Investopedia: Forest Labs Has Wood To Chop

Everything old is new again. It seems like Forest Labs (NYSE:FRX) is perpetually beset by worries about its future: Will the company be able to navigate the next patent cliff and will the company continue to find attractive licensing deals to keep its growth engine running? Even though the company has pretty much always been able to find favorable answers to the questions, Wall Street never seems willing to give Forest all that much benefit of the doubt. 

The Quarter That Was  Forest Labs delivered a mixed, though generally positive, fiscal third quarter. Revenue grew about 6% and essentially matched analyst expectations, as product revenue rose almost 7%. The company's largest drug, Lexapro, saw almost 1% sales growth, while Namenda sales rose 13%. Bystolic continues to have a solid launch (sales up 43% this quarter), while Savella is likewise enjoying a decent debut.

Forest certainly made hay with its expense control. Gross margin was basically flat this quarter, but the company pulled in its SG&A spending by a rather surprising amount. Operating income thus jumped more than 43% - helped not only by tighter expense control, but also some one-time costs in the year-ago period.

The Road Ahead   

The ever-present concern about Forest Labs is whether the company can continue to recharge its product portfolio with lucrative new drugs. Forest does virtually no in-house de novo research of its own, so its future is all about acquiring, developing and exploiting other companies' compounds. It has been a very successful model throughout Forest's history; Forest does just as well (and in most cases, better) as Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Novartis (NYSE:NVS) in converting revenue to free cash flow. 

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