Organized in 1956, Forest Laboratories Inc. (FRX) is a pharmaceutical corporation focused on the in-licensing drugs for development. Its products include those developed by it and those acquired from other pharmaceutical companies and integrated into its marketing and distribution systems. Forest and it subsidaries develop, manufacture and sell branded forms of ethical drug products, most of which are only available with written instructions from a physician. Forest emphasizes detailing to physicians of those branded ethical drugs that have the most potential for growth and benefit for patients. The company mainly sells its drugs in the U.S., but has a small international presence.

• Carl Icahn Stock Picks

• Carl Icahn Current Portfolio

• This Powerful Chart Made Peter Lynch 29% A Year For 13 Years

Forest also has well-established franchises in therapeutic areas of the central nervous, cardiovascular and respiratory systems, as well as R&D (research and development) programs addressing a great range of health conditions. Last fiscal year, the company posted total revenues of $3.1 billion, down 31.8%, mostly due to the loss exclusivity on the antidepressant Lexapro and the massive hole that left.

In spite of that, third quarter results were impressive with the company delivering earnings per share of $0.27, well above the year-ago loss of $0.21. The company has been making great strides building out its business to recover from Lexapro's loss, but it still is in the early beginning of it. To add up, in 2015 it will be losing Namenda's patent, its $1.6 billion-a-year Alzheimer's drug. Will it manage to make a full recovery before and after that event?

Outperform All the Way

Forest's new CEO, Brent Saunder, is determined to make Forest a nimbler and more streamlined organization and overcome whatever headwind may come its way. He has announced a strategic initiative, a share buyback program and a few accretive deals that should do nothing but boost the bottom line and help lessen the impact of the Nameda patent expiry, slow new product ramp and pipeline setbacks. Also, the new CEO has announced a cost-cutting initiative which will bring about savings of $500 million by fiscal 2016.

Partnerships and In-Licensing Deals

Forest has also one of the most respected sales forces in the pharmaceutical business, thus helping it attract new partners and in-licensing deals. Recently, it acquired Saphris, a treatment for schizophrenia and acute bipolar mania that makes $150 million annually in sales, which should help strengthen the company's nervous system (CNS) franchise. The acquisition of Aptalis should be a great boost for the firm as well. Through it, Forest will be able to strengthen its position in the gastrointestinal (GI) market in the U.S. and Canada and the cystic fibrosis (CF) market in Europe. All the acquired products complement existing products in Forest's portfolio. However, it is said that Forest's expansion into products outside of CNS may not be the best move, as it lacks significant experience and expertise. Truth to be told, besides CNS, the company has a strong presence in cardiovascular disease and metabolic disorders as well, and is expanding into other therapeutic areas not alone, but with the help of partners that should bring the extra help it needs to top others' experience and expertise.

Pipeline Deepening

Although multiple new drugs launches will weigh on expenses over the next few years, and that gaining approval for pipeline candidates is not easy given the regulatory environment, Forest has several candidates in different stages of development. Due to that, Forest's momentum is most likely to carry over into this year, partly also because of the slate of new CNS drugs. They include depression treatment Viibryd, which won approval in 2011 and produced $53 million in sales last quarter, 30 percent more than last year. Fetzima, another depression treatment, was green-lighed by the FDA last fall as well. This drug is similar to Eli Lilly (LLY)'s newly expired $5 billion a year Cymbalta, and thus its sales may help boost revenue this year.

Fear of Namenda's patent expiration is also fading as sales of Forest's newly launched, longer-lasting formulation of it once-daily extended-release (XR) jumped 228% last quarter. This prompted the decision to shelve the original formulation next August. Forest looks forward to convert 10 to 15 percent of Namenda users to the XR formulation within July 2014 and 20% to 30% in the following 18 to 24 months.

If the company manages to convert most of Namenda users to it, a significant portion of that market will remain protected when the patent finally expires. Also, sales of Forest's most recently launched compounds grew close to 60% year-over-year, suggesting here may be a significant opportunity for growth in the coming years.

The Numbers

Finally, Forest's strong balance sheet gives it significant capacity to keep expanding its pipeline through acquisitions and in-licensing deals. It is also one of its most appealing aspects, altogether with the mentioned aboved. Running with no debt and having a strong cash position, this company's financials are hard to resist. It seems so, as Actavis (ACT) recently highly overpaid to buy this company.

Forest is now trading at a high premium rate and its return on equity seem low but once it is fully recovered and the transition period is over, it is most likely to deliver. Gurus Carl Icahn (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Dodge & Cox, as well ass Ray Dalio (Trades, Portfolio) think so and have invested on this stock.

Disclosure: Damian Illia holds no position in any stocks mentioned.

This article first appeared on GuruFocus.