GSK puts £145m into patent fund as Pfizer launches Viagra lawsuit

GlaxoSmithKline has put aside £145m to settle patent disputes as generic drug makers and rival pharmaceuticals giants step up the legal challenges to its intellectual property.

The UK's number one drugs group disappointed the market with its third-quarter results yesterday, citing the slide in the dollar and the launch of copycat versions of its top-selling antibiotic for lower than expected sales.

Augmentin, the antibiotic, had sales of £197m in the three months to the end of September, down 24 per cent on last year. A rival drug came on the US market in June after its maker successfully challenged GSK's patents, and has now taken more than 40 per cent of the market.

Analysts were concerned that the unusual provision of £145m against patent challenges signalled GSK was expecting more bad news.

GSK's chief executive, Jean-Pierre Garnier, said the money would mainly be used to reach out-of-court settlements.

"What generic companies are doing is throwing a lot of stuff at the wall, hoping that some of it will stick, and we will see challenges on almost every molecule. Sometimes the cost of pursuing a legal action exceeds the cost of paying this 'go away money'.

"This was a prudent topping up of the legal reserve and we are unlikely to do it every quarter unless the legal situation starts to worsen in a big way."

Some analysts thought the legal provisions were a form of "profit smoothing" after the company's earnings outstripped its guidance to the market by some way, but they underscored the extent to which GSK's fortunes are dependent on the courts. Overnight, Pfizer, the world's largest drug maker, said it had begun a US lawsuit claiming GSK's new impotence drug infringes patents on its drug, Viagra. GSK is planning to launch a rival, Levitra, next year.

Mr Garnier vowed to see off the lawsuit. "Pfizer's legal challenge is not new. They tried this approach in Europe and they failed. We are pretty confident that this will not succeed, but we will leave it to the courts. We are not changing our plans."

Eli Lilly, the US giant which also plans to launch its own rival to Viagra next year, is also being sued by Pfizer, which is hoping to protect its exclusive position in the impotence market. Viagra had sales of £1bn last year and it is estimated the global impotence market could be worth £3bn by 2006.

Eli Lilly yesterday issued another profit warning after sales of Prozac, its ground-breaking anti-depressant which lost patent protection last year, continued to slide. It has lost more than 75 per cent of its market share to generic rivals.

GSK issued its own profit warning in June when the rival Augmentin was launched, predicting a "Prozac-style" wipeout of sales. Although Augmentin's performance has not been as poor as feared, GSK yesterday stuck to its conservative guidance of "at least 10 per cent" earnings growth this year, despite the fact that earnings for the nine months so far are 15 per cent higher than last year. Pre-tax profits so far this year at up 12 per cent to £4.8bn, with £1.4bn in the third quarter, with cost savings from the merger of Glaxo Wellcome and SmithKline Beecham propelling much of the growth.

GSK shares, which have lost a third of their value in a year, were down 6 per cent to 1,247p despite confirmation of a second £4bn share buy-back programme.

The company is facing pressure in Europe, particularly in Italy, where the government is demanding lower prices, but some of its recently launched blockbusters also had lacklustre sales growth.