UPDATE 3-US court finds King Pharma Altace patent invalid

(Adds analyst note on Skelaxin hearing, updates share price)

NEW YORK, Sept 11 (Reuters) - A federal appeals court on Tuesday ruled that King Pharmaceuticals Inc's KG.N patent for its biggest product, the blood-pressure medicine Altace, was invalid, opening the door to competition from cheap generic versions of the drug.

King shares fell as much as 11.7 percent on the news before recovering some of those losses.

The U.S. Court of Appeals for the Federal Circuit reversed a lower court ruling that had found India's Lupin Ltd LUPN.BO had infringed the patent by seeking regulatory approval to make a generic version of the drug, known chemically as ramipril.

“We conclude that the subject matter of the asserted claims of the 722 patent would have been obvious. Accordingly, we reverse,” the appeals court said in its 18-page decision.

As the court found the ramipril patent to be “obvious” and therefore invalid, it saw no reason to address Lupin’s other arguments in favor of reversal, court papers said.

Investors have been concerned about patent challenges to King’s two biggest products -- Altace and the muscle relaxer Skelaxin -- and the company’s share price has been declining since mid-July. One of their biggest fears appears to have come to pass with this court ruling.

“Altace accounts for 35 percent of revenue,” said Angela Larson, an analyst with Susquehanna Financial Group who had expected King to prevail in court. “Without Altace they have to start questioning the value of maintaining a primary care sales force.”

King has been planning to launch a new formulation of the blood pressure medicine in early 2008 with the aim of switching Altace patients to the new drug before the older one faced generic competition.

“If Lupin can launch before end of the year, this becomes a very difficult scenario for King, as they would have lost the window to convert patients to the newer version,” Larson said.

King shares were down $1.03, or 7.2 percent, to $13.23 in late afternoon trading on the New York Stock Exchange, after falling as low as $12.59 earlier in the day.

Altace had sales of $163 million in the second quarter, while Skelaxin sales were $108 million for the same period.

Altace and Skelaxin amount to more than 70 percent of King’s earnings per share, according to Cowen & Co analyst Ian Sanderson.

CIBC World Markets analyst Elliot Wilbur, who has been monitoring legal action involving Skelaxin, said more bad news may be on the horizon for King.

“At today’s Skelaxin court hearing things did not appear to go well for King, suggesting Skelaxin generics may be showing up on the near-term radar screen soon,” Wilbur said in a research note.

“The confluence of negatives suggests continued short-term downward pressure” on King shares, Wilbur said.

A branded product can quickly lose as much as 80 percent of its revenue once cheaper generic versions appear on the market.

Larson, however, said she was maintaining her “neutral” rating on King’s beaten-down shares. “The stock is too cheap to go to a sell rating,” she said. (Reporting by Bill Berkrot, with additional reporting by Tim Dobbyn in Washington)