Pink eye drug AzaSite, a major component of Inspire Pharmaceutical's (Nasdaq: ISPH) portfolio and one of the key products sought by Merck (NYSE: MRK) in its $430 million acquisition of the North Carolina company, could soon be facing generic competition.

Inspire said in a regulatory filing that generics company Sandoz notified the company that it has submitted an application to the U.S. Food and Drug Administration seeking approval to market a generic version of AzaSite. Sandoz said in the letter that patents issued to InSite Vision and Pfizer (NYSE: PFE) are either invalid or will not be infringed by the product Sandoz plans to market.

Inspire in 2007 was granted a license to InSite's patents, as well as a sublicense to Pfizer's patents. InSite and Pfizer each have primary responsibility for enforcing rights of their respective patents. But the agreement did give Inspire "step-in rights" to start legal action against an infringer if InSite and Pfizer don't do so first.

The companies have 45 days from receipt of the April 15 letter to start a patent infringement lawsuit against Sandoz. A suit would result in an automatic stay of FDA approval of Sandoz's generic for up to 30 months, or until a final court decision.

"If required, Inspire intends to vigorously enforce its intellectual property rights, pursuant to the step-in rights, relating to AzaSite," the company said in the filing.

Inspire has reached an agreement to be acquired by Merck for $430 million. When the deal was announced on April 5, Merck said that Inspire's eye products would add to its own ophthalmology business.

AzaSite was developed to treat bacterial conjunctivitis, also known as pink eye. The drug targets the single-agent ocular antibiotic market, which was estimated to be about $576 million in the United States. In 2010, prescriptions for all branded products in this category totaled 15 million, according to data compiled from IMS Health.

AzaSite generated $42.7 million in revenue in 2010, a 22 percent increase over 2009 sales that the company attributed to a higher number of prescriptions and greater patient usage.

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