Pfizer Wins, a Sector Rejoices

Motley Fool Inside Value recommendation Pfizer (NYSE:PFE) and its investors got a most welcome piece of news late Friday, when a U.S. court upheld the drug giant's patents and rejected an attempt by Indian pharmaceutical company Ranbaxy to launch a generic form of Lipitor. Assuming that this ruling holds up on appeal, Lipitor (and its billions in annual sales) will be protected in the U.S. through 2011.

Is this important to Pfizer? Big time. Lipitor makes up nearly a quarter of this company's revenue, and its premature loss to generic competition would have dealt a major blow in Pfizer's attempts to stabilize its business and resume some of the growth that investors have come to expect.

It also has a measure of significance for the entire industry. Patents are the lifeblood of the pharmaceutical sector. The only thing that really justifies investing the hundreds of millions of dollars into new product development (most of which will fail) is the promise that a successful compound will enjoy patent protection and have the chance to earn enough money to pay for itself, recoup the losses of all the failed compounds, and provide some return to shareholders for their investments in the company.

Of course, there's a flip side as well. In an effort to lengthen the gravy train and reap more money from the protections offered by a patent, drug companies will often attempt to file other claims that effectively extend the life of the original patent. Sometimes these are legitimate; sometimes they're just attempts to work the system and protect a company's cash-cow drugs.

That's why generics companies like Teva (NASDAQ:TEVA), MylanLabs (NYSE:MYL), and Barr Labs (NYSE:BRL) spend small fortunes on legal teams dedicated to challenging big pharma patents, in the hopes of being the first to market with an approved generic formulation. And that's why investors in drug companies like Pfizer, Lilly (NYSE:LLY), and Forest Labs (NYSE:FRX) get nervous when those challenges come. Generic companies don't win them all, but they win enough (as in the case of Lilly's Prozac patent) to be a real threat.

This is certainly good news for Pfizer, and it removes a big threat to the business. While the battles aren't over -- Ranbaxy will appeal in the U.S., and Pfizer will appeal some European decisions that went against it -- Pfizer's odds of prevailing look better today than before. Although Pfizer may not be my absolute favorite top pick in the pharma sector, it's pretty far up the list, and I think long-term-oriented investors can still buy today and be happy with that purchase in the years to come.

We've prescribed further Foolishness:

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).