There is one thing that scares investors in pharmaceuticals more than anything else: the threat of generic competition. So it was no surprise to see shares of Endo Pharmaceuticals (NASDAQ:ENDP) down more than 13% last week on news that the Food and Drug Administration had issued recommendations that will make it easier for generic drugs to gain approval to compete with Endo's lead product, Lidoderm.

Lidoderm is a patch used to treat pain associated with shingles, and in Endo's third-quarter results released Thursday, it accounted for nearly 59% of its sales. The news from the FDA doesn't necessarily mean that generics will enter the market any time sooner to compete against Lidoderm; its patents don't start to run out until 2009 at the earliest. It does mean that competitors will have an easier and less costly time getting generics to the market when the patents expire.

Endo's results didn't bring much good news, either. Ironically, Endo's own generic product was responsible for reduced revenue for the quarter. Sales of its generic oxycodone product were down $30 million to $19 million, causing overall revenues to fall $26 million, or 11%, to $217 million. By the end of 2006, because a patent disagreement with the maker of branded oxycodone has been resolved, Endo will cease all sales of its generic version of the drug. Due to this revenue shortfall, earnings were down 33% to $45 million and earnings per share came in at $0.33.

Things will get better for Endo. Part of this lack of revenue growth for the quarter has been because one of its Lidoderm wholesalers changed its stocking patterns. Lidoderm sales were flat for the quarter because this decreased inventory, but future sales should reflect underlying demand. Lidoderm sales are expected to grow nearly 12% in the fourth quarter, and at least 26% to $530 million to $540 million for the year.

Endo estimates that it will have adjusted earnings per share of $1.53 to $1.58 for 2006, and while this will be down from the $1.73 the company made last year on an adjusted basis, shares of Endo are only trading at around 19 times this reduced level. Investors looking for value in the pharmaceutical sector should take note.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.