Merck ( MRK) can't catch a break. Saddled with an anemic drug pipeline and having botched its Medco spinoff, the well-known pharma must also deal with the unclear patent status of one of its flagship products, Fosamax.

Fosamax, also known as alendronate sodium, was approved by the FDA in 1995 in daily dosages to treat bone thinning in osteoporosis patients. The drug has been a huge success, generating just over $2 billion in annual sales.

The problem is that because of a quirk in the patent language, generic drug companies such as Teva Pharmaceuticals ( TEVA) have argued that they should be allowed to develop and market a generic form of the pill.

Naturally, Merck disagrees. But a court decision on the Fosamax patent case could be handed down as early as September or October. A negative outcome for Merck could seriously hurt the company's earnings.

For what it's worth, Teva isn't a newbie to patent litigation. Its lawyers convinced a judge to dismiss six of Merck's patent claims last year. The company has also successfully challenged another drug giant, GlaxoSmithKline ( GSK), and its patent for both Nabumetone, an anti-inflammatory, and Augmentin, an antibiotic.

The stakes are huge for Merck. According to a recent report by Salomon Smith Barney analyst George Grofik, a Teva victory could cost Merck as much as 12% of its annual pharmaceutical sales, and reduce its 2004 EPS (consensus currently $3.79) by as much as 60 cents a share.

Bottom line: Teva's challenge to Merck warrants serious consideration.

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your feedback.

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