Survival of the Forest

It's not all that often that you see a large publicly traded company go from "survive" mode to "thrive" mode in the mere span of a few months. Yet that may be just what's on tap for Forest Labs (NYSE:FRX). Though patent challenges to Lexapro are not fully resolved yet, developments there have been favorable, and the company is now looking toward FDA filings that may reignite this idea as a growth story.

For better or for worse, Forest is a pretty simple company to follow right now. Revenue was up 15% on a 12% rise in product sales, as the company's triumvirate of Lexapro, Namenda, and Benicar grew revenue by 10%, 32%, and 72%, respectively. Gross margin ticked up a bit, and operating profits were up about 13%, even though the company spent much more on R&D (big chunks of that in the form of license payments). For those who like to track such things, Lexapro was more than 60% of total revenue this quarter.

As I just said, this company may soon transition from mere survival to the pursuit of growth. I don't pretend to know whether Teva (NASDAQ:TEVA) will appeal its losing patent challenge on Lexapro, nor do I know whether Forest will prevail in a similar suit against CaracoPharmaceutical (NYSE:CPD). But one successful verdict in hand at least improves Forest's odds of maintaining exclusivity on Lexapro through 2012.

But simply keeping a hold on what you already have does not constitute growth. For Forest Labs, that will come in the form of new product launches, if and when the FDA gives the thumbs-up to new drugs like Faropenem (which has been filed with the FDA and has an action date of Oct. 20) and nebivolol. (Nebivolol is under FDA review for the treatment of hypertension, and the company hopes to file a separate NDA for congestive heart failure later this year.)

Forest is certainly a different kind of pharmaceutical company. Without in-house drug development efforts, it relies upon licensing agreements with smaller drug companies that lack marketing and distribution wherewithal. You could say that this makes the company less attractive to large drug suitors like Merck (NYSE:MRK) or Pfizer (NYSE:PFE), since there's no "franchise" here. Conversely, you could argue that it makes Forest even more attractive -- since it already has a suite of in-licensed drugs in the pipeline, without redundant R&D personnel to integrate or fire.

Either way, Forest Labs remains a stock worth watching. Stay tuned to see whether patent challengers to Lexapro move on to other targets, and whether the FDA gives the nod on new products that will be key to ongoing growth.

For more pharm-fresh Foolishness:

• The Diverging Fortunes of Forest and Teva
• Barr Labs and Pliva: Round 2
• Merck Goes on the Attack

Merck is an Income Investor selection, and Pfizer is an Inside Value pick. Whatever your investing style, the Fool has a newsletter for you.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).