I don't understand your question. Why do you need quotes?
Your source string is this:
sourceString= "Lorem ipsum dolor sit amet.&newline&Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat.&newline&Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur.&newline&Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum."
You do
set targetString to replace(sourceString, "&newline&", newline)
And when you display targetString on the screen, there should be line breaks where needed.