Eisai Doles Out Tough Medicine

Japanese drugmaker Eisai (OTC BB: ESALY.PK) won a high-stakes court battle protecting one of its major drug platforms from generic competition. That's gotta give the generics industry some heartburn.

Eisai had sued both Teva Pharmaceutical (NASDAQ:TEVA) and Dr. Reddy Labs (NYSE:RDY) for infringing on its patent of Aciphex, a heartburn medication, and the two generics companies had countersued for "inequitable conduct." Waiting in the wings was a similar lawsuit against Mylan Labs (NYSE:MYL), which agreed to be bound by this court decision.

When I looked at the court proceedings leading up to the trial, I wasn't holding out much hope for Eisai. The judge in the preliminary proceedings had not been too favorably disposed to Eisai's arguments and had said a "reasonable examiner" could view its conduct as trying to deceive him. In the end, however, he ruled that Teva and Dr. Reddy had infringed on the Aciphex patent, which expires in 2013.

That will put a crimp in the companies' plans to horn in on the $1.3 billion in sales Aciphex garnered for Eisai, which it co-markets with Johnson & Johnson (NYSE:JNJ) in the United States. Teva has said it would appeal the ruling, as well as an earlier one which upheld the patent's validity.

Generic companies often attempt to move in on a patented drug well before the protection expires. The first company to win approval gets a six-month window of exclusivity to sell its generic version before anyone else can sell theirs. Teva had won such FDA approval last year, but had to await the outcome of the trial.

Shares of Eisai jumped 10% on the news, while Dr. Reddy Labs fell 8% in trading yesterday. Teva's shares were essentially flat. The analyst community, in predictable fashion, raised its ratings on Eisai, which had been expected to lose the case. While that would have been a big blow to the company, as Aciphex accounts for about one-quarter of all sales, Eisai has been moving to expand its drug pipeline, recently buying a portfolio of cancer drugs from Ligand Pharmaceuticals (NASDAQ:LGND).

Eisai also sells the top-selling Alzheimer's treatment Aricept, which is also facing threats from generics. Sales of Aricept rose 38% last year, though Eisai and its partner Pfizer (NYSE:PFE) are facing some battles regarding the drug on a number of fronts.

With the patent infringement lawsuit settled (aside from the obvious appeals process), there is more clarity on Eisai's prospects. Those continue to be strong, even if they end up giving the competition heartburn.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.