Lilly Gains on Zyprexa Patent Win

Updated from April 14

Shares of Eli Lilly ( LLY) rose early Friday after a federal judge late Thursday ruled in favor of the drugmaker in a patent challenge by three companies to its top-selling drug Zyprexa.

The judge said the three challengers failed to prove the patent was invalid or unenforceable.

The stock was up $1.63, or 2.8%, to $58.75 in premarket trading.

"We have always been very confident that our patents are valid and enforceable and today's court ruling sends a clear message on the strength of those patents," said Sidney Taurel, Lilly's chairman, president and chief executive.

Most analysts predicted Lilly would win the case, protecting the U.S. patent on an antipsychotic drug that produced $4.4 billion in worldwide sales last year, including $2.4 billion in the U.S.

Zyprexa accounted for 32% of the company's total sales last year, and analysts say it contributes to an even greater percentage of operating profit.

A Lilly loss would have crushed the stock and hurt annual earnings for the rest of the decade, analysts have said during the long patent battle. Some also have viewed the case as a litmus test for the enforceability of other pharmaceutical patents.

On Thursday, nervous investors traded more than 15.8 million shares, or about five times the average daily trade for the past three months.

The key Zyprexa patent was challenged by three companies -- Ivax ( IVX), Teva Pharmaceutical Industries ( TEVA) and Dr. Reddy's Laboratories ( RDY). They argued that the patent, which Lilly says remains in force until 2011, was invalid.

In premarket trading, shares of Ivax lost 73 cents, or 4%, to $17.75; shares of Teva were up 2 cents at $32.15; while shares of Dr. Reddy closed at $17.05 Thursday.

Lilly had been fighting these patent challenges since 2001. Subsequently, the lawsuits were consolidated before a federal judge in Indianapolis, Lilly's home town. As an indication of the case's complexity, the actual trial was held in January and February of last year.

Zyprexa has been under pressure in the U.S. because of competition from other antipsychotic medications. For example, a recent report by A.G. Edwards noted that Zyprexa's U.S. prescriptions dropped 22% between the first quarter of 2004 and the first quarter of 2005. By contrast, prescriptions for several brand-name competitors in the class of drugs known as atypical antipsychotics rose during this period.

Competitors include Geodon from Pfizer ( PFE), Risperdal from Johnson & Johnson ( JNJ), Seroquel from AstraZeneca ( AZN) and Abilify from Bristol-Myers Squibb ( BMY). Zyprexa remains the third-biggest drug in terms of total U.S. prescriptions, says the A.G. Edwards report, citing data from IMS Health.

"We expect international revenues of Zyprexa to continue to somewhat offset the U.S. sales decline," says Albert L. Rauch, of A.G. Edwards, in an April 14 report to clients, before the federal court's decision, which affects only U.S. patent protection. He has a buy rating on Lilly. He doesn't own shares; his firm doesn't have an investment banking relationship.

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