Forest Labs' Clear-Cut Woes

I love Eric Sevareid's semifamous line about how working with TV executives was like "being nibbled to death by ducks." Unfortunately, that doesn't transpose so well to the case of Forest Labs (NYSE:FRX), so I guess I'll say instead that Forest is being chewed on by beavers. It's been a tough ride lately for Forest shareholders, and while there is still some silver lining, it comes with a healthy dose of dark cloud.

Revenue dropped 16% in the third quarter, worse than the mean analyst guess; improved Lexapro and Namenda sales couldn't counteract generic competition's impact upon Celexa. Although Namenda sales were up 53%, its $124 million in revenue is still a modest part of the total. Lexapro, the main provider, saw sales up about 13% year over year, and basically flat sequentially.

With lower sales came lower margins, which led to a nasty drop in net income relative to last year. That said, earnings per share compared reasonably well to estimates.

The company has some substantial hurdles to clear -- without a lot of time to do so. First, Ivax's (AMEX:IVX) challenge to Lexapro's patent begins in December. With Lexapro making up almost two-thirds of current revenue, this is obviously an important trial for Forest. I've got to think that the company wants to at least try settling with Ivax. Such a deal could buy it time to replace the impending lost revenue.

Of course, that's assuming Ivax (or soon-to-be-acquirer TevaPharmaceuticals (NASDAQ:TEVA)) wants a settlement. It might listen if it likes the terms. But if it smells blood, it may move forward aggressively.

Whatever the outcome of the patent dispute, Forest absolutely needs to bring some product candidates into the pipeline. Fortunately, the company has a decent reputation for commercializing drugs and plenty of cash available for upfront licensing payments. Management said that it expects to add several new candidates in the coming months. Let's hope it does; bringing potential new revenue on board should be a high priority for this company.

Forest Labs will test shareholders' patience, and I could readily understand why some would rather wait for new product announcements before buying. That said, the Street seldom rewards the obvious; any gains from this stock will probably go to those brave enough to invest ahead of the news.

Further Forested Foolishness:

• Two Pharma Trees Fall
• A Clearing in the Forest?
• Does Forest Have the Blues?

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