Forest Labs Not Down -- Yet

Forest Labs (NYSE: FRX) announced better-than-expected earnings growth yesterday, causing a minor bump in the stock price. But it'll need a lot more than one solid quarter to get its stock growing again.

The company's revenue for the third quarter increased 12% year over year, on strong performances from its two biggest sellers. Depression treatment Lexapro and Alzheimer's drug Namenda were up 11% and 26%, respectively. Some of that growth came from wholesalers stocking up at the end of the year, but it's impressive nonetheless.

Forest's bottom line looked even better. Net income rose 21% on both an increase in interest income and a decrease in spending on research and development. However, that decrease has me a little worried.

Forest is in a race against the patent clock. The market exclusivity on Lexapro and Namenda, which accounted for a whopping 89% of product sales revenue this quarter, will expire in 2012 and 2013, respectively -- assuming Teva Pharmaceuticals (Nasdaq: TEVA) doesn't win any further appeals on its Lexapro patent challenge. That may seem like a long time from now for shortsighted investors, but it's a blink of an eye in drug-development time. Investors should be looking for more R&D spending as Forest tries to boost its pipeline.

The pipeline does contain a handful of phase 2 and phase 3 drugs that the company expects could represent several billion dollars of sales, so there's a chance of replacing the inevitable sales decline. Data is expected from quite a few trials throughout 2008, so investors won't have to wait long to know whether revenue backup is on its way.

Alternately, Forest could try to boost its pipeline through in-licensing, as it did with the newly approved beta blocker that it's marketing for Mylan (NYSE: MYL). It remains to be seen whether Forest can compete in the crowded beta-blocker market, which includes 18 other competitors from much larger companies such as AstraZeneca (NYSE: AZN) and GlaxoSmithKline (NYSE: GSK).

I fear that while Forest looks a lot like a big pharmaceutical company, with its pending patent expirations, it lacks the might to get over that oncoming hump. Investors rating Forest in our Motley Fool CAPS service must think that it'll be able to sneak under the radar; they've given it a solid four-star rating. Is this quarter a fresh start for Forest, or the beginning of the end? Have your say and give Forest a rating.