Forest Laboratories Earnings Call Insights: Rebate Charges and Product Sales Trends

Forest Laboratories, Inc. (NYSE:FRX) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Rebate Charges

David Risinger – Morgan Stanley: I have a number of financial questions, but they should be pretty straightforward. First Frank, if you could just tell us the rebate charge for Namenda in the December quarter and how that compared to the year ago December quarter, so we can understand how much of an inflection there was. Second, I think that you had mentioned $8.3 million of Ironwood share of losses on Linzess. So, my question is, should we assume that if we double that, the quarterly operating loss on the Linzess product was $16.6 million on sales of $19.2 million or was that $8.3 million figure some sort of true up? Next on Linzess, should we assume that it can grow in the March quarter sequentially?

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Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: Dave?

David Risinger – Morgan Stanley: Yes.

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: I’m going to limit you to three questions.

David Risinger – Morgan Stanley: Okay.

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: Choose number three, carefully.

David Risinger – Morgan Stanley: The third one is simply, should we expect Linzess to grow in the March quarter even though stocking was 19 million in the December quarter?

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: So, let me address the Namenda question first, and as we — I’ll address it with a slightly different answer. In the third quarter, our overall contract rebate percentage was about 23% for Namenda, which is very high. As we look at our fiscal fourth quarter, which again, is the beginning of the contract calendar year, that drops down to about 10%, so, you get about a 12.5 point move in the contract discount rate from quarter-to-quarter. That equates to just about, $75 million on the exact same volume quarter-over-quarter. So, again that’s one reason why again, we feel pretty confident about the Namenda numbers.

David Risinger – Morgan Stanley: Was that an inflection versus the year ago December, I just didn’t understand why December of ’12 would be dramatically different from December of ’11?

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: Well, you have…

and again what happens when the contracts restart, you have the benefit of your Medicaid Part D contract liability restarts in January and across all of your managed care contracts, you get the benefit of the price increases that we’ve taken in the prior year. So, between those two things, you have a very large impact quarter-over-quarter 3Q versus 4Q. You also have an impact, as we look at the percentage of lives in Medicare Part D in our retail plans, it’s been running this year about 64% of lives, whereas last year it was just below 60%. So, you’ve had a shift in patients going from commercial plans to Part D plans, which will likely continue, as we go out in the future.

David Risinger – Morgan Stanley: Got it.

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: And yeah, with 8.3 million for Ironwood, again that is their 50% share of the loss in the quarter from the partnership. With regard to Linzess yes, we do expect to grow – produce some sales in the fiscal fourth quarter.

Product Sales Trends

Liav Abraham – Citi: Just moving from David’s question. Perhaps you can provide a little additional color on overall product sales trends. The trends seem relative weak for a number of products not only in Namenda, from Viibryd, Savella, Daliresp, I know you did comment on this to a certain extent in the call, but the seasonal trends is a little weaker, than the third quarter of previous years, in order to meet your sales guidance for the year, this implies that you have to show very strong growth in fiscal Q4 to meet group sales guidance.

How confident are you on the sales trends for the fourth fiscal quarter? The second question relates to operating expenses as we enter calendar ’13, given that you’ve moved some of your R&D costs from fiscal ’14 into fiscal ’13, and given where you are in your clinical trials and in your pipeline, would it be reasonable to expect to a flattening, perhaps a decline particularly in R&D costs in fiscal ’14?

Francis I. Perier, Jr. – EVP, Finance and Administration and CFO: Let me take the second question first. I think, yes, we have accelerated the enrollment of certain programs, but Marco has also described a very robust development program that is ongoing as well. So, I would not guide anyone towards an expectations in R&D that the running rate for R&D, which is principally the clinical program and operations would be going down next year, and I’m not really going to provide a whole lot of color about ’14.

We’re in the middle of that whole planning and budgeting process right now. With regard to sales trends, I think Elaine really tried to elucidate the fact that we believe that the underlying sales trends for the business are actually very good and all of our products really do get impacted by both the price and the Part D impact in Q3 versus Q4. So, you get that same kind of pricing benefit just by the simple rollover of the calendar year and the initiation of the next contract for all of your managed-care contracts including Part D contracts. So, I think we feel pretty good about where we are relative to our estimate.

A Closer Look: Forest Laboratories Earnings Cheat Sheet>>