Lilliputian Attack on Lilly?

Barely more than a week after discussing the possibility of generic challengers for Eli Lilly's (NYSE: LLY  ) top compound, Zyprexa, the company announced that it had lost court cases in Canada and Germany that could permit generic competition against the drug in these countries.

Zyprexa is an atypical antipsychotic compound commonly prescribed to schizophrenics and sufferers of bipolar disorder, among other indications. Sales of the drug were $4.4 billion last year, accounting for more than 25% of Lilly's revenues.

The good news for Lilly investors is that the company doesn't expect these court decisions to affect its financial estimates for 2007. It's not clear whether the unchanged financial guidance results from the conservative financial estimates Lilly previously gave, or whether the threat of Lilly appealing these decisions will cause the drugmakers in Canada and Germany to hold off their generic Zyprexa sales until after appeals decisions are made.

Having won another patent case in the U.S. over Zyprexa late last year, Lilly's U.S. patents are safe until they expire in 2011. But the Canadian decision could indirectly affect some degree of U.S. sales through cross-border importation of generic Zyprexa, if it becomes available in Canada.

With appeals over the lower court decisions pending, Lilly hasn't lost its marketing exclusivity for Zyprexa in Canada and Germany just yet, unless the generic manufacturers do at-risk launches of their versions. This strategy could end up costing them millions if the drugmakers then lose the appeals cases.

Even though I believe every investor should have some degree of exposure to pharmaceutical stocks, these decisions in two of the biggest pharmaceutical drugs markets should serve as a warning of the potential litigation dangers when investing in some of the pharmaceutical giants.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.