Lilly, based in Indianapolis, saw its shares fall $32.56 to close at $76 on the New York Stock Exchange.
Lilly chief executive Sidney Taurel said the company will appeal the ruling and intends to stick with its "strategy of independence."
The federal appeals court ruling means that Barr Laboratories Inc. may be able to introduce its generic Prozac sooner than expected.
It could be a year longer before Lilly introduces an improved version of the original drug that it is developing with Sepracor Inc.
Prozac had 1999 sales of $2.6 billion, accounting for a quarter of Lilly's sales last year.
Lilly chief financial officer Charles Golden said earnings will decline in the second half of 2001 and first half of 2002.
Profits should rise again in the second half of 2002 as new products enter the market, he said in a prepared statement. The company expects to have single-digit per-share profit increases in 2001 and 2002 and then return to increases of 10 percent or more in 2003.
"The price for the new Prozac may be pressured now," said Jordan Schreiber, manager of Merrill Lynch's Healthcare Fund, which holds Lilly shares.
Shares of Barr, based in Pomona, N.Y., rose $25.69, or 55 percent, to $72.13. Shares of Sepracor, based in Marlborough, Mass., fell $23.38 to $106.13.
Shares of New York-based Forest Laboratories Inc., which makes the competing antidepressant Celexa, fell $25.55 to $88.94.
Forest has been stepping up its marketing efforts on Celexa, its biggest-selling drug. Analysts said shares fell on concern that the Lilly decision could hurt Celexa sales.
Revenue from Celexa, which has been taking market share from Prozac, rose to $149.9 million in the fiscal first quarter ended June 30 from $77.5 million in the year-earlier period, Forest said last month.
The U.S. Court of Appeals for the Federal Circuit in Washington reversed a lower court's decision supporting Prozac patent protection through 2003.
The court has nationwide authority over patent cases, and its decisions are rarely reversed.
"The U.S. Supreme Court almost never reviews these patent cases," said patent attorney Edward O'Connor. "It tends to defer to the expertise of the appellate court."
To compete with a generic Prozac, Lilly and Sepracor would have to show clear benefits for their new version of Prozac, which they developed by focusing on one of the two molecular forms of the compound in the drug.
"We still don't have enough data to support the benefits of Sepracor's drug," said Robert Parente, an analyst at Leerink Swan & Co., who has a "hold" rating on Sepracor. "Consumers might be swayed to generics, especially if generics are out ahead of time and consumers have the chance to get comfortable with them before the Sepracor drug is approved."
Generic competitors can quickly overcome brand-name drugs' hold on U.S. markets.
Merck & Co. said it expects generic competition to claim about 80 percent of the U.S. market for its Vasotec blood-pressure drug, within a year. A less expensive rival version of Vasotec will be introduced this month.
Abbott Laboratories Inc. has seen U.S. sales of its Hytrin blood-pressure drug plunge since generic competition started in 1999. Second-quarter sales of Hytrin, also an enlarged-prostate treatment, were about $30 million, compared with about $150 million in the year-earlier period, analysts say.
Lilly's Prozac could face the same steep sales declines when generic competition begins, analysts said.
A generic drug must prove its effects are similar to those of the brand-name version, to win U.S. Food and Drug Administration approval.
"If equivalency is confirmed by the FDA and then Prozac goes generic, we would expect very rapid conversion," said David Campen, medical director of drug information services for Kaiser Permanente, the largest U.S. nonprofit health-care organization.