The Generic Cracks Open for Pfizer

Earlier in the week, Pfizer (NYSE: PFE) received word that a Norwegian appeals court had given the go-ahead for generic drugmaker Ranbaxy to market a generic version of Pfizer's top-selling cholesterol-lowering drug, Lipitor.

Nowadays, the drug business is not just about R&D. Yes, drugmakers need to have a strong drug development pipeline -- but they also must have a good legal team to defend against the challenges by generic manufacturers to their product's patents. Pfizer had partially won an earlier challenge by Ranbaxy in the Norwegian courts, but the appeals court decision this week invalidated Pfizer's patents in the country.

Lipitor is hugely important to Pfizer because its $13 billion in sales accounted for nearly 29% of Pfizer's total pharmaceutical revenues in 2006. The drug has already been indirectly subject to generic competition, as some of the other major cholesterol-fighting compounds like Bristol-Myers Squibb's (NYSE: BMY) Pravachol and Merck's (NYSE: MRK) Zocor have been replaced by cheap generic copies that compete with Lipitor.

Pfizer does plan on appealing the decision, but Norway is not the only country in which it is facing Lipitor patent challenges. Ranbaxy had previously lost patent challenges over Lipitor in the U.K. and is still duking it out in the courts with Pfizer in large markets like Canada and the United States.

The bad news on Lipitor from small-market Norway won't affect the drug's patents in the U.S., which are in force until 2010 (barring an improbable U.S. Supreme Court decision against Pfizer). One problem, though, is that whenever a generic compound gets approved in one country, there is almost always some degree of cross-border leakage of the generic product into other markets.

The larger takeaway from the Lipitor legal saga is that investors always need to be aware of the strength of a drug company's patents throughout the world. Investors also need to know what the unexpected loss of a drug's marketing exclusivity can do to a pharma's top and bottom lines. Patent risk isn't just limited to the pharmaceutical sector, but it is a risk that is much more important for drugmakers, which rely on their intellectual property patent estates to protect their monopolistic profits.

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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.