Will Forest Labs Earn or Burn Tomorrow?

2013 is here, and earnings season has already started ramping up. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Forest Labs . The pharmaceutical stock has suffered a big drop in revenue because of the loss of a blockbuster drug's patent protection, but it's also moving forward on new drugs to replace it. Let's take an early look at what's been happening with Forest Labs over the past quarter and what we're likely to see in its quarterly report on Tuesday morning.

Stats on Forest Labs

Source: Yahoo! Finance.

Will Forest Labs' earnings hold up?
Analysts aren't too enthusiastic about Forest's prospects for the quarter, expecting a loss that will reverse a substantial year-ago gain. But despite the gloom, Forest Labs' shareholders have nevertheless had a reasonably good quarter, with the stock rising more than 4% since early October.

The big problem for Forest is the fact that it lost patent protection on its blockbuster anti-depressant Lexapro last March. Over the past several quarters, Forest has seen revenue plunge due to the loss, as generic competition from Teva Pharmaceutical has pushed down prices substantially.

But as with other pharma companies dealing with patent expirations, Forest's hope is that new drugs will replace lost Lexapro sales. In August, Forest and partner Ironwood Pharmaceuticals got FDA approval for their Linzess treatment for irritable bowel syndrome. After an FDA review of marketing materials, the two companies said that Linzess became available on Dec. 17, so Forest's report should include at least some minimal information about the launch and whether it will succeed in putting a dent into over-the-counter sales of products like Procter & Gamble's Metamucil.

One interesting angle that Forest may be asked about is whether it plans to try to merge with another company. Last fall, AstraZeneca was seen as a possible purchaser of the company, and with both companies having to deal with patent-cliff issues, combining R&D forces is a trend we've seen throughout the industry.

Expectations for Forest are quite low, having gotten pushed down substantially over the past few months. If Forest nevertheless misses those lower estimates, expect to see more wrangling from activist investor Carl Icahn, who has a substantial stake in the company and has been pushing for change for a long time. That could eventually prove to be good news for investors, but it won't necessarily provide for a comfortable ride along the way.

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The article Will Forest Labs Earn or Burn Tomorrow? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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