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Nerves Frayed at Forest

Forest Laboratories (FRX) is entering this quarterly earnings season with a dilemma common to its brand-name peers -- what to do about the threat of generic competition.

The difference is that the impact could be quite uncommon if Forest loses a patent fight for the antidepressant Lexapro, which accounted for $1.87 billion, or 63% of its corporate revenue, for the fiscal year ended March 31.

New York-based Forest is being challenged by Israel's Teva Pharmaceutical Industries (TEVA), which wants to break Lexapro's U.S. patent. A trial was held in March, and a judge's decision is expected this summer, perhaps even this month.

There's plenty of nervousness because Lexapro's impact on Forest is far greater than what, for example, the cholesterol drug Lipitor provides to Pfizer (PFE) or the antipsychotic Zyprexa contributes to Eli Lilly (LLY).

Shares of those two companies were rattled when generic-drug companies tried to overturn their U.S. patents, but Big Pharma investors rejoiced when Lilly won a court fight in April 2005 and Pfizer prevailed last December.

"We believe the overhang of the Lexapro decision will continue to cap the share price," says Robert Uhl of Friedman Billings & Ramsey in a recent research report. Like a majority of analysts, he is neutral on Forest. He doesn't own shares, but his firm says it seeks to do business with companies covered in research reports.

Going to Court

Forest's stock has bounced around from the mid-$30s to the high-$50s, but the net effect over the last 12 months has been basically no change in the shares. The stock closed at $38.56 Wednesday.

The quarter that ended June 30 won't reveal anything about the Lexapro litigation when the results are presented next week, but analysts will certainly ask Forest officials about another event that could affect the drug's sales. Pfizer's antidepressant Zoloft lost U.S. patent protection on June 30, and analysts want to assess the impact of generic versions, especially if managed-care companies persuade their customers to use cheaper products.

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