Competition is the name of the game in generic pharmaceuticals, where lookalike manufacturers lurk like vultures on the rim of patent protection, waiting to feast on the remains of big drug companies' former blockbusters.

Recently, the prey has been fighting back.

Citing the increasingly tough steps major drug companies have been taking to keep generic manufacturers away from their lunch,

Watson Pharmaceuticals

(WPI)

says it's de-emphasizing its generic drug business and will focus on developing its own treatments in coming years. The decision was greeted skeptically on Wall Street -- the company's shares got routed along with those of many of its peers.

It didn't help that Watson reported a loss of $58.6 million, or 55 cents a share, at the same time, compared with a loss of $67.5 million, or 66 cents a share, in the year-ago period. The company took a number of murky charges, including asset impairment and inventory writeoffs totaling $219 million.Watson's operating earnings were 35 cents per share, 44% below Wall Street's forecast for earnings of 62 cents per share.

"The generics industry has been under considerable pressure over the last few months due to increased competition and aggressive tactics by brand companies seeking to delay the introduction of generic products," said Allen Chao, chief executive of Watson Pharmaceuticals, in a statement.

Watson has been plummeting since the news, falling 39.5% to $28.54 Tuesday, when it was the biggest percentage loser in

New York Stock Exchange trading. Watson has fallen another 5.8% to $26.90 today.

Among its peers,

Mylan Laboratories

(MYL) - Get Report

fell 6% to $32.05 yesterday and is down another 3.3% today, while

Barr Laboratories

(BRL)

shed 8.25% to $62.49 yesterday and is down another 3.3% today.

Elan

(ELN)

declined 6.7% to $39.80 Tuesday, but is up 1.1% to $40.24 today. The stocks were among the most actively traded on the Big Board Tuesday.

"Competition from brand names is an issue a number of generic companies face right now," said Jason Fox, an analyst at H&R Block Financial Advisors. "Timing is a problem for these companies." The legal battle for approval of generic versions of

Bristol-Myers Squibb's

(BMY) - Get Report

diabetes drug Glucophage, for example, prevented Watson from selling it in the third quarter. Watson already sells a generic version of the company's BuSpar anxiety treatment.

In Bristol-Myers, Watson has one of the drug industry's sternest foes, a company that has repeatedly been at the forefront of legal and regulatory efforts to derail generic rivals. Bristol-Myers recently got a court to toss out decisions allowing for generic versions of its Taxol cancer treatment, and is trying to secure exclusivity on Glucophage extended to 2004 by invoking a right to label it for pediatric use.

Fox downgraded Watson Pharmaceuticals to accumulate from buy on Tuesday. "The company's projections going forward were drastically reduced from previous estimates," he said. "And whenever a company goes through a reorganization, there is a heightened degree of risk." Several other Wall Street firms downgraded the company as well, including Salomon Smith Barney, Buckingham Research, SunTrust Robinson Humphrey and SG Cowen.

"This could be an early indication of increased competition for generic drug businesses," said David Buck, an analyst at Buckingham Research. "But the other companies didn't have bad earnings."

Barr Laboratories, for example, reported strong fiscal first-quarter earnings in late October, as revenue soared on sales of a generic version of antidepressant Prozac. And Mylan Laboratories reported an increase in second-quarter earnings, boosted by sales of its version of BuSpar.

With large drugmakers increasingly reluctant to give up their patents, investors apparently see more risk than opportunity in these shares, at least for now.

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