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Pfizer Survives Key Patent Test

A U.K. court upholds the main Lipitor patent but rules against the company on another.

Updated from 11:12 a.m. EDT

A British court on Wednesday declared a split decision for


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cholesterol fighter Lipitor, upholding the drug's main patent but declaring another patent invalid.

Pfizer was challenged by India's

Ranbaxy Laboratories

, a generic drugmaker that has filed patent challenges against Lipitor in several countries, including the U.S.

Shares of Pfizer were up 51 cents, or 2.1%, to $24.81 in heavy trading, thanks to a decision that will have more of a psychological impact on investors than a financial impact on the New York-based drug company.

Analysts said Pfizer would have had to lose both patent challenges in order for Ranbaxy to have begun selling a copy of Lipitor, the world's best-selling prescription drug. Lipitor produced $10.9 billion in sales for Pfizer last year and accounted for 24% of corporate revenue.

Because British patent law is different from U.S. law, the split decision is unlikely to have any effect on the U.S. case. A U.S. federal court judge is expected to issue a ruling in late 2005 or early 2006.

The decision by the U.K.'s High Court of Justice upholding the key patent covering Lipitor until November 2011 "is an important victory not only for Pfizer but for all innovators pursuing high-risk medical discoveries," said Hank McKinnell, Pfizer's chairman and CEO, in a prepared statement.

Pfizer said it would appeal the adverse decision affecting another patent, due to expire in July 2010, covering an ingredient in Lipitor. Ranbaxy was joined by another generic company,

Arrow Generics

, in challenging the 2010 patent. Ranbaxy plans to appeal the decision on the main patent.

Writing before the decision was announced, Banc of America Securities analyst Chris Schott estimated that Lipitor produced sales of $500 million to $700 million in the U.K. Last year, Pfizer sold $4.2 billion worth of Lipitor in foreign markets and $6.6 billion in the U.S.

This year, the U.S. number should rise to $7.5 billion while foreign sales should increase to $4.7 billion, a recent report by Prudential Equity Group LLC estimates.

Ranbaxy has challenged Lipitor in several countries,

winning one battle in Austria in March. Pfizer has appealed. Austria is a very small market, and the Austria patent office ruling won't affect other countries.

The same two patents subject to the U.K. ruling are being challenged in the U.S. Schott says Pfizer has a "high likelihood" of winning at least the battle for the more important 2011 patent. If Pfizer loses both U.S. patents, the stock could drop by 20% to 25%, says Schott, who has a buy rating on Pfizer. He doesn't own shares, but his firm has an investment-banking relationship and was involved in a public offering.

Writing a research report just before the British patent decision, Prudential Equity Group's Tim Anderson says he consulted attorneys who believe Pfizer has a 65% chance of defeating a challenge to the 2011 patent in the U.S. and a 50% chance in the other patent fight. Because patent decisions are unpredictable and because the Lipitor stakes are so high, he says Pfizer should consider settling the case.

"Losing Lipitor does more than just strip out a hefty calculable chunk of earnings," says Anderson, who's neutral on Pfizer. "It would likely cause collateral damage elsewhere that would be harder to measure." His firm doesn't have an investment banking interest. His research report says Anderson, a member of his research team or a member of his household owns shares.

A defeat in the U.S. patent case would do much more than rattle Pfizer shareholders. "It is a stumbling block that mutes enthusiasm for the entire drug group ... with the premise being that if Pfizer can't protect its parents from generic challengers, nobody can," says Anderson.

Lipitor-like angst has afflicted other Big Pharma companies. Analysts following

Bristol-Myers Squibb

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routinely outline

worst-case scenarios if their anticoagulant drug Plavix loses a patent challenge in the U.S.

And Wall Street fretted for many months over a patent challenge to

Eli Lilly's

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schizophrenia drug Zyprexa, until a

federal judge sided with Lilly in mid-April. The challengers are appealing.