AstraZeneca Shares Pop After Court Upholds Crestor's Patent Protection

AstraZeneca (AZN) shares surged late in the session Tuesday, closing at $48.74, up $4.02, just shy of 9%. What makes a Big Pharma stock jump so much, especially on a day markets skidded some 3%?

Well, anyone following the pharmaceutical industry is aware of the constant talk about the looming patent cliff: Many medications with high-volume sales will lose patent protection over then next few years, meaning generic versions will appear on pharmacy shelves, cutting into the bottom lines of the companies making the brand-name originals. But on Tuesday, AstraZeneca scored a win in court regarding the patent for its cholesterol treatment, Crestor.

U.S. District Court Judge Joseph Farnan Jr. has found that the substance patent protecting Crestor is valid and enforceable. What the Delaware judge's ruling means in practice is that Crestor will remain under patent protection until 2016, and the Food and Drug Administration won't be able to issue final approvals for generics prior to that. That's excellent news for AstraZeneca, which had $4.5 billion in Crestor sales in 2009.

The case began in 2007 when nine generic drug manufacturers, including Apotex, Aurobindo, Cobalt, Mylan (MYL), Par, Sandoz, Sun and Teva (TEVA) challenged AstraZeneca's patent on rosuvastatin calcium, the active ingredient in Crestor. AstraZeneca and Shionogi, the owner of the patent, then filed patent infringement suits against them and their subsidiaries.

But does Tuesday's court victory mean that Astra's troubles are over, or are they merely postponed? Crestor, along with Pfizer's (PFE) Lipitor and Merck's (MRK) Zocor (generic version, simvastatin), belongs to a class of drugs called statins, which work by stopping a specific enzyme from making cholesterol. High levels of LDL cholesterol, the so-called "bad cholesterol," can lead to clogged arteries and are a known risk factor for heart attacks, strokes and heart disease. Statins generated $33.8 billion in global sales in 2008, according to IMS Health, a health care research firm.

With Zocor already available in generic form and Lipitor's patent expiring next year, some analysts aren't sure Crestor has room to grow. Still, at least one analyst (from Jefferies) upgraded the shares, while some others wrote favorable notes. Other analysts looked favorably on the now-higher possibility that the company would increase returns to shareholders in the form of stock buybacks and special dividends.

Other than having patent protection long after the other statins, Crestor is differentiated from the other two also by the fact it is approved in the U.S. and Europe for use by people with normal cholesterol to prevent heart attacks and strokes. So while cheaper generics will be abundant in the market after Lipitor loses protection -- it currently has 50% market share -- Crestor's wider potential patient base may be the difference that helps it keep its growth.