Patent threat sends Galen shares into reverse

Shares in Galen, the women's healthcare group, plunged yesterday after it revealed a patent on a drug it bought for £187m last month is being challenged in the US courts.

Investors expressed their fury that the legal battle was not disclosed at the time of the acquisition, but only came to light in a footnote to Galen's annual report, published yesterday morning.

John King, the chairman, said he did not believe Galen had needed to reveal details of the dispute over Sarafem, a treatment for severe pre-menstrual tension, because patent challenges are so common in the pharmaceutical industry and the issue was "not material".

Investors disagreed, however, sending the shares down 11 per cent to 432.5p. Mr King's assertion also appeared to contradict the text of the legal disclosures in the annual report. This said: "An adverse outcome in this proceeding would likely have a material adverse effect on our results of operations because the introduction of a generic competitor to Sarafem would likely drastically reduce sales of Sarafem."

Teva Pharmaceuticals, an Israeli manufacturer of generic, or copycat, drugs says the patent on Sarafem is invalid. Sarafem is a version of the anti-depressant Prozac, which is specifically licensed to treat pre-menstrual dysphoric disorder, severe PMT. Galen said when it bought the drug from Eli Lilly that patent protection covers it until 2007.

Some analysts appear to have been told about the existence of the legal challenge in question-and-answer sessions with the company, but the name of the litigant and the details of the case were not disclosed.

Hugh Kingsmill Moore, of ING Financial Markets, said: "They said their hands were tied and they had been prevented by Eli Lilly from going into any details. John King is an honest man, but this has been handled at best clumsily."

David Marshall, an analyst at NCB Stockbrokers in Dublin, said Galen had demonstrated yesterday how Sarafem would come under legal assault from the makers of generic Prozac. "While it was likely that there would be upcoming patent challenges on Sarafem, it is disappointing that this generic challenge was not disclosed at the time of the product acquisition."

The patent challenge could land Galen with generic competition to Sarafem by August next year in a worst-case scenario. Mid-2005 is a more likely launch date for a rival, and that would call into question the £187m price tag, analysts said.

But Mr King said he was confident of Galen's intellectual property, and the risks of the court case had been factored into the price. "We are relaxed, we have done our due diligence and are confident it is an excellent deal. We have paid a lot more for products with no patent protection, and this is all factored into the price and our plans for the product," he said.