WASHINGTON (Reuters) - Shares of Allergan Inc AGN.N fell 12 percent on Monday after U.S. regulators issued draft guidance that would enable generic versions of the company's dry eye drug Restasis to come to market more quickly.
In a move that surprised investors, the U.S. Food and Drug Administration proposed allowing companies to apply for marketing approval of generic versions of Restasis based on laboratory tests, not on human clinical trials.
The FDA said in its proposed guidance that conducting a study in humans to test whether the drugs are essentially equivalent would not be feasible or reliable due to the "modest efficacy" of Restasis.
Analysts said the draft guidance, if adopted following a 60-day period of public comment, makes the arrival of a generic version of Restasis much more likely. The patent on Restasis expires in May 2014.
"Today's draft guidance suggests the FDA is conceptually open to the idea of granting approval to a generic without running a study," said Chris Schott, an analyst at J.P. Morgan in a research note. "We see today's update from the FDA as introducing incremental risk to one of Allergan's key franchises."
Allergan expects Restasis, which was approved in the United States in 2002, to generate sales of $850-$890 million in 2013, or as much as 15 percent of its total sales. The product, also known as cyclosporine ophthalmic emulsion, is designed to improve the eye's natural ability to produce tears.
Allergan said in a statement it believes the FDA's proposed testing method "cannot predict clinical safety and efficacy, and thus cannot be used to establish bioequivalence."
The company said it will provide this feedback to the FDA during the public comment period and added that it is reviewing all its potential options, including filing a Citizen's Petition "to ensure that the appropriate scientific considerations are evaluated."
Even if the guidance is adopted, however, some analysts say the likelihood of a generic version of Restasis being introduced immediately following the expiration of its patent to be low, in part due to the drug's complex manufacturing process.
"We believe that the exact timing of such an event is uncertain and, at this time, see a low probability of generic competition immediately following the May 2014 patent expiration," said Larry Biegelsen, an analyst at Wells Fargo Securities, in a research note.
Biegelsen expects sales of Restasis to rise to more than $1 billion beginning in 2015.
The FDA also offered generic companies the option of conducting a human clinical trial, but said if they choose that route they should first submit the trial's protocol to the agency for review.
Allergan's shares closed down 11.6 percent at $81.99.
(Reporting by Toni Clarke in Washington; Additional reporting by Ransdell Pierson in New York)