Shares of drug developer Allergan Inc. sank Monday on the first full trading day after the Food and Drug Administration released a draft of guidance that could provide an easier-than-expected path to approval for a generic challenger to its eye treatment Restasis.
THE SPARK: The FDA said Friday afternoon that a generic version of Restasis could be accepted for approval without a requirement for testing in humans, essentially if the drug's composition is similar enough to Restasis.
Allergan said it plans to tell the FDA that proposals that don't involve testing in humans cannot predict the safety and effectiveness of the drug.
THE BIG PICTURE: Sales of brand-name drugs often plummet after cheaper generic competition enters the market.
Restasis helps increase the eye's ability to produce tears to treat chronic dry eye. Allergan expects sales of between $850 million and $890 million this year from the drug, making it one of the company's biggest sellers.
Aside from eye care drugs, Allergan also sells breast implants, Botox anti-wrinkle injections and other cosmetic treatments.
THE ANALYSIS: Stifel analyst Annabel Samimy said in a research note she does not expect the approval of a generic equivalent for at least another two or three years. But the introduction of cheaper generic competition by early 2017 could lead to a 30 percent sales hit for the drug.
"We note that the longer-term implications of the recommended generic development path remain unclear, but the possibility of generic entry on Restasis has caused pressure to the stock," Samimy wrote in a Friday research note.
Citi analyst Liav Abraham lowered her rating on Allergan shares to "Neutral" from "Buy" and dropped her price target to $95 from $124.
SHARE ACTION: Allergan shares dropped more than 3 percent Friday in heavy trading. The stock then sank 9.4 percent, or $8.70, to $84 Monday afternoon, while the Standard & Poor's 500 index fell about 1 percent.
That wiped out the stock's gains so far this year after closing 2012 at $91.73. The share price had topped $116 as recently as April.