This is the first instance of generic drug makers paying damages for marketing a copy of an existing drug for which patents have yet to expire - known as an 'at-risk' launch.
The Pfizer drug, Protonix, recorded peak annual revenue of almost $2 billion in 2007, before sales plunged following the launch of generic versions by Teva in 2007 and Sun Pharma in 2008.
The patent covering the active ingredient in Protonix – pantoprazole – expired in January 2011.
"It is an important milestone, setting a 'book-end' case for the industry. It will serve to encourage patent settlements," Bernstein Research analyst Aaron Gal said in a note.
Teva CEO Jeremy Levin (Photo: Motti Kimchi)
Morningstar analyst Damien Conover said the Pfizer case was unique among these types of lawsuits as it involved a "composition of matter patent" – one of the stronger patent protections.
"We see more at-risk launches but probably of less powerful patents," Conover said.
A New Jersey jury ruled that Teva had infringed the Protonix patent in April 2010, following a protracted 10-year legal battle.
A trial to determine damages began on Monday.
The patent was held by Nycomed, now a Takeda subsidiary, and the drug was licensed to Wyeth, now owned by Pfizer.
Takeda will receive 36% or about $774 million from the settlement, with the rest going to Pfizer.
Israel-based Teva, the world's largest generic drug maker, will pay $1.6 billion – half this year and the rest by October 2014. India's Sun Pharma will pay $550 million this year.
Teva said in February that it may face legal losses of up to $2.07 billion to resolve the case.
Teva said on Wednesday it will record a charge of about $930 million in the second quarter, in addition to the $670 million provision recorded in its 2012 financial statements.
However, the company said it may have up to $560 million of net insurance coverage for the settlement.
"The Protonix damages were one of the negatives Teva had to 'get out of the way' before investors can focus on the company's growth prospects," Bernstein's Aaron Gal said.
Separately, Teva reported positive results from a mid-stage study of its experimental lupus drug that aims to treat inflammation of the kidney caused by the autoimmune disorder.
The study showed that the drug when combined with mycophenolate mofetil and corticosteroids - the current standard of care - improved kidney function compared with current therapy alone.
Teva's US-listed shares were down about 1 percent at $39.47 on the New York Stock Exchange.
Hit to acquisition plans
Sun Pharma set aside 5.84 billion rupees, or about $100 million, last November towards potential damages to Pfizer. The company will now have to shell out a further $450 million as final settlement.
"This is not a very positive out-of-court settlement," said Daljeet Kohli, head of research at brokerage IndiaNivesh in Mumbai.
"The agreed amount is way too high for such a settlement. It will also restrict Sun's ability to look for acquisitions."
The Indian company has been considering several potential acquisitions. It was in talks to buy Swedish drug maker Meda and Israel's Taro Pharmaceutical Industries Ltd, but both deals fell through.
Sun Pharma's shares closed little changed at 980.70 rupees, prior to the announcement of the settlement.
Pfizer's shares were up about 1% at $28.69 , while Teva's shares were down about 1% at $39.51.