Like a woodsman with a big ax, generic competition continues to cut away at Forest Labs' (NYSE:FRX) profitability. And it'll still be a while before Forest investors can look for the kind of growth to which they've become accustomed over the history of this company.

Revenue fell by about 9% this quarter. Yes, that's a bit worse than expected, but not by a truly significant degree. Sales in the antidepressant franchise tumbled by 13%, as growth in Lexapro couldn't offset Celexa revenue lost to generic competition. But Namenda, a drug for the treatment of Alzheimer's disease, continued to be something of a bright spot, with sales growing more than 23%.

While revenue shrinks, the company continues to run and build its business. Sales, general, and administrative expenses rose 3% in the quarter, and research and development was 22% higher. In turn, there was a 25% drop in net income, which, offset by share repurchases, translated into a 19% drop in earnings per share.

Based on the emails I've received, I'm sensing that there's a bit of confusion about what Forest is and how it operates, so I'll devote a little time here to this subject. In a very real sense, Forest is a specialist in pharmaceutical development and marketing. It looks for companies -- often smaller ones overseas -- that can't, or don't want to, finish clinical development of a drug and/or market it themselves. Forest then in-licenses these compounds, finishes the clinical development, and markets them in North America in exchange for paying certain upfront fees, milestones, and royalties.

The advantage is that Forest doesn't have to pay for the infrastructure of a basic science research effort -- it takes the fruits of other people's basic science and carries it forward. The bad news is that it has virtually no internal pipeline of its own -- it has to in-license compounds to replenish the pipeline. Historically, though, that bad news hasn't been all that bad: There are always smaller pharmaceuticals and biotechs that lack the infrastructure (or willingness) to bring their own products to market.

Forest now has a fair number of interesting products in the pipeline, but with the exception of the recently licensed drug nebivolol, they won't likely be hitting the market until 2007 and beyond. Of course, Forest will also begin a period of easier year-over-year comparisons (the anniversary of falling Celexa sales), and that might ease the perceptions around this stock. Competitors such as Lilly (NYSE:LLY) and GlaxoSmithKline (NYSE:GSK) will remain formidable, and the patent challenge on Lexapro from Ivax (AMEX:IVX) is a valid worry, but investors shouldn't count Forest out just yet.

For more Foolishness on Forest:

Glaxo is a Motley Fool Income Investor recommendation. Interested in stocks that pay you back for your investment? See which dividend-payers Mathew Emmert likes by taking a free, no-risk trial subscription to the Income Investornewsletter service.

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