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A women leaves the Eli Lilly and Company campus in an Indianapolis file photo from April 18, 2006.MICHAEL CONROY/The Associated Press

Ottawa says a $500-million NAFTA challenge launched by U.S. drug giant Eli Lilly and Co. against Canada over its patent-law regime is "wholly without merit" and should be tossed out.

The Indianapolis-based pharmaceutical company has been waging a battle on what it claims is a spate of Canadian court rulings that violate international rules and have unfairly cost the company two of its key patents, allowing cheaper generic versions to hit the market in Canada.

In a challenge it filed last year, Lilly is demanding $500-million in compensation for those two lost patents, using the North American free-trade agreement's (NAFTA) controversial Chapter 11, which allows foreign investors to take government decisions before an arbitration panel.

The company's chairman and chief executive officer John Lechleiter told The Globe's editorial board last year the rulings had cost Lilly $1-billion in revenue and forced it to shed 280 Canadian jobs. He even warned the situation could see Lilly leave Canada entirely. The company, which has also been struggling as some of its bestselling drugs see their U.S. patents run out of time, has lobbied legislators in Washington to pressure Canada over the patent rulings.

But now Canada has struck back. In a statement of defence, the Canadian government calls Lilly a "disappointed litigant" that is now trying to turn the NAFTA panel into a "supranational court of appeal from reasoned, principled, and procedurally just domestic court decisions."

Ottawa says Lilly's case is based on "misstatements" of Canadian law and of Canada's obligations under NAFTA and other international treaties. And it accuses the drug giant of "misleadingly" characterizing the way its two patents were defeated.

At the heart of the dispute is what Lilly calls a "promise doctrine" that it says Canadian Federal Court judges have been retroactively applying since 2005 in cases where patents are challenged by generic drug companies.

The drug giant says in its NAFTA filing that Canadian judges are unfairly ruling that original patent applications should include more proof of a drug's effectiveness, allowing generic companies to come along years later and have the patents tossed out in court.

That's how Lilly says it recently lost its hold on two key patents it applied for in the 1990s: One for olanzapine, which it markets as Zyprexa for the treatment of schizophrenia, and another for atomoxetine, which Lilly markets as Strattera for the treatment of attention deficit hyperactivity disorder.

The effectiveness or the safety of the drugs, which were tested and later approved by Health Canada and have been widely used, is not at issue in the case. Indeed, the drug's effectiveness is what attracts court challenges from generic drug makers, who want to market their own cheaper versions. The question at issue is whether Lilly presented enough evidence that the drugs would be effective at the time it first filed its patent applications.

Lilly claims Canada's courts have set the bar too high. But Canada argues that its courts have merely been applying a long-established principle in patent law, meant to disallow companies from unfairly shutting out competing researchers by "shot-gun" patenting large groups of drugs without knowing whether they actually work.

In the case of these two Lilly drugs, the Canadian government says, the company was trying to secure new patents on compounds it had already patented by promising that the drugs could be used to do something new.

In the case of Strattera, Lilly said the drug, already part of a group of compounds patented as anti-depressants, could be used to treat attention-deficit hyperactivity disorder. But according to the government's filing, the company "did not disclose any study or working examples" when it applied for its patent in 1996. In 2010, A Federal Court judge ruled that Lilly had only one "flawed" study that exposed patients to the drug for just three weeks.

With Zyprexa, the drug was also already patented in Canada as part of a group of compounds used to treat mental illnesses. In 1991, Lilly applied to patent it as an anti-psychotic drug to treat schizophrenia, saying the drug "shows marked superiority and a better side effects profile." But a Federal Court judge ruled in 2007 that Lilly had "no data" at the time to back this up.

In an e-mailed statement, Lilly said it was still reviewing Canada's submission, but maintained the company had suffered financial losses "from the application in Canada of unique and burdensome patent utility standards which are inconsistent with international norms and Canada's treaty obligations."

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