This Company is Quickly Approaching the Patent Cliff

Just when you thought you knew it all, drug manufacturer Forest Laboratories (NYS: FRX) managed to squeeze blood out of a turnip again yesterday.

With patent expirations looming large, Forest Labs delivered 1% year-over-year sales growth on its blockbuster depression drug Lexapro and 6% sales growth on Namenda, its Alzheimer's treatment, over the year-ago period. The company also launched three news drugs last year, Teflaro to prevent infections, Daliresp for the treatment of lung disease, and Viibryd also for depression, which cumulatively accounted for 3% of Forest's third-quarter sales.

Aside from Forest Labs' better-than-expected quarterly profit of $1.04 and the company bumping its fiscal 2011 forecast higher by $0.05 over its previous guidance, there are a lot of unanswered questions about this pipeline.

As I alluded to earlier (and back in September), Forest is faced with the stark reality that it's going to lose patent exclusivity on Lexapro this year and Namenda in 2015. Lexapro accounted for $593 million of Forest Labs' $1.21 billion in revenue in the third quarter, with Namenda accounting for another $340 million. Or, to put in an even-easier-to-understand figure, 77% of Forest Labs' sales will be at risk from generic competitors within three years. Not to mention that the company's costs shot up by 39% as Forest has been forced to spend voraciously to support the launch of its three new drugs.

One reason I'm not convinced Forest Labs is in as good a shape as its current stock price would indicate relates to the ability of generic drug makers to pounce on freshly exposed drugs. Teva Pharmaceutical (NAS: TEVA) is simply waiting in the wings to pounce on Lexapro and countless other Big Pharma drugs falling off patent in 2012. In 2015, Forest will provide licenses to 10 generic-drug manufacturers, including Teva and Dr. Reddy's Laboratories (NYS: RDY) , to begin selling their versions of Namenda.

Another reason I'm skeptical about Forest's growth has to do with its newest drugs. While hopes are high for Viibryd, the anti-depression drug that Forest purchased when it paid up for Clinical Data, it's going to face overlapping competition from Lexapro, the soon-to-be-marketed Lexapro generics, Eli Lilly's (NYS: LLY) Cymbalta, and Pfizer's (NYS: PFE) Zoloft. Even Teflaro, which many pundits see poised for success, is going to face stiff competition within the next few years.

Forest Labs is faced with the reality that its pipeline is in serious trouble and it's highly unlikely that its three new launches will repair the damage that generic drugs are set to inflict beginning this year. I continue to maintain my CAPScall of underperform on Forest Labs and anticipate the drugmaker is in for a rough couple of years.

What's your take on Forest Laboratories? Share your thoughts in the comments section below and consider adding Forest Laboratories to your free and personalized Watchlist so you can keep track of the latest news about the company.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. Since he's afraid of heights, you often won't find him near cliffs. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical, Pfizer, and Dr. Reddy's Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has no expiration when it comes to transparency.

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