forest10qsep09.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
__________________________________________
(Mark
One)
|
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended September 30, 2009
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from to
Commission
File No. 1-5438
FOREST LABORATORIES,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of incorporation or organization)
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11-1798614
(I.R.S.
Employer
Identification
Number)
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909
Third Avenue
New
York, New York
(Address
of principal executive offices)
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10022-4731
(Zip
code)
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(212)
421-7850
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer x
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Accelerated
filer o
|
Non-accelerated
filer o
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Smaller
reporting company o
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|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Number of
shares outstanding of Registrant's Common Stock as of November 6, 2009:
301,765,815
(Quick Links)
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EXHIBIT 101.INS
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EXHIBIT 101.SCH
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EXHIBIT 101.PRE
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EXHIBIT 101.CAL
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EXHIBIT
101.LAB
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Condensed
Consolidated Balance Sheets
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(In
thousands)
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September
30, 2009
(Unaudited)
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March 31, 2009
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Assets
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Current
assets:
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Cash
(including cash equivalent investments of $1,735,362 in September and
$1,337,871 in March)
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$ |
1,736,133 |
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$ |
1,338,905 |
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Marketable
securities
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1,330,604 |
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1,242,017 |
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Accounts
receivable, less allowance for doubtful accounts of $17,913 in September
and $18,511 in March
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484,664 |
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449,444 |
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Inventories,
net
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440,706 |
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393,527 |
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Deferred
income taxes
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228,215 |
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217,811 |
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Other
current assets
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104,437 |
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144,250 |
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Total
current assets
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4,324,759 |
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3,785,954 |
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Marketable
securities and investments
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545,276 |
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449,793 |
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Property,
plant and equipment
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595,681 |
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586,039 |
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Less:
accumulated depreciation
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263,181 |
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240,104 |
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332,500 |
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345,935 |
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Other
assets:
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Goodwill
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14,965 |
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14,965 |
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License
agreements, product rights and other intangibles, less accumulated
amortization of $493,189 in September and $474,960 in
March
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480,149 |
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497,897 |
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Deferred
income taxes
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99,799 |
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100,758 |
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Other
assets
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1,325 |
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1,506 |
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Total
other assets
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596,238 |
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615,126 |
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Total
assets
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$ |
5,798,773 |
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$ |
5,196,808 |
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See
notes to condensed consolidated financial statements.
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FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
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(In
thousands, except for par values)
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September
30, 2009
(Unaudited)
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March 31, 2009
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Liabilities and Stockholders'
Equity
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Current
liabilities:
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Accounts
payable
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$ |
124,213 |
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$ |
117,192 |
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Accrued
expenses
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744,270 |
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700,636 |
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Total
current liabilities
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868,483 |
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817,828 |
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Long-term
liabilities:
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Income
tax liabilities
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298,525 |
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264,389 |
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Stockholders'
equity:
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Series
preferred stock, $1.00 par; shares authorized 1,000; no shares issued or
outstanding
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Common
stock, $.10 par; shares authorized 1,000,000; issued 422,465 shares in
September and 422,268 shares in March
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42,246 |
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42,227 |
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Additional
paid-in capital
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1,514,310 |
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1,491,239 |
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Retained
earnings
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6,828,796 |
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6,379,236 |
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Accumulated
other comprehensive loss
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( 1,473 |
) |
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( 47,145 |
) |
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Treasury
stock, at cost (120,699 shares in September and 120,653 shares in
March)
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( 3,752,114 |
) |
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( 3,750,966 |
) |
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Total
stockholders' equity
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4,631,765 |
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4,114,591 |
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Total
liabilities and stockholders' equity
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$ |
5,798,773 |
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$ |
5,196,808 |
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See
notes to condensed consolidated financial
statements.
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Condensed
Consolidated Statements of Income
(Unaudited)
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Three
Months Ended
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Six
Months Ended
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(In
thousands, except per share amounts)
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Net
sales
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$ |
962,714 |
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$ |
925,570 |
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$ |
1,910,956 |
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$ |
1,819,315 |
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Contract
revenue
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50,590 |
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47,210 |
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98,299 |
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101,363 |
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Interest
income
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9,411 |
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19,194 |
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21,611 |
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37,424 |
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Other
income
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41,219 |
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|
532 |
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41,219 |
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1,248 |
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1,063,934 |
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992,506 |
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2,072,085 |
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1,959,350 |
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Costs
and expenses:
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Cost
of sales
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221,161 |
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205,001 |
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437,905 |
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402,342 |
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Selling,
general and administrative
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324,924 |
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326,261 |
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636,731 |
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669,215 |
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Research
and development
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263,079 |
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146,357 |
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410,205 |
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258,469 |
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809,164 |
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677,619 |
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1,484,841 |
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1,330,026 |
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Income
before income tax expense
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254,770 |
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314,887 |
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587,244 |
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629,324 |
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Income
tax expense
|
|
|
68,108 |
|
|
|
70,801 |
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|
137,684 |
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|
142,318 |
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Net
income
|
|
$ |
186,662 |
|
|
$ |
244,086 |
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$ |
449,560 |
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$ |
487,006 |
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Net
income per common share:
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Basic
|
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$ |
0.62 |
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$ |
0.80 |
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$ |
1.48 |
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$ |
1.59 |
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Diluted
|
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$ |
0.61 |
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$ |
0.80 |
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$ |
1.48 |
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$ |
1.59 |
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Weighted
average number of common shares outstanding:
|
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|
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Basic
|
|
|
302,983 |
|
|
|
304,814 |
|
|
|
302,952 |
|
|
|
306,146 |
|
|
Diluted
|
|
|
303,530 |
|
|
|
305,938 |
|
|
|
303,443 |
|
|
|
307,126 |
|
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|
| |
|
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|
See
notes to condensed consolidated financial statements.
|
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Condensed
Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
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|
(In
thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
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|
2008
|
|
|
2009
|
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|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
income
|
|
$ |
186,662 |
|
|
$ |
244,086 |
|
|
$ |
449,560 |
|
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$ |
487,006 |
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Other
comprehensive income (loss):
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Foreign
currency translation gains (losses)
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|
295 |
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|
( 17,452 |
) |
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11,808 |
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|
( 17,813 |
) |
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Pension
liability adjustment
|
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|
( 11,558 |
) |
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( 11,558 |
) |
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Unrealized
gains (losses) on securities:
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Unrealized
holding gains (losses) arising during the period, net of
tax
|
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|
19,561 |
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|
|
( 10,512 |
) |
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|
45,422 |
|
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|
( 11,073 |
) |
|
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|
|
|
|
|
|
|
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|
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|
|
|
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Other
comprehensive income (loss)
|
|
|
8,298 |
|
|
|
( 27,964 |
) |
|
|
45,672 |
|
|
|
( 28,886 |
) |
|
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|
|
|
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|
|
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Comprehensive
income
|
|
$ |
194,960 |
|
|
$ |
216,122 |
|
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$ |
495,232 |
|
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$ |
458,120 |
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| |
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See
notes to condensed consolidated financial statements.
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FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
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|
Six
Months Ended
|
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|
(In
thousands)
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
449,560 |
|
|
$ |
487,006 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
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|
|
|
|
|
|
|
|
Depreciation
|
|
|
22,618 |
|
|
|
22,754 |
|
|
Amortization
and impairments
|
|
|
18,229 |
|
|
|
35,895 |
|
|
Stock-based
compensation expense
|
|
|
22,282 |
|
|
|
20,254 |
|
|
Deferred
income tax (benefit) provision
|
|
|
( 9,445 |
) |
|
|
5,927 |
|
|
Foreign
currency transaction loss (gain)
|
|
|
35 |
|
|
|
( 630 |
) |
|
Net
change in operating assets and liabilities:
|
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|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
( 35,220 |
) |
|
|
22,964 |
|
|
Inventories,
net
|
|
|
( 47,179 |
) |
|
|
( 25,696 |
) |
|
Other
current assets
|
|
|
39,813 |
|
|
|
( 42,314 |
) |
|
Other
assets
|
|
|
181 |
|
|
|
( 10 |
) |
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
7,021 |
|
|
|
( 151,025 |
) |
|
Accrued
expenses
|
|
|
43,634 |
|
|
|
151,133 |
|
|
Income
tax liabilities
|
|
|
34,136 |
|
|
|
23,104 |
|
|
Net
cash provided by operating activities
|
|
|
545,665 |
|
|
|
549,362 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
( 8,532 |
) |
|
|
( 19,240 |
) |
|
Purchase
of marketable securities and investments
|
|
|
( 1,335,269 |
) |
|
|
( 1,247,144 |
) |
|
Redemption
of marketable securities
|
|
|
1,151,199 |
|
|
|
1,309,441 |
|
|
Net
cash (used in) provided by investing activities
|
|
|
( 192,602 |
) |
|
|
43,057 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
proceeds from common stock options exercised by employees under stock
option plans
|
|
|
821 |
|
|
|
3,378 |
|
|
Excess
tax (provision) benefit related to stock-based
compensation
|
|
|
( 13 |
) |
|
|
236 |
|
|
Purchase
of treasury stock
|
|
|
( 1,148 |
) |
|
|
( 332,459 |
) |
|
Net
cash used in financing activities
|
|
|
( 340 |
) |
|
|
( 328,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
44,505 |
|
|
|
( 26,784 |
) |
|
Increase
in cash and cash equivalents
|
|
|
397,228 |
|
|
|
236,790 |
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,338,905 |
|
|
|
833,052 |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
1,736,133 |
|
|
$ |
1,069,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
94,710 |
|
|
$ |
135,342 |
|
|
See notes to
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis
of Presentation:
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles (or
GAAP) for interim financial information and with the instructions to Form 10-Q
and Accounting Standards Codification (or ASC) 270-10. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included and the Company has evaluated
subsequent events up to the date of this filing. Certain amounts as
previously reported have been reclassified to conform to current year
classifications. Operating results for the six-month period ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2010. For further information
refer to the consolidated financial statements and footnotes thereto
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended March 31, 2009.
In June
2009, the Financial Accounting Standards Board (or FASB) issued ASC 105, “The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” which is effective for interim periods ending after
September 15, 2009. This establishes the FASB Accounting Standards
Codification as the only source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with GAAP, with the exception of Statements of Financial
Accounting Standards not yet included in the Codification. The
Company adopted ASC 105 as required for the period ended September 30,
2009.
During
the current quarter the Company adopted ASC 605-25 “Revenue Arrangements with
Multiple Deliverables”. This statement provides principles for
allocation of consideration among its multiple-elements, allowing more
flexibility in identifying and accounting for separate deliverables under an
arrangement. The Company has elected early adoption of this standard
which did not have a material effect on the Company’s condensed consolidated
financial statements.
2. Accounts
Receivable (In
thousands):
Accounts
receivable, net, consists of the following:
|
|
|
September
30, 2009
(Unaudited)
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
383,378 |
|
|
$ |
351,697 |
|
|
Other
|
|
|
101,286 |
|
|
|
97,747 |
|
|
|
|
$ |
484,664 |
|
|
$ |
449,444 |
|
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Inventories
(In
thousands):
Inventories,
net of reserves for obsolescence, consist of the following:
|
|
|
September
30, 2009
(Unaudited)
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
164,708 |
|
|
$ |
126,292 |
|
|
Work
in process
|
|
|
845 |
|
|
|
982 |
|
|
Finished
goods
|
|
|
275,153 |
|
|
|
266,253 |
|
|
|
|
$ |
440,706 |
|
|
$ |
393,527 |
|
4. Fair Value
Measurements (In
thousands):
The
following table presents the level within the fair value hierarchy at which the
Company’s financial assets are carried at fair value and measured on a recurring
basis:
|
Description
|
|
Fair
value at
September 30, 2009
|
|
|
Quoted
prices in active markets for identical assets
(Level 1)
|
|
|
Significant
other observable market inputs
(Level 2)
|
|
|
Unobservable
market
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market accounts
|
|
$ |
1,548,870 |
|
|
$ |
1,548,870 |
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
290,530 |
|
|
|
|
|
|
$ |
290,530 |
|
|
|
|
|
|
Commercial
paper
|
|
|
1,089,375 |
|
|
|
547,039 |
|
|
|
542,336 |
|
|
|
|
|
|
Variable
rate demand notes
|
|
|
142,844 |
|
|
|
|
|
|
|
142,844 |
|
|
|
|
|
|
Floating
rate notes
|
|
|
395,252 |
|
|
|
|
|
|
|
395,252 |
|
|
|
|
|
|
Auction
rate securities
|
|
|
36,539 |
|
|
|
|
|
|
|
|
|
|
$ |
36,539 |
|
As of
September 30, 2009, the Company has determined the value of the auction rate
securities portfolio based upon a discounted cash flow model, which has been
unchanged since the beginning of this fiscal period.
On April
1, 2009, the Company adopted the provisions of ASC 820-10-65, “Fair Value
Measurements and Disclosures” for non-financial assets and non-financial
liabilities. This statement did not have a material effect on the
Company’s condensed consolidated financial statements.
The
majority of the Company’s non-financial assets and liabilities are not required
to be carried at fair value on a recurring basis. However, the Company is
required on a non-recurring basis to use fair value measurements when analyzing
asset impairment as it relates to license agreements, product rights and other
intangible assets and long-lived assets. The carrying amount of cash,
accounts receivable and accounts payable and other short-term financial
instruments approximate their fair value due to their short-term
nature.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. Marketable Securities
(In
thousands):
Available-for-sale
debt securities consist of the following:
|
|
|
September 30,
2009
|
|
|
|
|
Estimated
fair value
|
|
|
Gains
in accumulated other comprehensive income
|
|
|
Losses
in accumulated other comprehensive income
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Variable
rate demand notes
|
|
$ |
135,394 |
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
189,274 |
|
|
$ |
1,029 |
|
|
|
|
|
Commercial
paper
|
|
|
922,854 |
|
|
|
1,586 |
|
|
|
|
|
Floating
rate notes
|
|
|
83,082 |
|
|
|
|
|
|
$ |
( 135 |
) |
|
Total
current securities
|
|
|
1,330,604 |
|
|
|
2,615 |
|
|
|
( 135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds and notes
|
|
|
101,256 |
|
|
|
723 |
|
|
|
|
|
|
Commercial
paper
|
|
|
78,711 |
|
|
|
726 |
|
|
|
|
|
|
Auction
rate notes
|
|
|
36,539 |
|
|
|
|
|
|
|
|
|
|
Floating
rate notes
|
|
|
312,170 |
|
|
|
|
|
|
|
( 23,726 |
) |
|
Total
noncurrent securities
|
|
|
528,676 |
|
|
|
1,449 |
|
|
|
( 23,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale debt securities
|
|
$ |
1,859,280 |
|
|
$ |
4,064 |
|
|
$ |
(23,861 |
) |
Proceeds
from the sales of available-for-sale debt securities was $1,151,199 for the six
months ended September 30, 2009. Gross realized gains on those sales
for the six months ended September 30, 2009 was $9,970. For purposes
of determining gross realized gains and losses, the cost of the securities is
based on average cost. Net unrealized holding losses on
available-for-sale debt securities in the amount of $19,797 for the six months
ended September 30, 2009 has been included in Stockholders’
equity: Accumulated other comprehensive income. The
preceding table does not include the Company’s $16,600 investment in Ironwood
Pharmaceuticals, Inc., which is held at cost and described in Note 6 to the
Condensed Consolidated Financial Statements.
Contractual
maturities of available-for-sale debt securities at September 30, 2009, are as
follows:
|
|
|
Estimated
fair value
|
|
|
Within
one year
|
|
$ |
1,330,604 |
|
|
1-5
years
|
|
|
418,143 |
|
|
5-10
years
|
|
|
60,617 |
|
|
After
10 years
|
|
|
49,916 |
|
|
|
|
$ |
1,859,280 |
|
Actual
maturities may differ from contractual maturities because some borrowers have
the right to call or prepay obligations with or without call
penalties.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The
Company currently invests funds in variable rate demand notes that have major
bank liquidity agreements, municipal bonds and notes, commercial paper including
money market instruments, auction rate securities and bank floating rate
notes. Certain securities are subject to a hard-put option(s) where
the principal amount is contractually assured by the issuer and any resistance
to the exercise of these options would be deemed as a default by the
issuer. Such a potential default would be reflected in the issuer’s
respective credit rating, for which the Company maintains investment grade
requirements pursuant to its corporate investment guidelines. While
the Company believes its investments that have net unrealized losses are
temporary, further declines in the value of these investments may be deemed
other-than-temporary if the credit and capital markets were to continue to
deteriorate in future periods. The Company does not have the intent to sell its
investments and it is more likely than not that the Company will not have to
sell the investments before the recovery of its cost
basis. Therefore, the Company does not consider these investments to
be other-than-temporarily impaired and will continue to monitor global market
conditions to minimize the uncertainty of impairments in future
periods.
6. License and
Collaboration Agreements (In thousands):
In August
2009, the Company entered into a license agreement with Nycomed GmbH (or
Nycomed) to develop and commercialize Daxas® (roflumilast) in the United
States. Daxas is a proprietary selective phosphodiesterase 4 (PDE4)
enzyme inhibitor for oral administration developed by Nycomed for the treatment
of chronic obstructive pulmonary disease (COPD). Under the terms of
the agreement, the Company made an upfront payment to Nycomed of $100,000 which
was recorded to research and development expense. The Company may be
obligated to make payments to Nycomed for future development and sales
milestones and royalties on Daxas sales. The Company may also be
responsible for certain development expenses incurred prior to FDA
approval.
The
Company also entered into a license agreement with AstraZeneca UK Limited (or
AstraZeneca) in August 2009, pursuant to which AstraZeneca will co-develop and
commercialize ceftaroline worldwide excluding the United States, Canada and
Japan. Ceftaroline is the Company’s late stage, next generation,
broad-spectrum, hospital-based injectable cephalosporin being investigated for
the treatment of complicated skin and skin structure infections (cSSSI) and
community acquired bacterial pneumonia (CABP). Under the terms of the
agreement, the Company received an upfront payment of $40,000 which was recorded
to other income. AstraZeneca may be obligated to pay the Company
milestones and royalties based on future sales of
ceftaroline.
Effective
April 1, 2009 the Company implemented ASC 808-10 “Collaborative Arrangements”,
which prescribes that certain transactions between collaborators be recorded in
the income statement on either a gross or net basis, depending on the
characteristics of the collaboration relationship, and provides for enhanced
disclosure of collaborative relationships.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
These
collaborations are contractual agreements with third parties consisting of a
joint operating activity involving the research and development, manufacturing
and marketing of a product. These collaboration agreements are profit
sharing in nature and consequently both the Company and its partners are active
participants and are subject to significant risks and rewards. These
collaborative arrangements generally require the Company to make milestone and
royalty payments based upon the results of specific research and development
objectives and future sales, if any. These agreements also include
provisions for reimbursement of certain expenses between the Company and its
partners. The Company has entered into several other license
agreements which are not profit sharing in nature and accordingly do not qualify
as collaboration agreements as defined by ASC 808-10.
Two of
the Company’s previously described agreements qualify as collaboration
agreements under ASC 808-10: In October 2008, the Company entered
into a collaboration agreement with Phenomix Corporation (or Phenomix) to
co-develop and co-promote dutogliptin, Phenomix’ proprietary orally
administered, small molecule dipeptidyl-peptidase-4 (DPP-4) inhibitor being
developed for the treatment of Type II diabetes. The Company made a
$75,000 upfront payment to Phenomix in fiscal 2009, which was recorded to
research and development expense. In September 2007, the Company
entered into a collaboration agreement with Ironwood to co-develop and co-market
Ironwood’s first-in-class compound linaclotide, currently being investigated for
the treatment of constipation-predominant irritable bowel syndrome and chronic
constipation. Under the terms of the agreement, in fiscal 2008 the
Company paid Ironwood a $70,000 upfront licensing fee which was recorded to
research and development expense. During the current quarter, the
Company paid Ironwood $45,000 in development milestones, of which $28,400 was
charged to research and development expense and $16,600 was recorded as a
preferred equity investment in Ironwood. These products have not yet
been approved by the FDA.
7. Net Income Per
Share (In
thousands):
A
reconciliation of shares used in calculating basic and diluted net income per
share follows:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Basic
|
|
|
302,983 |
|
|
|
304,814 |
|
|
|
302,952 |
|
|
|
306,146 |
|
|
Effect
of assumed conversion of employee stock options
|
|
|
547 |
|
|
|
1,124 |
|
|
|
491 |
|
|
|
980 |
|
|
Diluted
|
|
|
303,530 |
|
|
|
305,938 |
|
|
|
303,443 |
|
|
|
307,126 |
|
Options
to purchase approximately 17,228 shares of common stock at exercise prices
ranging from $20.55 to $76.66 per share and options to purchase approximately
17,331 shares of common stock at exercises prices ranging from $20.55 to $76.66
that were outstanding during a portion of the three and six-month periods ended
September 30, 2009, respectively, were not included in the computation of
diluted net income per share because they were anti-dilutive. These
options expire through 2019. Options to purchase approximately 14,939
shares of common stock at exercise prices ranging from $34.12 to $76.66 per
share and options to purchase approximately 14,940 shares of common stock at
exercise prices ranging from $34.12 to $76.66 that were outstanding during a
portion of the three and six-month periods ended September 30, 2008,
respectively, were not included in the computation of diluted net income per
share because they were anti-dilutive. These options expire through
2018.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The above
references to earnings per share are in conformity with ASC 260-10-45 “Earnings
Per Share”. The Company adopted ASC 260-10-45 on April 1, 2009. The
application of ASC 260-10-45 did not have a material effect on the Company’s
earnings per share for the three and six-month periods ended September 30, 2009
and 2008.
8. Stock-Based
Compensation (In
thousands):
In August
2007 the stockholders of the Company voted to adopt the 2007 Equity Incentive
Plan (or the 2007 Plan) which replaces and supersedes all prior stock option
plans. Under the 2007 Plan, 13,950 shares were authorized to be issued to
employees of the Company and its subsidiaries at prices not less than the fair
market value of the common stock at the date of grant. The 2007 Plan
provides for the granting of incentive and nonqualified stock options,
restricted stock, stock appreciation rights and stock equivalent units.
These awards generally vest in three to five years. Stock option grants
may be exercisable for up to ten years from the date of issuance. As of
September 30, 2009, 5,312 shares were available for grant.
Compensation
expense of $10,460 ($8,634 net of tax) and $22,282 ($18,192 net of tax) was
recorded for the three and six-month periods ended September 30, 2009,
respectively. For the three and six-month periods ended September 30,
2008, compensation expense of $9,667 ($8,227 net of tax) and $20,254 ($17,044
net of tax) was recorded. This expense was charged to cost of sales,
selling, general and administrative and research and development expense, as
appropriate.
The
weighted average number of diluted common shares outstanding is reduced by the
treasury stock method which, in accordance with the provisions of ASC 718-10
“Compensation-Stock Compensation” takes into consideration the compensation cost
attributed to future services not yet recognized.
9. Business Segment
Information (In
thousands):
The
Company operates in only one segment. Below is a breakdown of net
sales by therapeutic class:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
(In
thousands)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central
nervous system
|
|
$ |
855,948 |
|
|
$ |
833,112 |
|
|
$ |
1,694,980 |
|
|
$ |
1,643,432 |
|
|
Cardiovascular
|
|
|
47,754 |
|
|
|
19,593 |
|
|
|
93,797 |
|
|
|
29,408 |
|
|
Other
|
|
|
59,012 |
|
|
|
72,865 |
|
|
|
122,179 |
|
|
|
146,475 |
|
|
|
|
$ |
962,714 |
|
|
$ |
925,570 |
|
|
$ |
1,910,956 |
|
|
$ |
1,819,315 |
|
10. Long-Term
Debt:
On
December 7, 2007, the Company established a $500 million revolving credit
facility for the purpose of providing additional financial liquidity for the
financing of business development and corporate strategic
initiatives. The facility can be increased up to $750 million based
upon agreement with the participating lenders and expires on December 7,
2012. As of November 6, 2009, the Company has not drawn any funds
from the available credit. The utilization of the revolving credit
facility is subject to the adherence to certain financial covenants such as
leverage and interest coverage ratios.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
11. Income Taxes
(In
thousands):
The
Company’s income tax returns for fiscal years prior to 1999 in most
jurisdictions and prior to 2003 in Ireland are no longer subject to review as
such fiscal years are generally closed. Tax authorities in various
jurisdictions are in the process of reviewing the Company’s income tax returns
for various post-1999 fiscal years, including the Internal Revenue Service (or
IRS), which has recently concluded its examination of the Company’s U.S. federal
income tax returns for fiscal years 2002 and 2003.
In
connection with that examination the Company has agreed with an assessment
related to intercompany transfer pricing. Such assessment resulted in
additional U.S. federal and state corporation tax within previously established
tax reserves and did not have a material impact on the Company’s results of
operations.
Fiscal
years 2004, 2005 and 2006 are currently under review by the IRS. It
is unlikely that the outcome will be determined within the next 12
months. Potential claims for years under review could be
material.
The
Company’s continuing practice is to recognize net interest related to income tax
matters in income tax expense. As of September 30, 2009, the Company
had accrued an additional $12,015 in interest for a total of $41,913 related to
the resolution of various income tax matters.
The
Company’s effective tax rate was 26.7% and 23.5% for the three and six-month
periods ended September 30, 2009, as compared to 22.5% and 22.6% for the same
periods last year. The increase was primarily due to the Company’s upfront
license payment to Nycomed, a settlement agreement with Caraco Pharmaceutical
Laboratories, Ltd. (or Caraco) and various tax matters partially offset by the
effect of the license agreement with AstraZeneca. Effective tax rates
may be affected by ongoing tax audits.
12. Legal
Proceedings (In
thousands):
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
As
previously disclosed, the United States Attorney’s Office for the District of
Massachusetts (USAO) is investigating various potential violations of civil and
criminal laws in connection with the Company’s marketing of Celexa and Lexapro,
as well as in connection with the manufacturing and marketing of
Levothroid. In respect of these matters, the Company recorded a
reserve of $170,000 during fiscal 2009. In May 2009, Forest reached
an agreement in principle with the USAO and the Civil Division of the U.S.
Department of Justice (DOJ) to settle civil claims arising from these
investigations, including (a) claims on behalf of the U.S. government asserted
in the two qui tam
lawsuits previously disclosed and (b) related claims by states who are members
of the National Medicaid Fraud Control Unit, which has been working with the
USAO and the DOJ. The amount of the settlement subject to the
agreement in principle falls within the $170,000 reserve in respect of these
matters recorded in fiscal 2009. Consummation of the agreement in
principle is subject to the negotiation and finalization of appropriate
implementing agreements, including civil settlement agreements and a corporate
integrity agreement. The negotiation of these agreements is ongoing,
and until they are finalized, there can be no assurance that a negotiated
resolution of these matters can be achieved or that any such resolution will not
require payments in excess of the expense recorded in fiscal 2009. In
addition, the agreement in principle discussed above does not resolve the
government’s ongoing investigation into potential criminal law violations
related to Celexa, Lexapro and Levothroid. The Company is continuing
to cooperate with this investigation and to discuss these issues with the
government.
With
respect to the litigation brought by the Company and its licensing partner
Merz Pharma GmbH & Co. KgaA (or Merz) against several companies who had
notified the Company that they have filed ANDA’s with the FDA seeking to obtain
approval to market generic versions of Namenda, the Company and Merz have
entered into settlement agreements with Amneal Pharmaceuticals, LLC, Apotex
Inc., Cobalt Laboratories, Inc., Sun India Pharmaceutical Industries, Ltd., Teva
Pharmaceuticals USA, Inc., Upsher-Smith Laboratories, Inc., Wockhardt Limited,
and related companies and subsidiaries thereof in such patent infringement
litigation captioned Forest
Laboratories, Inc. et al. v. Cobalt Laboratories, Inc. et al. and pending
in the U.S. District Court for the District of Delaware. These
settlement agreements do not settle Forest and Merz’s patent infringement
litigation against Dr. Reddy’s Laboratories, Inc., Lupin Pharmaceuticals, Inc.,
Mylan Pharmaceuticals Inc., and related companies and subsidiaries thereof, that
is pending in the District of Delaware, or Forest and Merz’s patent infringement
litigation against Orchid Chemicals & Pharmaceuticals Ltd. and Orgenus
Pharma, Inc. that is pending in the U.S. District Court for the District of New
Jersey. A trial in the Delaware litigation is currently scheduled for
April 2010. No trial has been scheduled in the New Jersey
litigation.
Under the
terms of the settlement agreements reached, and subject to review of the
settlement terms by the U.S. Federal Trade Commission:
(1) The
Company and Merz will provide licenses to each of Amneal, Cobalt, Sun, Teva,
Upsher-Smith, and Wockhardt that will permit these companies to launch their
generic versions of Namenda as of the date that is the later of (a) three
calendar months prior to the expiration of the ‘703 patent, including any
extensions and/or pediatric exclusivities or (b) the date each company receives
final FDA approval of its ANDA, or earlier in certain
circumstances.
(2) The
Company and Merz will provide licenses to Apotex that will permit Apotex to
launch its generic version of Namenda as of the date that is the later of (a)
the expiration of the ‘703 patent, including any extensions and/or pediatric
exclusivity or (b) the date that Apotex receives final approval from the FDA of
its ANDA, or earlier in certain circumstances.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The
Company and Merz also agreed to reimburse certain of Amneal’s, Cobalt’s, Sun’s,
Teva’s, Upsher-Smith’s and Wockhardt’s legal costs in connection with the patent
litigation.
On
October 15, 2009, in the case captioned Infosint S.A. v. H. Lundbeck A/S et al.
and described in the Company’s Annual Report on Form 10-K for the fiscal year
ended March 31, 2009, a jury in the U.S. District Court for the Southern
District of New York reached a verdict finding that a claim of Infosint’s
manufacturing process patent is valid and infringed by Forest’s importation and
sale in the United States of certain “citalopram products,” and to the extent
infringement was found, that the Company’s licensing partner H. Lundbeck A/S
induced any such infringement. As part of this verdict, the jury
awarded Infosint $15,000 in damages. Judge Lewis A. Kaplan entered
judgment on October 21, 2009 in accordance with the jury’s
verdict. Equitable defenses that may eliminate any damages award have
yet to be heard by the district court. Further, the Company plans to
file post-trial motions in the district court and appeal the case to the U.S.
Court of Appeals for the Federal Circuit, if necessary. The Company
also continues to believe that its license agreements with Lundbeck require
Lundbeck to indemnify the cost of defending this action and from any associated
damages or awards.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
(Dollar
amounts in thousands)
General
Total net
revenues increased for the quarter and six months ended September 30, 2009 due
to strong sales of Lexapro®, Namenda®, Bystolic® and our newest product
Savella®. Savella is a selective serotonin and norepinephrine dual
reuptake inhibitor for the management of fibromyalgia, which was launched in
April 2009. Net income decreased 23.5% for the quarter and 7.7% for
the six months ended September 30, 2009 primarily due to an upfront license fee
of $100,000 to Nycomed GmbH (or Nycomed) for Daxas®, and a $20,000 charge in
connection with a settlement agreement with Caraco Pharmaceutical Laboratories,
Ltd. (or Caraco). These charges were offset by the receipt of an
upfront licensing payment of $40,000 from AstraZeneca UK Limited (or
AstraZeneca) for ceftaroline. During last year’s six months ended
September 30, we recorded a one-time charge of $44,100 to selling, general and
administrative expense as a result of terminating our co-promotion agreement
with Daiichi Sankyo (or Sankyo) for Azor®.
In July
2009, we along with our licensing partner H. Lundbeck A/S (or Lundbeck) entered
into a settlement agreement with Caraco regarding patent infringement disputes
relating to Lexapro. Pursuant to the settlement, we and Lundbeck will
provide licenses to Caraco for any patents related to Lexapro with respect to
the marketing of Caraco's generic version of the product as of the date any
third party generic that has properly received final approval from the FDA
enters the market, other than an authorized generic or the first filer with
Hatch-Waxman related exclusivity. In addition, Caraco will take over
the commercialization and sale of several products from Forest's Inwood business
in consideration for royalties on net sales of those products and Caraco’s
parent Sun Pharma will license to Lundbeck on a worldwide basis certain patent
applications related to the synthesis of escitalopram and
citalopram. In connection with the settlement, we incurred a $20,000
charge during the quarter ended September 30, 2009 which was recorded to
selling, general and administrative expense. We and Lundbeck
reimbursed certain of Caraco's legal costs in connection with these patent
litigations.
In August
2009, we entered into a license agreement with Nycomed to develop and
commercialize Daxas (roflumilast) in the United States. Daxas is a
proprietary selective phosphodiesterase 4 (PDE4) enzyme inhibitor for oral
administration developed by Nycomed for the treatment of chronic obstructive
pulmonary disease (COPD). Under the terms of the agreement, we made
an upfront payment to Nycomed of $100,000 which was recorded to research and
development expense. We may be obligated to make payments to Nycomed
for future development and sales milestones, and royalties on Daxas
sales. We may also be responsible for certain development expenses
incurred prior to FDA approval.
We also
entered into a license agreement with AstraZeneca in August 2009, pursuant to
which AstraZeneca will co-develop and commercialize ceftaroline worldwide,
excluding the United States, Canada and Japan. Ceftaroline is our
late stage, next generation, broad-spectrum, hospital-based injectable
cephalosporin being investigated for the treatment of complicated skin and skin
structure infections (cSSSI) and community acquired bacterial pneumonia
(CABP). Under the terms of the agreement, we received an upfront
payment of $40,000 which was recorded to other income. AstraZeneca
may be obligated to pay us milestones and royalties based on future sales of
ceftaroline.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
Financial Condition and
Liquidity
Net
current assets increased by $488,150 from March 31, 2009. Cash and
cash equivalents and marketable securities increased from ongoing
operations. Of our total cash and cash equivalents and marketable
securities position at September 30, 2009, 23%, or about $820,000, was domiciled
domestically with the remainder held by our international
subsidiaries. We currently invest funds in variable rate demand notes
that have major bank liquidity agreements, municipal bonds and notes, commercial
paper including money market instruments, auction rate securities and bank
floating rate notes. These investments are subject to general credit,
liquidity and market risks and have been affected by the global credit
crisis. Accumulated unrealized losses decreased by $46,392 to $23,861
on investments of $1,859,280 as compared with $70,253 in unrealized losses on
investments of $1,691,810 at March 31, 2009. We have recorded
unrealized losses on certain of these investments to other comprehensive
income. We believe these unrealized losses to be temporary in nature.
We do not have the intent to sell our investments and it is more likely than not
that we will not have to sell the investments before the recovery of our cost
basis. Trade accounts receivable increased due to higher sales of our
principal branded products. Raw materials and finished goods
inventory increased in order to support continued demand for our
products. We believe that current inventory levels are adequate to
support the growth of our ongoing business. 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. Other current liabilities increased due to
normal operating activities.
Property,
plant and equipment before accumulated depreciation increased from March 31,
2009 as we continued to make technology investments to expand our principal
operating systems to enhance supply chain and salesforce
applications.
Management
believes that current cash levels, coupled with funds to be generated by ongoing
operations, will continue to provide adequate liquidity to facilitate potential
acquisitions of products, payment of achieved milestones and capital
investments.
Results of
Operations
Net sales
for the three and six-month periods ended September 30, 2009 increased 4.0% and
5.0%, respectively, from the same periods last year to $962,714 and $1,910,956,
primarily due to strong sales of Lexapro, Namenda, Bystolic and our newest
product Savella.
Lexapro,
which is indicated for the treatment of depression in adults and adolescents and
generalized anxiety disorder in adults, and is our most significant product, had
sales of $566,015 and $1,131,470 for the quarter and six months respectively, a
decrease of approximately 3.1% from the same periods last year, due to a modest
decline in market share. Lexapro sales decreased $17,881 and $35,523
as compared with last year, of which $46,407 and $85,134 was due to volume
decreases offset by $28,526 and $49,611 related to price
increases. During fiscal 2007, Caraco filed an Abbreviated New Drug
Application (or ANDA) with a Paragraph IV Certification for a generic equivalent
to Lexapro. We along with our licensing partner H. Lundbeck A/S filed
a lawsuit in the U.S. District Court for the Eastern District of Michigan
against Caraco for patent infringement. In July 2009, we and Lundbeck
entered into a settlement agreement with Caraco and Sun Pharma as discussed
above. Lexapro’s patent is set to expire in March 2012.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
Sales of
Namenda, our N-methyl-D-aspartate (NMDA) receptor antagonist for the treatment
of moderate and severe Alzheimer's disease grew 11.9% and 15.0% for the
current quarter and six months, respectively, to $275,268 and $534,518. This
represents an increase of $29,207 and $69,839 as compared with the same periods last
year, of which $14,230 and $38,361 was due to volume and
$14,977 and $31,478 was due to
price. During the third quarter of fiscal 2008, we received
notification from several generic manufacturers that they filed ANDAs with
Paragraph IV Certifications to obtain approval to market generic equivalents of
Namenda. In January 2008, we along with our licensing partner Merz
Pharma GmbH & Co. KgaA commenced patent infringement litigation against
these generic manufacturers. See “Part II, Item 1. Legal
Proceedings”, for a discussion of certain settlements that have been reached in
this litigation. Namenda’s patent is set to expire in April
2015.
Sales of
Bystolic (nebivolol hydrochloride), our beta-blocker indicated for the treatment
of hypertension, launched in January 2008, achieved sales of $40,666 and
$78,331 for the three and six-month periods, respectively, as compared to
$14,163 and $18,537 for
the same periods last year. Sales of Savella, a selective
serotonin and norepinephrine dual reuptake inhibitor (SNRI) for the management
of fibromyalgia launched in April 2009, achieved sales of $10,230 and $19,839
for the current quarter and six months ended September 30, 2009. The
remainder of the net sales change for the periods presented was due principally
to volume and price fluctuations of our older and non-promoted product
lines.
Contract
revenue for the three and six months ended September 30, 2009 was $50,590 and
$98,299, respectively, compared to $47,210 and $101,363 in the same periods last
year primarily due to co-promotion income from our co-marketing agreement with
Sankyo for Benicar. Forest had been co-promoting Benicar, indicated
for the treatment of hypertension, since May 2002. Pursuant to the
agreement with Sankyo, active co-promotion of Benicar ended in the first quarter
of fiscal 2009 and we now receive a gradually reducing residual royalty through
March 2014. We are no longer incurring any salesforce expenses for
this product.
Other
income for the current quarter and six months increased primarily due to a
$40,000 upfront license payment from AstraZeneca. Interest income for
the three and six-month periods decreased over the same periods last year
primarily due to lower average rates of return offset by higher levels of
invested funds.
Cost of
sales as a percentage of net sales was 23.0% and 22.9% for the three and
six-month periods of the current year as compared with 22.1% for the same
periods last year.
Selling,
general and administrative expense decreased $1,337 and $32,484 for the three
and six-month periods ended September 30, 2009 as compared to the same periods
last year. The current quarter includes a one-time charge of $20,000
in connection with a settlement agreement with Caraco regarding patent
infringement disputes relating to Lexapro. In the June 2008 quarter
we recorded a one-time charge of $44,100 relating to the termination of the Azor
co-promotion agreement. The September 2008 quarter includes a $25,000
charge in connection with a settlement of all claims against all defendants in a
securities litigation pending against the Company and certain of our
officers. Excluding these one-time charges from all periods, selling,
general and administrative expense increased slightly due primarily to launch
activities for Savella.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
Research
and development expense increased $116,722 and $151,736 in the three and
six-month periods ended September 30, 2009. The current quarter
includes an upfront license fee of $100,000 to Nycomed for
Daxas. Excluding this upfront payment, research and development
expense increased 11.4% and 20.0% for the three and six-month periods,
respectively.
Research
and development expense also reflects the following:
|
|
·
|
In
October 2008, we entered into a collaboration agreement with Phenomix
Corporation (or Phenomix) to co-develop and co-promote
dutogliptin. Dutogliptin is Phenomix’ proprietary orally
administered small molecule DPP-4 inhibitor currently in Phase III
clinical development for Type II diabetes. We expect to have
top-line results for the first Phase III trial during the first half of
calendar 2010 and we recently initiated additional Phase III trials for
dutogliptin.
|
|
|
·
|
In
December 2008, we entered into an agreement with Pierre Fabre to develop
and commercialize F2695 in the United States and Canada for the treatment
of depression. F2695 is a proprietary selective norepinephrine
and serotonin reuptake inhibitor that is being developed for the treatment
of depression and other central nervous system disorders. We
recently initiated Phase III studies for
F2695.
|
|
|
·
|
In
connection with our acquisition of Cerexa, Inc. in January 2007, we
acquired worldwide development and marketing rights (excluding Japan) to
ceftaroline, a next generation, broad-spectrum, hospital-based injectable
cephalosporin antibiotic with activity against gram-positive bacteria such
as methicillin resistant Staphylococcus aureus and gram-negative
bacteria. In June 2008, we reported positive results from two
Phase III studies of ceftaroline for complicated skin and skin structure
infections and in June 2009, we reported positive results from two Phase
III studies for community-acquired bacterial pneumonia. The
data from these two indications will serve as the basis of our New Drug
Application which we expect to file around the end of calendar
2009.
|
|
|
·
|
In
April 2006, we entered into an agreement with Laboratorios Almirall, S.A.
(or Almirall) for the U.S. rights to aclidinium, a novel long-acting
muscarinic antagonist which is being developed as an inhaled therapy for
the treatment of chronic obstructive pulmonary disease
(COPD). In September 2008 we received positive results from two
Phase III studies assessing the safety and efficacy of aclidinium in
moderate to severe COPD. In both trials, once-daily aclidinium
showed a statistically significant difference versus placebo in the
primary endpoint of trough FEV1, a measure of pulmonary function that is
decreased in patients with moderate to severe COPD. After
consultation with the FDA, we and Almirall have determined an alternative
development pathway forward and have commenced the first additional Phase
III study to establish the safety and efficacy of aclidinium at a higher
and more frequent dosing regimen. The positive outcome from a
recently completed short-term Phase II study comparing aclidinium BID
(twice daily) with placebo and tiotropium supports this
decision. We and Almirall also plan to initiate additional
Phase III studies with this dosing regimen later this year. We
expect to report top-line results from the Phase II trial and the first
Phase III study with the new dosing regimen during the first quarter of
calendar 2010 and anticipate filing an NDA for aclidinium in late 2011 or
early 2012. We and Almirall are also pursuing the development
of a fixed-dose combination of aclidinium and the beta-agonist formoterol,
which is currently in Phase II
testing.
|
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
|
|
·
|
During
the September 2007 quarter, we entered into a partnership with Ironwood
Pharmaceuticals, Inc. to co-develop and co-market the compound linaclotide
in North America. Linaclotide is currently being investigated for the
treatment of constipation-predominant irritable bowel syndrome (IBS-C) and
chronic constipation (CC). Based on positive results of Phase
II(b) randomized, double-blind, placebo-controlled studies assessing the
safety and efficacy of linaclotide in patients with CC and IBS-C, we have
initiated a comprehensive Phase III clinical program to evaluate
linaclotide’s safety and efficacy in patients with either IBS-C or
CC. We recently reported positive top-line data for the two
Phase III trials in CC. The IBS-C trials commenced in July 2009
and we expect to report top-line data in the second half of calendar
2010.
|
|
|
·
|
During
the third quarter of fiscal 2005, we entered into an agreement with Gedeon
Richter Ltd. (or Richter) for the North American rights to cariprazine and
related compounds, being developed as an atypical antipsychotic for the
treatment of schizophrenia, bipolar mania and other psychiatric
conditions. In October 2009, we and Richter received positive
top-line results from a Phase II(b) dose-ranging study in schizophrenia
patients. This study was performed in order to better determine
an optimal dose range to take into the planned Phase III
program. Based on these results and a previously reported
positive Phase II trial in bipolar mania disorder, we also expect to
initiate Phase III mania disorder studies in early 2010 and the
schizophrenia Phase III program shortly thereafter. In
addition, we have recently commenced Phase II proof of concept studies in
bipolar depression and as add-on treatment for Major Depressive
Disorder.
|
|
|
·
|
Regarding
Bystolic (nebivolol hydrochloride), we recently filed an sNDA for a
congestive heart failure indication based on a single large Phase III
study. We anticipate an action date from the FDA in the first
quarter of 2010.
|
|
|
·
|
During
the third quarter of fiscal 2006, we entered into an agreement with
Richter for the North American rights to radiprodil (RGH-896), a compound
that targets the NR2B receptor being developed for the treatment of
chronic pain and other CNS conditions. We have commenced a
Phase II dose-ranging study of radiprodil in patients with diabetic
peripheral neuropathic pain, with results expected in the second half of
calendar 2010.
|
Among
other research and development projects we continue to support are mGLUR1/5, a
series of novel compounds that target group 1 metabotropic glutamate receptors
and NXL104, a novel intravenous beta-lactamase inhibitor being developed in
combination with ceftaroline. 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 26.7% and 23.5% for the three and six-month periods ended
September 30, 2009, as compared to 22.5% and 22.6% for the same periods last
year. The increase was primarily due to the upfront license payment to
Nycomed, a settlement agreement with Caraco and various tax matters partially
offset by the effect of the license agreement with
AstraZeneca. Effective tax rates may be affected by ongoing tax
audits. See Note 11 to the Condensed Consolidated Financial
Statements.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
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.
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 generally accepted
accounting principles 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 and certain contingencies. Forest 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 effect of any
adjustments when necessary. Certain of these risks, uncertainties and
assumptions are discussed further under the section entitled “Forward Looking
Statements.”
Revenue
Recognition
Revenues
are recorded in the period the merchandise is shipped. As is typical
in the pharmaceutical industry, gross product sales are subject to a variety of
deductions, primarily representing rebates and discounts to government agencies,
wholesalers and managed care organizations. These deductions
represent estimates of the related liabilities and, as such, judgment is
required when estimating the impact of these sales deductions on gross sales for
a reporting period. Historically, our adjustments for actual future
settlements have not been material, and have resulted in either a net increase
or a net decrease to net income. If estimates are not representative
of actual settlement, results could be materially
affected. Provisions for estimated sales allowances, returns, rebates
and other pricing adjustments are accrued at the time revenues are recognized as
a direct reduction of such revenue.
The
accruals are estimated based on available information, including third party
data, regarding the portion of sales on which rebates and discounts can be
earned, adjusted as appropriate for specific known events and the prevailing
contractual discount rate. Provisions are reflected either as a
direct reduction to accounts receivable or, to the extent that they are due to
entities other than customers, as accrued expenses. Adjustments to
estimates are recorded when customer credits are issued or payments are made to
third parties.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
The
sensitivity of estimates can vary by program and type of
customer. However, estimates associated with Medicaid and contract
rebates are most at risk for adjustment because of the extensive time delay
between the recording of the accrual and its ultimate settlement, an interval
that can range up to one year. Because of this time lag, in any given
quarter, adjustments to actual may incorporate revisions of prior
quarters.
Provisions
for Medicaid and contract rebates during a period are recorded based upon the
actual historical experience ratio of rebates paid and actual prescriptions
written. The experience ratio is applied to the period’s sales to
determine the rebate accrual and related expense. This experience
ratio is evaluated regularly to ensure that the historical trends are as current
as practicable. As appropriate, we will adjust the ratio to more
closely match the current experience or expected future
experience. In assessing this ratio, we consider current contract
terms, such as the effect of changes in formulary status, discount rate and
utilization trends. Periodically, the accrual is adjusted based upon
actual payments made for rebates. If the ratio is not indicative of
future experience, results could be affected. Rebate accruals for
Medicaid were $26,941 at September 30, 2009 and $36,394 at September 30,
2008. Commercial discounts and other rebate accruals were $173,955 at
September 30, 2009 and $150,319 at September 30, 2008. These and
other rebate accruals are established in the period the related revenue was
recognized, resulting in a reduction to sales and the establishment of a
liability, which is included in accrued expenses.
The
following table summarizes the activity for the six-month period in the accounts
related to accrued rebates, sales returns and discounts (In thousands):
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
277,894 |
|
|
$ |
229,681 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for rebates
|
|
|
272,150 |
|
|
|
247,957 |
|
|
Settlements
|
|
|
( 285,827 |
) |
|
|
( 233,276 |
) |
|
|
|
|
( 13,677 |
) |
|
|
14,681 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for returns
|
|
|
13,430 |
|
|
|
13,720 |
|
|
Settlements
|
|
|
( 12,981 |
) |
|
|
( 11,904 |
) |
|
|
|
|
449 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for chargebacks and discounts
|
|
|
174,496 |
|
|
|
151,700 |
|
|
Settlements
|
|
|
( 171,965 |
) |
|
|
( 153,747 |
) |
|
|
|
|
2,531 |
|
|
|
( 2,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
267,197 |
|
|
$ |
244,131 |
|
Deductions
for chargebacks (primarily discounts to group purchasing organizations and
federal government agencies) closely approximate actual as these deductions are
settled generally within 2-3 weeks of incurring the liability.
FOREST
LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS (Continued)
(Dollar
amounts in thousands)
Forest's
policy relating to the supply of inventory at wholesalers is to maintain
stocking levels of up to three weeks and to keep monthly levels consistent from
year to year, based on patterns of utilization. We have historically
closely monitored wholesale customer stocking levels by purchasing information
directly from customers and by obtaining other third party
information. Unusual or unexpected variations in buying patterns or
utilizations are investigated.
Sales
incentives are generally given in connection with a new product
launch. These sales incentives are recorded as a reduction of
revenues and are based on terms fixed at the time goods are
shipped. New product launches may result in expected temporary
increases in wholesaler inventories, which as described above, are closely
monitored and historically have not resulted in increased product
returns.
Forward Looking
Statements
Except
for the historical information contained herein, the Management Discussion and
other portions of this Form 10-Q contain forward looking statements that involve
a number of risks and uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products, the impact of
competitive products and pricing, the timely development and launch of new
products, changes in laws and regulations affecting the healthcare industry, and
the risk factors listed from time to time in our filings with the SEC, including
the Annual Report on Form 10-K for the fiscal year ended March 31,
2009.
In the
normal course of business, operations may be exposed to fluctuations in currency
values and interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. Because we had no
debt and only minimal foreign currency transactions, there was no material
impact on earnings due to fluctuations in interest and currency exchange
rates.
As of the
end of the period covered by this report, the Company conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over
financial reporting during the Company's most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Forest is
party to certain legal proceedings described in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2009 (or the 2009 10-K) and our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009.
As
previously disclosed, the United States Attorney’s Office for the District of
Massachusetts (USAO) is investigating various potential violations of civil and
criminal laws in connection with our marketing of Celexa and Lexapro, as well as
in connection with our manufacturing and marketing of Levothroid. In
respect of these matters, we recorded a reserve of $170 million during fiscal
2009. In May 2009, Forest reached an agreement in principle with the
USAO and the Civil Division of the U.S. Department of Justice (DOJ) to settle
civil claims arising from these investigations, including (a) claims on behalf
of the U.S. government asserted in the two qui tam lawsuits previously
disclosed and (b) related claims by states who are members of the National
Medicaid Fraud Control Unit, which has been working with the USAO and the
DOJ. The amount of the settlement subject to the agreement in
principle falls within the $170 million reserve in respect of these matters
recorded in fiscal 2009. Consummation of the agreement in principle
is subject to the negotiation and finalization of appropriate implementing
agreements, including civil settlement agreements and a corporate integrity
agreement. The negotiation of these agreements is ongoing, and until
they are finalized, there can be no assurance that a negotiated resolution of
these matters can be achieved or that any such resolution will not require
payments in excess of the expense recorded in fiscal 2009. In
addition, the agreement in principle discussed above does not resolve the
government’s ongoing investigation into potential criminal law violations
related to Celexa, Lexapro and Levothroid. We are continuing to
cooperate with this investigation and to discuss these issues with the
government.
With
respect to the litigation brought by our licensing partner Merz and us against
several companies who had notified us that they have filed ANDA’s with the FDA
seeking to obtain approval to market generic versions of Namenda, we and Merz
have entered into settlement agreements with Amneal Pharmaceuticals, LLC, Apotex
Inc., Cobalt Laboratories, Inc., Sun India Pharmaceutical Industries, Ltd., Teva
Pharmaceuticals USA, Inc., Upsher-Smith Laboratories, Inc., Wockhardt Limited,
and related companies and subsidiaries thereof in such patent infringement
litigation captioned Forest
Laboratories, Inc. et al. v. Cobalt Laboratories, Inc. et al. and pending
in the U.S. District Court for the District of Delaware. These
settlement agreements do not settle Forest and Merz’s patent infringement
litigation against Dr. Reddy’s Laboratories, Inc., Lupin Pharmaceuticals, Inc.,
Mylan Pharmaceuticals Inc., and related companies and subsidiaries thereof, that
is pending in the District of Delaware, or Forest and Merz’s patent infringement
litigation against Orchid Chemicals & Pharmaceuticals Ltd. and Orgenus
Pharma, Inc. that is pending in the U.S. District Court for the District of New
Jersey. A trial in the Delaware litigation is currently scheduled for
April 2010. No trial has been scheduled in the New Jersey
litigation.
Under the
terms of the settlement agreements reached, and subject to review of the
settlement terms by the U.S. Federal Trade Commission:
(1)
Forest and Merz will provide licenses to each of Amneal, Cobalt, Sun, Teva,
Upsher-Smith, and Wockhardt that will permit these companies to launch their
generic versions of Namenda as of the date that is the later of (a) three
calendar months prior to the expiration of the ‘703 patent, including any
extensions and/or pediatric exclusivities or (b) the date each company receives
final FDA approval of its ANDA, or earlier in certain
circumstances.
(2)
Forest and Merz will provide licenses to Apotex that will permit Apotex to
launch its generic version of Namenda as of the date that is the later of (a)
the expiration of the ‘703 patent, including any extensions and/or pediatric
exclusivity or (b) the date that Apotex receives final approval from the FDA of
its ANDA, or earlier in certain circumstances.
Forest
and Merz also agreed to reimburse certain of Amneal’s, Cobalt’s, Sun’s, Teva’s,
Upsher-Smith’s and Wockhardt’s legal costs in connection with the patent
litigation.
On
October 15, 2009, in the case captioned Infosint S.A. v. H. Lundbeck A/S et al.
and described in the 2009 10-K, a jury in the U.S. District Court for the
Southern District of New York reached a verdict finding that a claim of
Infosint’s manufacturing process patent is valid and infringed by Forest’s
importation and sale in the United States of certain “citalopram products,” and
to the extent infringement was found, that our licensing partner H. Lundbeck A/S
induced any such infringement. As part of this verdict, the jury
awarded Infosint $15 million in damages. Judge Lewis A. Kaplan
entered judgment on October 21, 2009 in accordance with the jury’s
verdict. Equitable defenses that may eliminate any damages award have
yet to be heard by the district court. Further, we plan to file
post-trial motions in the district court and appeal the case to the U.S. Court
of Appeals for the Federal Circuit, if necessary. We also continue to
believe that our license agreements with Lundbeck require Lundbeck to indemnify
the cost of defending this action and from any associated damages or
awards.
There
have been no material changes with respect to the risk factors disclosed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
In May
2006 our Board of Directors (or the Board) authorized a share repurchase program
(or the 2007 Repurchase Program) for up to 25 million shares of our common
stock. On August 13, 2007 the Board authorized an additional 10
million shares to be available for repurchase. No shares were
repurchased during the quarter ended September 30, 2009. As of
November 6, 2009, 5.7 million shares were available for repurchase under the
2007 Repurchase Program.
Item
4. Submission of Matters to a
Vote of Security Holders
(a) The
Company held its Annual Meeting of Stockholders on August 10,
2009.
(c) At
the annual meeting, holders of the Company's Common Stock voted for the election
of eight members of the Company's Board of Directors to serve until the next
annual meeting and until their successors are duly elected and
qualified. Holders of the Company's Common Stock voted for the
approval on an advisory basis of the Company’s executive compensation program
and for the ratification of BDO Seidman, LLP to serve as the Company's
independent registered public accounting firm for the fiscal year ending March
31, 2010.
At the
meeting, the following votes for and against, as well as the number of
abstentions and broker non-votes were recorded for each matter as set forth
below:
|
|
Matter
|
For
|
Against
|
Abstain
|
Broker
non-votes
|
|
|
Election
of Directors:
|
|
|
|
|
|
|
Howard
Solomon
|
245,825,529
|
17,537,645
|
187,837
|
|
|
|
Lawrence
S. Olanoff, M.D., Ph.D.
|
254,424,680
|
8,975,776
|
150,555
|
|
|
|
Nesli
Basgoz, M.D.
|
257,481,485
|
5,721,101
|
348,425
|
|
|
|
William
J. Candee, III
|
253,505,287
|
9,804,670
|
241,054
|
|
|
|
George
S. Cohan
|
253,503,685
|
9,794,898
|
252,428
|
|
|
|
Dan
L. Goldwasser
|
253,823,367
|
9,400,287
|
327,357
|
|
|
|
Kenneth
E. Goodman
|
248,391,460
|
14,941,622
|
217,929
|
|
|
|
Lester
B. Salans, M.D.
|
255,612,412
|
7,650,256
|
288,343
|
|
|
|
|
|
|
|
|
|
|
Executive
Compensation Plan Advisory Vote
|
252,954,761
|
5,620,972
|
4,975,278
|
|
|
|
|
|
|
|
|
|
|
Ratification
of Independent Registered Public Accounting Firm
|
259,913,869
|
3,434,978
|
202,164
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
|
|
|
Exhibit
10.1
|
Settlement
Agreement among Forest Laboratories, Inc., H. Lundbeck A/S, Caraco
Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd.
dated July 10, 2009
|
|
|
Exhibit
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
Exhibit
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
Exhibit
32.1
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
Exhibit
32.2
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
101.INS
|
XBRL
Instance Document**
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document**
|
|
|
101.PRE
|
XBRL
Taxonomy Presentation Linkbase Document**
|
|
|
101.CAL
|
XBRL
Taxonomy Calculation Linkbase Document**
|
|
|
101.LAB
|
XBRL
Taxonomy Label Linkbase Document**
|
|
|
|
**Attached
as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 are the following materials, formatted in eXtensible
Business Reporting Language ("XBRL"): (i)
Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated
Statements of Income, (iii) Condensed Consolidated Statements of
Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows
and (v) the Notes to Consolidated Financial
Statements.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November
9, 2009
Forest Laboratories,
Inc.
(Registrant)
/s/ Howard
Solomon
Howard
Solomon
Chief
Executive Officer
/s/ Francis I. Perier,
Jr.
Francis
I. Perier, Jr.
Senior
Vice President - Finance and
Chief
Financial Officer