Mixed Foliage at Forest Labs

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Strong core drug sales continue to boost results at Forest Laboratories (NYSE: FRX). Problem is, the firm is dependent on a couple of blockbusters that will soon go off patent. Management is working overtime to reposition itself, but don't count on an easy transition.

Full-year results released this morning highlight Forest Labs' strategy. First, the company is endeavoring to develop other sources of revenue. Back in January it acquired privately held pharma firm Cerexa -- this transaction caused a reported loss for fiscal 2007 from a related in-process research and development (IPR&D) write off.

Management is also upping R&D spending going forward due to a "dramatically increased late-stage product pipeline." If clinical trials turn out favorably, the coming year could result in a major enhancement to the pipeline, which isn't seen as that strong in its current form. Additionally, during the conference call, the company cited a focus on other acquisitions and on licensing and co-promoting drugs as a means of replacing the upcoming patent hurdles.

For now, sales of the firm's core antidepressant drug, Lexapro, ended the year on another strong note -- growing 12% to top $2 billion for the first time. Namenda, a drug for treating certain forms of Alzheimer's disease, grew an impressive 30%. Collectively, Lexapro and Namenda accounted for 80% of total sales. These two drugs will leave a major hole in sales and earnings when they lose patent protection in the next four to five years.

Forest Labs' situation reminds me of Pfizer's (NYSE: PFE) current predicament, as it will soon lose Lipitor -- and a big chunk of sales -- to generic competition. I'm partial to Pfizer, as it has a lower valuation and stronger cash generation capabilities than Forest. It also pays a high dividend coupon, meaning investors are getting paid to wait and see if new products can replace expiring drugs.  

For more stable existing sales trends and respectable pipeline potential, Fools may want to look to European pharma firms such as GlaxoSmithKline (NYSE: GSK) and Novartis (NYSE: NVS). Here at home, Eli Lilly (NYSE: LLY) has held up well, and Merck's (NYSE: MRK) prospects have improved as of late. If Forest Labs is still of interest, be sure to keep close tabs on upcoming pipeline results.       

For related Foolishness:

• Companies You Should Buy Right Now
• The Best Drug Stock for 2007: Forest Laboratories
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Eli Lilly and GlaxoSmithKline are Income Investor recommendations, while Pfizer is an Inside Value selection. Try any of our Foolish newsletters free for 30 days.     

Fool contributor Ryan Fuhrmann is long shares of Pfizer but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned. The Fool has an ironclad disclosure policy.