What are the two words, other than "Carl Icahn," that are bound to provoke pointed commentary and even a lawsuit from

Mylan Laboratories

(MYL) - Get Report

?

What are the two words that prompt the generic-drug industry's trade association to rip the federal government, saying Washington has allowed big drugmakers to "devalue" a law covering generic products?

The two words are "authorized generics." In recent years, the practice of making special deals to exploit a loophole in federal law has pitted Big Pharma vs. generic companies -- but also some generic companies vs. their peers.

Giants such as

Johnson & Johnson

(JNJ) - Get Report

and

Bristol-Myers Squibb

(BMY) - Get Report

have used this tactic to partially reduce the financial impact of patent expirations on their products.

Generic companies say this behavior deprives them of financial rewards for filing successful patent challenges. In the long term, the Generic Pharmaceutical Association says, this "could result in generic companies undertaking fewer patent challenges, which could result in higher drug costs."

Authorized generics, analysts say, are just one reason why the industry has become

brutally competitive. "Although we generally agree that authorized generics take advantage of a loophole ... the practice doesn't appear to break any laws," says a recent report from Prudential Equity Group. "At this point we don't see that a legislative solution is likely, and the Federal Trade Commission doesn't seem to perceive a problem either."

The Food and Drug Administration also doesn't offer much sympathy. Last year, when it rejected two complaints about the practice, it said authorized generics lead to greater competition and lower drug prices. It called the tactic "pro-competitive."

That doesn't sit well with Mylan, whose chief executive, Robert J. Coury, can be counted on during almost every quarterly earnings teleconference with analysts to decry authorized generics as a practice that misleads consumers and is something that Congress never intended.

Twelve months ago, Mylan sued

Procter & Gamble

(PG) - Get Report

and

Watson Pharmaceuticals

(WPI)

in a California court over the authorized generics deal involving P&G's urinary infection drug Macrobid. The suit is still pending.

The Generic Pharmaceutical Association also argues that authorized generics distort the Medicaid system. Due to the way the federal government calculates payments for Medicaid, brand name companies get a "windfall" rebate for authorized generics "to the detriment of the federal and state government programs," the association alleges.

The Law and the Loophole

According to the Hatch-Waxman Act, a generic-drug maker can get a 180-day exclusive marketing right to a brand-name product going off patent if it is the first to file an application with the FDA. In the land of narrow profit margins, 180 days is a big plus for any generic company before its peers swarm in with their own copycat products.

But brand-name drug producers make deals by licensing, or authorizing, a patent on their drug so a competitor of the first-to-file firm can sell a copycat version in return for royalty payments to the brand-name drug company.

Conceding it will lose sales quickly from a proprietary drug, the brand-name producer figures it can protect at least some extra revenue through the licensing deal. And using a slightly different strategy, the brand-name drug company also will try to offset the impact of generic competition by selling a generic version of its own brand-name drug.

"In both cases, the traditional first-to-file generic competitor is hurt by the huge dent in revenue it normally expects during its 180-day exclusivity period," says the March 3 Prudential report, whose lead author is analyst David Woodburn. "The courts have continually sided with the FDA and the brand companies that the FDA cannot prohibit the marketing of authorized generics during this critical period."

Prudential looked at 16 authorized generics via licensing deals, noting that Bristol-Myers Squibb and

GlaxoSmithKline

(GSK) - Get Report

are the biggest exploiters of this loophole. Each has made four deals; Johnson & Johnson has made three.

The firm also identified six cases of big companies

selling generic versions of their own proprietary products.

Pfizer

(PFE) - Get Report

has done this three times, most recently with a cheaper copy of its epilepsy drug Neurontin, while it fights patent battles with several generic companies.

Forest Laboratories

(FRX)

has done this twice, most recently when its antidepressant Celexa lost its U.S. patent protection.

Despite its trade group's criticism of authorized generics, the industry lacks a united front. Watson Pharmaceuticals, for example, has signed six authorized generics deals;

Par Pharmaceutical

(PRX)

is next with three, according to Prudential.

"We intend to pursue agreements to distribute generic alternatives to third parties' brand products, sometimes known as 'authorized generics,'" Watson says in a recent 10-K filing with the

Securities and Exchange Commission.

"The FDA and courts ... have ruled that there is no prohibition in

federal law against distributing authorized generic versions of a brand drug," the company says. But if the practice is curtailed or halted, "it could have a material adverse effect on our results of operations, financial condition and cash flows."