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Nerves Frayed at Forest

June 30 was the end of Forest's first quarter, and the Wall Street consensus calls for a profit of 51 cents a share on revenue of $785.9 million, according to Thomson First Call. The estimate excludes items. For the same period last year, Forest earned 52 cents a share, excluding special items, on revenue of $711.8 million.

Forest's revenue and profit for the 2006 fiscal year declined from the previous year. One major reason was the dramatic erosion in sales of the antidepressant Celexa, a Lexapro predecessor. Forest knew Celexa would lose its patent, whereas the company is fighting Teva to keep Lexapro's U.S. patent for at least another four years. Forest licenses Lexapro from the Danish company H. Lundbeck, which has joined Forest in suing Teva.

Several brand-name drug companies have decided to settle with generic challengers, thus preventing an all-or-nothing outcome, but in this case, Forest is following the Pfizer and Lilly strategy of fighting in court.

Forest did settle a Lexapro patent challenge in October with the Australian generic-drug company Alphapharm. Analysts say the Teva litigation presents a greater problem than the Alphapharm dispute.

Pipeline Prospects

The possibility for a settlement with Teva "remains in the cards, particularly given the devastating downside should Forest Laboratories lose, though visibility here is low," says Elliott Wilbur of CIBC World Markets in a June 22 research report. Wilbur, who doesn't own shares, has a sector-perform rating on Forest. His firm says it seeks to do business with companies covered in its research reports.

"We strongly believe Forest will win the case," says Marc Goodman of Credit Suisse. He recently initiated coverage of Forest with an outperform rating. He tempered his enthusiasm by saying the risk-return on the stock "is not favorable" because a win could boost shares by 15% to 20%, while a loss could deflate the stock by 50%.

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