March 4 (Bloomberg) -- Bayer AG fell to the lowest level in a year in Frankfurt trading after a U.S. judge invalidated a patent on the Yasmin contraceptive, giving Barr Pharmaceuticals Inc. a chance to sell a cheaper copy.

Germany's largest drugmaker declined as much as 5.6 percent. The decision yesterday by a federal judge in New Jersey means Woodcliff Lake, New Jersey-based Barr may be able to sell a generic version before the patent expires in 2020.

Yasmin is part of a group of contraceptives that became the single biggest contributor to Bayer's pharmaceutical revenue last year, with 1.04 billion euros ($1.58 billion) in sales. The ruling may threaten the newer Yaz birth control pill, which is also protected by the patent. Bayer, which bought German rival Schering AG in 2006 to boost growth from pharmaceuticals, reduced the 2008 profitability goal for its health unit as a result of the Yasmin decision.

``Bayer's lacking a lot of positive news flow at the moment so the market is quite nervous,'' said Ulle Woerner, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany, in a telephone interview today. ``I don't think the market expected this to happen at all. This is quite a hit for Bayer. This is a trigger to look closer at my `buy' rating.''

Yasmin sales in the U.S. were $488.1 million last year. The ruling increases the possibility that Barr will introduce a generic version sometime in the second half of the year, Citigroup analyst Andrew Benson said in a note to clients. There are three patents on Yasmin, with the one invalidated yesterday considered among the strongest, he said.

Shares React

Bayer shares dropped 2.20 euros, or 4.4 percent, to 48 euros at 1:13 p.m. The stock has lost 23 percent of its value this year, compared with an 11 percent decline in the Bloomberg Europe Pharmaceutical Index.

Barr shares rose 1.72 euros to 32.40 euros ($49.30) in German trading after closing at $45.67 yesterday in New York Stock Exchange trading.

Branded medicines with $150 billion in revenue will compete with generic copies starting in 2011 as Pfizer Inc., Novartis AG, GlaxoSmithKline Plc and Sanofi-Aventis SA drugs lose patent protection.

Makers of cheaper imitations undercut prices by as much as 80 or 90 percent in the first months of sale, eroding revenue for branded drugmakers. Bayer may lose as much as half of Yasmin sales in the first year of generic competition, estimates Andreas Heine, an analyst at UniCredit Markets & Investment Banking in Munich.

50% Decline?

``We expect that sales of Yasmin in the U.S. can fall by up to 50 percent in the first twelve months after the launch of a generic version,'' Heine said in a note to clients today, in which he cut his price target on Bayer shares to 54 euros from 56 euros.

The Leverkusen-based company forecast the slowest sales growth since 2004 on Feb. 28, when it also said fourth-quarter profit fell 78 percent. Revenue is being hurt by higher raw material costs in the plastics unit and stalling farm income, which is impacting the crop chemicals operation. Bayer is trying to switch patients to YAZ from the older Yasmin to keep the family of birth-control treatments gaining sales.

More Risks

``With this decision, the patents for YAZ are also at risk. We see a 50 percent likelihood of a court decision against YAZ,'' Heine wrote. He said Bayer's pharmaceutical sales may not grow at all this year as the company battles against a rise in the euro against the dollar.

Bayer may appeal the decision and is evaluating the effect of the court's ruling on the Yaz birth control pill, a related drug that was approved for sale in the U.S. in 2006 and also is protected by the patent. Bayer has marketing exclusivity on Yaz until March 2009.

``Bayer disagrees with the court's decision and will consider its legal options in this regard,'' Bayer said in a statement. ``The company will continue to vigorously defend its intellectual property.''

Bayer now aims to increase earnings before interest, tax, depreciation and amortization toward 27 percent of sales this year compared with a previous goal for about 27 percent. The company is sticking to its goal of a 28 percent Ebitda margin before special items for next year at the health unit. The margin last year was 25.6 percent.

Lawsuit

Barr, the second-biggest U.S. maker of birth-control pills behind Watson Pharmaceuticals Inc., filed for U.S. Food and Drug Administration approval in January 2005 to sell a generic version. Schering AG, which Bayer later purchased, sued to block the copy.

``Clearly, this is a positive development for the company and we are evaluating what the potential impact could be on our earnings guidance for 2008,'' Barr Chairman Bruce Downey said in a statement.

The patent, which expires in 2020, is on a formula for the compound drospirenone in which the particle size was reduced so it could be absorbed by the body more quickly before it is exposed to stomach acid. U.S. District Judge Peter Sheridan agreed with Barr that the decision to reduce the particle size would have been obvious to any researcher.

The case is Bayer Schering Pharma AG v. Barr Laboratories Inc., 05cv2308, U.S. District Court, District of New Jersey (Newark).

To contact the reporters on this story: Trista Kelley in London at tkelley2@bloomberg.net; Eva von Schaper in Munich at evonschaper@bloomberg.net

Last Updated: March 4, 2008 07:14 EST