartan, aclidinium/formoterol, vilazodone, cariprazine 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 nine months ended December 31, 2013 included $40.0 million and $68.0 million, respectively, in milestone payments and no upfront payments. The three and nine months ended December 31, 2012, included $44.5 million in milestone payments and $76.0 million in upfront payments. During the quarter ended December 31, 2012, we made an upfront payment of $65.0 million to Adamas Pharmaceuticals, Inc. (Adamas) for the development and commercialization of a FDC of Namenda XR and donepezil CHI which will be a daily therapy for the treatment of moderate to severe dementia of the Alzheimer's type.

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 and acute mania associated with bipolar disorder, . . .

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