Updated from 9:33 a.m. EDT

Bristol-Myers Squibb ( BMY) reported a better-than-expected second quarter and reaffirmed its full-year earnings projections, but the drugmaker's stock was hit by word that the federal government is conducting a criminal investigation.

The Justice Department is looking into a proposed settlement Bristol-Myers has reached for the anticoagulant Plavix, the company's biggest drug. By early afternoon, the stock was down $1.89, or 7.3%, to $24.10 on trading volume of 19.3 million shares, roughly three times the daily average.

CEO Peter Dolan told analysts and investors Thursday that his company learned about the investigation the previous day. He said the company is cooperating, but he added that he doesn't have any specific information about the reason for the probe, which is being conducted by the Justice Department's antitrust division.

The settlement under scrutiny was hammered out in March, when Bristol-Myers and its partner Sanofi-Aventis ( SNY) made a deal with Canadian generic-drug company Apotex to settle a patent fight concerning Plavix. Last year, Plavix accounted for $3.82 billion, or 20%, of Bristol-Myers' revenue. The drug produced $2.45 billion in sales for Sanofi-Aventis in 2005.

The Food and Drug Administration said in January that Apotex could begin selling generic versions of Plavix, but the generic firm decided against marketing the drug until a court acted or a settlement was made.

A pending trial was suspended when the sides reached the agreement. The original settlement said Sanofi-Aventis, which holds the Plavix patents, would grant Apotex a license to make and sell generic Plavix starting in September 2011. The date was recently amended to June 1, 2011. Apotex could put a product on the market earlier if another company persuades a court to declare the Plavix patent invalid.

Key Driver

Bristol-Myers' reliance on Plavix was again demonstrated in the second quarter as the drug's sales rose 18% from a year earlier to $1.15 billion.

For the quarter, the company earned 35 cents a share, excluding one-time items, beating the Wall Street consensus estimate by 3 cents. Revenue from continuing operations for the three months ended June 30 was $4.87 billion, slightly better than the $4.76 billion forecast of analysts polled by Thomson First Call.

On a GAAP basis, the company earned $667 million, or 34 cents a share. For the same period last year, the company earned $1 billion, or 50 cents a share, on sales of $4.89 billion.

Bristol-Myers and Sanofi-Aventis are suing another generic company in a similar case, alleging patent infringement in the U.S. They also are defending Plavix challenges "in less significant markets for the product," Bristol-Myers said.

The Federal Trade Commission is reviewing the Apotex deal. State attorneys general are also examining the agreement, which must be endorsed by a federal judge who was scheduled to preside over the patent litigation.

If the Apotex deal is called off and generic Plavix enters the market before the 2011 patent expiration date, Bristol-Myers and Sanofi-Aventis stand to suffer serious damage to their revenue, profit and share prices.

Bristol-Myers warned investors that there's a "significant risk" the agreement might be blocked by regulators. If that happens, Dolan said Bristol-Myers Squibb and Sanofi-Aventis would return to court to defend the patent.

Bristol-Myers also reaffirmed its full-year EPS guidance from continuing operations of $1.15 to $1.25, excluding one-time items. Analysts were forecasting $1.19. The company said sales declines from existing drugs due to patent expirations should be "more or less offset" by rising sales of key products and new offerings.

Closing Loopholes?

Aside from Plavix, the best-performers included the HIV drug Reyataz, whose second-quarter sales rose 29% from last year to $236 million, and the Avapro and Avalide blood-pressure drugs, whose sales gained 9% to $280 million. For the antipsychotic Abilify, sales rose 35% to $324 million. Sales of the cancer treatment Erbitux jumped 76% to $172 million.

Bristol-Myers collaborates with ImClone Systems ( IMCL) to market Erbitux and with Japan's Otsuka Pharmaceuticals to promote Abilify.

Generic competition chewed into sales of several products, most notably the cholesterol treatment Pravachol, whose revenue plunged 48% to $323 million. Last year, Pravachol was the company's second-biggest drug.

The Apotex agreement is just one issue that has prompted legislators and regulators to complain that brand-name companies are finding loopholes in generic-drug laws at the expense of consumers.

Last month, four U.S. senators introduced legislation they say would stop the practice of brand-name companies paying generic firms to refrain from entering the market.

Separately, senators introduced a bill to prevent the practice of authorized generics, a situation in which a brand-name company licenses its product to a maker of generics. The FTC has started examining this practice.

Also, last week, Jon Leibowitz, an FTC commissioner, told a Senate committee that instances in which brand-name companies are, in effect, paying generic-drug companies to stay out of the market are on the rise.

"In the current fiscal year, we have seen significantly more settlements with payments and restriction of entry," he said. "Seven of 10 agreements between brand-name and generic companies included a payment from the brand-name to the generic company and an agreement to defer generic entry."

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