A key theme of fourth-quarter earnings reports from major drug companies has been the challenge of generic competition, with the result being lower sales and lower profit for many global pharmaceutical stocks.

Eli Lilly (NYSE:LLY) is a prime example of this, reporting a decline of 12% in fourth-quarter revenue. This was mainly the result of Lilly losing patent protection for its most important product, the antidepressant Cymbalta, which has led to the introduction of a number of lower cost copies.

In addition, Eli Lilly could as soon as March lose patent protection for its bone-building drug Evista, with other product facing the same situation through 2014. So sales could be pinned back somewhat during the year.

However, generic competition did not seem to impact fourth-quarter results from Novartis (NYSE:NVS). It posted a 2% increase in quarterly net profit and actually benefited from positive surprises with regard to generic competition.

Unlike many of its peers, Novartis did not experience the level of competition from generics that it had expected. As such, sales increased by 3% from the fourth quarter of 2012.

That's not to say that Novartis avoided generic competition entirely, but it did get a little bit more breathing space in which to counter lower-cost copies.

Indeed, there were multiple key developments concerning Novartis' product pipeline during the fourth quarter, including regulatory approval for a pre-filled syringe for diabetic macular edema drug Lucentis in Europe and Australia, as well a positive recommendation in the U.K. and Germany for Jetrea, which is used in treating symptomatic vitreomacular adhesion and vitreomacular traction when associated with macular hole.

Novartis has also delivered multiple regulatory filings, which appears to further strengthen the company's position for 2014. Company guidance states that the top line is set to grow at low to mid single-digits, with the bottom line benefiting from improved efficiencies to grow at a slightly faster rate.

Meanwhile, sector peer Merck (NYSE:MRK) was able to increase earnings per share by 6% in the fourth quarter of 2013 from the year-ago period despite suffering from a significant amount of generic competition. Its top line fell by 4% in the quarter as drugs such as Singulair, Maxalt, and Temodar lost market exclusivity, although much of the decline was offset by strong sales growth for a number of other drugs, including Remicade and Simponi.

Clearly, Merck is adapting to increased challenges from generics, although it does have a relatively strong pipeline and is anticipating regulatory actions for a number of drugs in 2014, including Vorapaxar (for the reduction of atherothrombotic events) and Noxafil IV (for fungal infections). Although lower-cost generics hit sales growth during the quarter, Merck seemed better able to cope with the challenge than Eli Lilly.

Of course, Eli Lilly does have multiple drugs within its pipeline and recently submitted four new products for approval, so while challenges remain to key products, it appears the company can turn things around over the medium to long term.

While Novartis looks to be the best placed for 2014 in terms of how it coped with generic competition in 2013, Merck and Eli Lilly could yet surprise on the upside.

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