Merck & Co. Inc. (MRK) suffered a double blow on Friday when a court ruled that the patent on its second-biggest drug will lapse a decade earlier than expected and U.S. regulators elevated their probe of its withdrawn Vioxx arthritis drug into a formal investigation.

Shares of Merck fell more than 10 percent.

The U.S. Court of Appeals in Washington D.C. ruled that Merck's U.S. marketing exclusivity on Fosamax, its $3.2 billion-a-year osteoporosis pill, will expire by February 2008. It was a victory for Israeli generic drug maker Teva Pharmaceutical Industries Ltd. (TEVA), which had challenged the patent. Teva's shares rose just over 2 percent.

Merck said it disagrees with the court's decision and is considering its options, including whether to request the appeals court to reconsider its decision.

"The stock decline is justified by the news because Fosamax (search) is the leading osteoporosis drug" and one of the company's biggest profit drivers, said Sena Lund, an analyst at Cathay Financial.

The developments come just four months after Merck was forced to withdraw its $2.5 billion-a-year Vioxx drug after it doubled the risk of heart attack and stroke in a long-term trial.

In upgrading its investigation, the Securities and Exchange Commission (search) will now be able to issue subpoenas into how responsibly Merck dealt with the public and regulators as it learned of the dangers of Vioxx.

Whitehouse Station, N.J.-based Merck said it is cooperating with the investigation. An estimated 1400 plaintiffs have filed lawsuits against the drugmaker, claiming they were hurt by the drug.

The ruling on Fosamax means Merck's earnings could take another hit in 2008, just as it had hoped to be bringing new drugs onto the market to offset the loss of Vioxx and declining sales of its biggest product, cholesterol drug Zocor, whose patent expires in 2006.

The company's earnings fell sharply in 2004 and analysts expect them to fall through 2006, as Zocor generics take their toll.

"Fosamax would be stretching Merck's problems out," said Lund.

The U.S. District Court in Delaware ruled in August 2003 that the patent on Merck's once-weekly form of Fosamax was valid. Teva appealed the decision to the higher court.

Merck, which has recently cut thousands of jobs, may have to pursue other cost-cutting measures because of the Fosamax setback, analysts said.

"They have some time and they have cash flow but some people have got to be wondering if the company isn't going to need to do some significant restructuring," said Scott Henry, an analyst at Oppenheimer & Co.

Merck's shares closed down $3.16, or 10.13 percent, to $28.02 on the New York Stock Exchange (search). Teva closed up 60 cents, or 2.17 percent, to $28.31 on Nasdaq.