What happened

Shares of Bausch Health Companies (NYSE:BHC) were sinking by 8.6% as of 2:51 p.m. EDT on Tuesday. The decline came after Bausch Health announced that it had filed a lawsuit against Novartis (NYSE:NVS) subsidiary Sandoz, related to alleged infringement of patents for diarrhea drug Xifaxan.

So what

Bausch Health's lawsuit was a reaction to Sandoz's filing of an Abbreviated New Drug Application (ANDA), in hopes of receiving approval to market a generic version of Xifaxan 550 mg tablets. Bausch Health maintains that this ANDA filing infringes on 14 patents for Xifaxan.

Hand holding a pen over a document reading Notice of a Lawsuit

Image source: Getty Images.

The need for litigation highlighted the risk for Bausch Health. Xifaxan is a primary source of revenue growth for the company, with sales for the drug jumping 21% year over year in the second quarter. It currently contributes over 16% of Bausch Health's total revenue. If a generic version of Xifaxan reached the market, it would seriously threaten Bausch Health's growth prospects.

Bausch Health stated that it "remains confident in the strength of the Xifaxan patents and will continue to vigorously defend its intellectual property." The company has 22 patents in total for the drug, which cover composition of matter and use.

Now what

Patent litigation comes with the territory when investing in pharmaceutical stocks. In many cases, though, the disagreements are settled before the matter makes it to court.

For example, last year Bausch Health reached a settlement in a similar lawsuit with Actavis Laboratories, which is owned by Teva Pharmaceutical. Under the deal, Actavis will be able to market a generic version of Xifaxan 550 mg tablets in the U.S. beginning in 2028. If Bausch Health can strike a deal along these lines with Sandoz, today's drop should only be a temporary issue.