Pretend you're the CEO of a drug company approaching the dreaded "patent cliff." Products yielding significant sales will soon face generic competition, but you don't know if your home-grown drugs can pick up the slack.

If you're the CEO of Pfizer (NYSE:PFE), you buy Wyeth. If you're the CEO of Forest Laboratories (NYSE:FRX), you have fewer, less dramatic choices even though your patent cliff looks more like a black hole.

Forest relies on two products for nearly 90% of its revenue -- the antidepressant Lexapro and the Alzheimer's disease drug Namenda. Lexapro brought in $566 million and Namenda $275 million in second-quarter revenue, for 58.8% and 28.6% of total sales.

Lexapro loses U.S. patent protection in 2012, while Namenda is covered until 2015. Given that those two are such a huge part of revenue, it really needs to get cracking.

Keeping to its strategy
Except, it actually has been. To a casual observer, Forest looks like it might feel pressure to make a big buy -- just like Pfizer did with Wyeth or like Merck (NYSE:MRK) is doing to Schering-Plough (NYSE:SGP).

However, Forest specializes in licensing products or collaborating with companies on marketing and development, and it shows no signs of changing its approach. (Lexapro came from Denmark's H. Lundbeck and Namenda from Germany's Merz.) Forest's newest drug, Savella, to treat fibromyalgia, was launched in April in conjunction with Cypress Bioscience (NASDAQ:CYPB) and Pierre Fabre.

Forest continues to cast a wide net. Among its major deals:

  • An agreement in August with Switzerland's Nycomed, enabling Forest to market the chronic obstructive pulmonary disease (COPD) drug Daxas in the U.S., pending regulatory approval.
  • A collaboration with AstraZeneca (NYSE:AZN) to co-develop and commercialize a Forest antibiotic outside the U.S., Canada, and Japan. Forest acquired the experimental drug via its 2007 purchase of a small, private biotech company. Forest plans to seek approval from the Food and Drug Administration by year-end.
  • In recent years, Forest has signed agreements with companies covering experimental treatments for diabetes, depression, irritable bowel syndrome, and schizophrenia.

Protecting its shares
Larry Olanoff, the chief operating officer, said Tuesday that a best-case scenario could produce "several billion dollars" in sales, or enough to replace the revenue when Lexapro and Namenda lose patent protection. He noted that some compounds may not be approved and some may not reach peak sales estimates, so the company will continue with its strategy.

Investors would argue that Forest needs these drugs as a treatment for its shares. If you stuck with Forest during a sustained growth period -- mid-April 1988 to mid-April 2004 -- your investment rose about 65-fold. If you kept the stock since then, you've been stuck.

During the past five years, Forest's shares have declined while trailing the S&P 500 index and the Amex Pharmaceutical Index, a group of 15 major drugmakers that includes Forest.

Investors can only hope that Forest's stock will respond to the company's strategy.

Should Pfizer have followed Forest's lead and made many smaller acquisitions or tried licensing? Fellow Fool Brian Orelli has so argued. What do you think? Let us know in the comments below.

Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.