Forest Labs stock: Buy or sell?

Forest (FRX) had a major patent expire in March; another expires in 2015. That stands out because 78% of its sales come from these two drugs. The company’s new drugs are early in their life cycle and won’t make up for the loss of Lexapro [an antidepressant] or Namenda [an Alzheimer’s drug]. Some say its drug for irritable- bowel syndrome will save them in 2016. But you won’t immediately go from zero to $1 billion in sales. Forest won’t generate anywhere near its current cash flow for some time, which means there’ll be a period where they’ll lose four-fifths of their sales. Also, with every product approval, Forest adds more salespeople. That’s a very big cost base, one that a merger could resolve. But I haven’t seen any company legitimately stepping up.

Bull: Irina Rivkind, Cantor Fitzgerald*

We see two short-term drivers: The FDA will rule this year on an irritable-bowel-syndrome treatment called Linaclotide and a pulmonary disease inhaler, Aclidinium. If approved, they could boost the stock nicely. Linaclotide could have sales of over $740 million by fiscal 2018. With last year’s purchase of Clinical Data, Forest also gained the antidepressant Viibryd, which could hit over $800 million in sales. The new drugs should offset some of the losses from Lexapro and Namenda and help the company diversify. This could appeal to a potential buyer that can reduce costs by folding Forest’s products into its own sales team. Then there’s Carl Icahn, who holds 10% of FRX shares. His involvement creates a halo around the stock.

*Rivkind worked at Forest Labs from 2001 to 2006.

This story is from the June 11, 2012 issue of Fortune.