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Lilly ruling hits Rx shares
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August 10, 2000: 11:00 a.m. ET
Prozac decision reverberates as patent issues weigh on many drug firms
By Staff Writer Martha Slud
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LONDON (CNNfn) - A U.S. ruling stripping patent protection for one of the world's most popular drugs sent a chill throughout the pharmaceutical industry Thursday, with stocks in the sector falling in Europe amid worries about the patent exclusivity for other top-selling medicines.
In London, shares in the FTSE pan-European drug index fell about 2 percent after a federal appeals court in the United States said generic competitors to Prozac, Eli Lilly and Co.'s (LLY: Research, Estimates) blockbuster antidepressant, may go on the market as early as August 2001 - two years earlier than anticipated.
The ruling - if it stands up on appeal - would speed up the availability of cheaper versions of the drug, the world's best-selling antidepressant. While that's good news for consumers and generic drug companies, it could reduce Eli Lilly's sales by up to $1 billion a year. Lilly's stock plummeted 30 percent on the ruling Wednesday, while other U.S. drug makers also were punished.
 While the issues facing Prozac's patent do not have any direct connection to other drug companies' patent issues, the court ruling is a sign that U.S. authorities are taking a tougher line on the drug industry, said Peter Cartwright, a pharmaceutical analyst at Williams de Broe.
"It's one appeals court ruling on one specific set of circumstances," he said. But "it is a sign that the U.S. government is taking a little bit of a harder line on the drug industry, whether this is patient access to medicine or patent life."
Drug stocks have been under pressure in the United States amid an election-year battle in Washington over a Clinton administration proposal to provide prescription drug benefits under the federal Medicare program for elderly Americans. The drug industry, which has been waging an often bitter public relations campaign against the White House, argues that the Clinton plan could lead to price controls on their products.
While Wednesday's court ruling is certainly bad news for Lilly, European drug stocks are falling in part because of profit-taking after recent gains, said another industry analyst.
"I think it's more the herd effect really," said Martin Hall, of HSBC Securities. "The sector has had a tremendous run recently."
At midday Thursday in London, shares of AstraZeneca PLC (AZN) - which is facing looming patent expiration for best-selling ulcer drug Losec - slid 3 percent to 2,951 pence; Glaxo Wellcome (GLX) stock was off 3.2 percent to 1,864 pence, and its merger partner, SmithKline Beecham (SB-), lost 2.3 percent to 865 pence.
In Paris, shares of Aventis (PAVE) edged down 1.5 percent and Sanofi-Synthelab (PSYN) fell 3.1 percent. Shares of Germany's Bayer (FBAY) fell 1.3 percent in Frankfurt, and Schering AD (FSCH) slid 2.5 percent.
AstraZeneca is expected to lose a key patent in the United States for Losec (known as Prilosec in the U.S.) in October 2001. Like Eli Lilly, the company is also fighting in court to protect the drug's patent exclusivity. It is also planning to launch a next-generation formulation, known as Nexium, in Sweden this month.
Prozac was the first drug of its kind, a member of a class of antidepressants known as selective serotonin reuptake inhibitors (SSRIs). Competitors include Pfizer Inc.'s (PFE: Research, Estimates) Zoloft; Effexa, made by American Home Products (AHP: Research, Estimates); Celexa, marketed by U.S.-based Forest Laboratories (FRX: Research, Estimates) and Denmark-based Lundbeck; and Paxil, made by SmithKline Beecham.
A SmithKline spokesman, Alan Chandler, told CNNfn.com that the introduction of generic rivals to Prozac sooner than expected should have no major impact on sales of Paxil, saying that the drug is now approved for additional mental health uses such as treatment of social anxiety order. Paxil patents do not expire until 2006.
"Basically, its profile and range of indications are different from Eli Lilly's Prozac," he said. "We see this as an opportunity to really differentiate the two products."
Renewed merger speculation?
Meanwhile, Eli Lilly's court defeat is sparking speculation in Europe and the United States that the Indianapolis-based company could become a takeover target, analysts said.
New Jersey-based Merck & Co. (MRK: Research, Estimates), which was knocked off its perch as the biggest U.S. drug maker earlier this year after Pfizer Inc. bought rival Warner-Lambert Co., is considered a potential acquirer. Switzerland's Roche and Novartis also are believed to be on the lookout for potential purchases.
The drug industry, traditionally one of the most fragmented business sectors, has been undergoing rapid consolidation. In addition to the Pfizer-Warner Lambert merger, Glaxo Wellcome announced plans to buy SmithKline earlier this year - in a deal that would make the combined firm the world's largest drug maker. U.S.-based Monsanto Co. and Pharmacia & Upjohn also linked up, creating the new company Pharmacia Corp. (PHA: Research, Estimates).
Eli Lilly, which recently enjoyed a nearly 20 percent one-day stock market bounce after announcing a laboratory breakthrough in development of a drug to treat the deadly disease sepsis, is now in a much weakened position, said Hall, of HSBC Securities.
"We basically think Lilly's now looking very vulnerable to the M&A market," he said. 
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