Recently, AstraZeneca ( AZN - Analyst Report ) received disappointing news related to Seroquel XR which is approved for schizophrenia, bipolar disorder and major depressive disorder. The UK High Court has ruled against the formulation patent protecting Seroquel XR (quetiapine fumarate) and rendered it invalid. Seroquel XR is marketed as Seroquel XL in the UK.

Teva UK Limited and Teva Pharmaceuticals Limited ( TEVA - Analyst Report ) had challenged AstraZeneca’s Seroquel XR patent in December 2010. Similar challenges were made by Accord Healthcare Limited, Intas Pharmaceuticals Limited, Hexal AG and Sandoz Ltd. in March and April 2011. We note that the patent covering the formulation of Seroquel XR expires in 2017 in both the EU and the US.

In contrast to this decision, on March 7, 2012, the District Court in The Hague, Netherlands, had ruled in favor of AstraZeneca and found Seroquel XR’s formulation patent to be valid. The company is engaged in several other lawsuits related to Seroquel XR’s patent.

Just a few days ago, AstraZeneca took legal action against the US Food and Drug Administration (FDA) challenging the agency’s decision to reject AstraZeneca’s Citizen Petitions on March 7, 2012. The company had filed a lawsuit in the US District Court for the District of Columbia.

The Citizen Petitions were filed by the company for Seroquel IR and Seroquel XR. They were filed to bar the FDA from approving any generic versions of the drug that do not include warnings related to hyperglycemia and suicidality in its label. The Seroquel franchise generated sales of $5.8 billion in 2011. The loss of patent protection and entry of generic drugs in the market will hit AstraZeneca’s top-line.

Neutral on AstraZeneca

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Even though we are encouraged by the company’s focus on the high-potential emerging markets, we remain concerned about the generic competition faced by its key products. In 2011, the company lost almost $2 billion revenues to generic competition.

The company is looking to drive the bottom-line through cost-cutting initiatives and share buybacks. The weak late-stage pipeline coupled with the slow Brilinta uptake also bothers us.