Merck ( MRK - Analyst Report ) received a setback recently when the US District Court for the District of New Jersey ruled against the company in its patent infringement lawsuit against Apotex regarding Nasonex.

Although the court ruled that the patent is valid, it also said that Apotex’s product would not infringe on the patent. Merck had filed a patent infringement suit against Apotex in December 2009. The company is currently evaluating its options. In our view, Merck may file an appeal or it could even enter into a settlement agreement with Apotex to delay the entry of generics.

Apotex is looking to bring its generic version to market before the Nasonex patent expires on April 3, 2018. The company has yet to gain approval from the US Food and Drug Administration (FDA) for its product. The 30-month stay on FDA approval expired in May 2012.

Nasonex, a part of Merck’s respiratory and immunology portfolio, is an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms. The product posted sales of $1.3 billion in 2011. The entry of a generic version would lead to a significant loss of sales in the US.

The unfavorable Nasonex ruling comes just a few weeks ahead of a major patent expiry being faced by Merck. Singulair, which accounted for approximately 11.4% of total revenues in 2011, is likely to witness significant sales erosion post August 2012 due to its patent expiry. The company recorded $5,479 million in revenues from Singulair in 2011.

Neutral on Merck

We currently have a Neutral recommendation on Merck, which carries a Zacks #3 Rank (short-term Hold rating). Merck is currently facing issues such as the patent expiration of key drug, Singulair, EU pricing pressure, US health care reform, the Remicade/Simponi transition and pipeline setbacks.

We believe the company will continue resorting to cost-cutting initiatives to drive the bottom-line. Meanwhile, some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.