Bristol-Myers Squibb ( BMY) saw its shares sag Monday as a legal setback for the anticoagulant Plavix, the company's biggest drug, disheartened investors.

After the markets closed Friday, state attorneys general rejected a deal that Bristol-Myers and Plavix's developer, Sanofi-Aventis ( SNY), had made with a Canadian generic-drug maker, Apotex. The agreement would have halted patent litigation and protected Plavix against generic competition until mid-2011.

When the companies announced the decision, they didn't say what their next step would be, but they did express uncertainty about the future of the anticoagulant.

At this time, it isn't possible "to assess the outcome of the Plavix litigation, including the Apotex matter, or the timing of potential generic competition for Plavix," they said. " We intend to vigorously pursue enforcement of their patent rights in Plavix."

Many analysts expect Bristol-Myers and Sanofi-Aventis to reactivate their patent infringement suit against Apotex. The drug had the sixth-highest sales of any U.S. drug last year, according to IMS Health, which tracks pharmaceutical trends. Last year, Plavix contributed $3.8 billion, or 20%, of Bristol-Myers' revenue. For Sanofi-Aventis, it produced $2.45 billion in sales, or 7.4% of the total. Sanofi-Aventis ranks eighth in U.S. drug sales, and Bristol-Myers is 10th, according to IMS.

Shares of Bristol-Myers were off 35 cents, or 1.4%, to $24.12. Sanofi-Aventis, which licenses the U.S. Plavix rights to Bristol-Myers, was up 65 cents, or 1.4%, to $47.93.

Legal Wrangling

The Plavix problem accelerated in January when Apotex received permission from the Food and Drug Administration to begin selling generic Plavix. The brand-name drug companies previously had sued Apotex, claiming patent infringement, but they reached a settlement in March . They suspended their lawsuit, which was scheduled for trial in June, contingent on the deal being approved by the states and the Federal Trade Commission.

Although the FTC is still reviewing the agreement, the current Apotex deal, which was amended a few months ago , is dead because it needed approval by both the states and the FTC.

In a letter to the companies, the attorneys general didn't provide details on why they rejected the deal. The FTC has criticized a number of agreements in which the agency says generic companies are being paid to delay entering the marketplace.

As for the Apotex case, Sanofi-Aventis and Bristol-Myers each set aside $20 million in reserves during the first quarter. The companies said the deal enables them to pay Apotex "for certain short-dated inventories" of the Canadian company's generic Plavix.

Because of the attorneys general decision, the Plavix sellers could try to negotiate another deal with Apotex and run it by the FTC and the attorneys general, or they could resume their suit against Apotex.

Apotex could begin selling generic Plavix immediately, but it faces a dilemma: If it sells the generic product and later loses in court, it could be hit with big monetary damages. Fear of losing a patent case in court was the reason Apotex didn't start marketing the drug when the FDA gave it clearance in January.

Some Protection

Last week, Bristol-Myers and Sanofi-Aventis said they were the subject of a criminal investigation by the Justice Department relating to the Plavix deal, and the companies said they couldn't offer much insight into the outcome of the probe.

"We reiterate our belief that the probability of the newly launched Department of Justice criminal investigation compromising Bristol-Myers Squibb's position in the matter as low, although we cannot completely exclude this possibility," C. Anthony Butler of Lehman Brothers wrote in a research report. Butler, who has an overweight rating, believes the patent challenge would be defeated in court.

The analysts doesn't own shares of Bristol-Myers, but his firm says its does, or seeks to do, business with companies mentioned in research reports.

Merrill Lynch analyst David Risinger tells clients that he expects the Apotex case to go to trial. "We assume that the patent is upheld," says Risinger, who has a neutral rating on Bristol-Myers. He doesn't own shares, but his firm has had a noninvestment banking relationship.

Meanwhile, Chris Schott, of Banc of America Securities, says a launch of generic Plavix by Apotex is a "low probability event." Schott, who is neutral on Bristol-Myers, says that "time is on Bristol's side" because the ill-fated settlement process has delayed the potential for generic competition by at least a year.

A return to the courtroom is the most likely scenario, Schott says. Even if Bristol-Myers loses the case, Plavix would be safe from generic competition until late 2008 or early 2009, he says. He doesn't own shares. His firm says it seeks to do or does business with companies covered in research reports.

However, even if the Apotex challenge is dispatched, Bristol-Myers and Sanofi-Aventis still must deal with three other generic-drug companies, which have filed U.S. patent challenges against Plavix.