Does This FDA Approval Mean Anything?

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It looks like tobacco companies aren't the only ones trying to profit from smokers.

Drugmaker Perrigo Pharmaceuticals  (Nasdaq: PRGO  ) gained FDA approval on Wednesday to market an over-the-counter smoking cessation drug comparable to GlaxoSmithKline's (NYSE: GSK  ) Nicorette mini lozenges. Perrigo's product will be available in retail stores before the end of 2012, and, even though the company's press release didn't reveal what the suggested retail price will be, it should be significantly cheaper than the branded option.

What did the market think?
Unfortunately, if you're looking at this stock from a short-term perspective, the approval of this mini lozenge won't translate into mega profits overnight. In fact, Perrigo's share price dipped slightly on Wednesday and rebounded by about half a percentage point yesterday.

The market largely ignored this FDA approval for a few reasons. First, this isn't a ground-breaking new discovery for the treatment of nicotine addiction -- it's a generic version of a product that's already on the market. The biotech stocks that typically soar on FDA approval news are working on drugs that either address unmet medical needs or have a huge potential market.

Take, for instance, Sarepta Therapeutics (Nasdaq: SRPT  ) . This stock spiked 180% in a single day last week after releasing positive data related to its developmental Duchenne muscular dystrophy drug eteplirsen. Patients taking eteplirsen showed significant progress in a Phase IIb clinical trial, and this drug has the potential to treat a disease that currently lacks a cure. Furthermore, while investors were hoping that the trial would be positive, the market was uncertain about the results leading up to this announcement. In Perrigo's case, however, the FDA approval of its smoking cessation generic was a foregone conclusion.

Second, the market size for this product is limited; Perrigo's press release noted that GlaxoSmithKline's Nicorette mini lozenges topped $30 million in retail sales last year. Even if Perrigo is able to capture 100% of this market, this would only comprise 1% of the company's net sales in fiscal 2012. This drop in the ocean won't be making huge waves for Perrigo.

Craving more profit?
From a short-term perspective, this new product won't move the needle for Perrigo's stock. From a long-term perspective, however, it's a completely different story.

Perrigo's strength as a generic drug manufacturer is the depth of its product portfolio. You can walk into virtually any pharmacy in the U.S. and find Perrigo's over-the-counter creams, pills, and syrups. It already makes a generic version of GlaxoSmithKline's Nicorette gum, and offering the mini lozenges simply extends the company's presence in the smoking cessation market.

As a long-term play, I like the fact that Perrigo is slowly expanding its offering through the addition of small products -- and the company's strategy seems to be working. Its stock is up almost 419% in the last five years.

PRGO Chart

PRGO data by YCharts

Perrigo's quarterly earnings are set to be released in early November, and those results will likely have an affect on its share price. The company missed expectations last quarter, and shareholders should be watching for how Perrigo's actual earnings correspond to estimates.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Max Macaluso, Ph.D., has no positions in the stocks mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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