Patent deal prompts Glaxo share surge

Zantac settlement: US court case that could have cost drugs giant pounds 400m a year called off at last minute

An eleventh-hour deal between Glaxo Wellcome and the rival drug manufacturer Genpharm of Canada has put a stop to a Baltimore court case that could have cost the UK drugs giant up to pounds 400m a year in lost profits. The out-of-court settlement yesterday confirmed the validity of the patents that protect Zantac, the world's largest selling prescription drug, lifting a cloud that had hung over Glaxo for several years.

Investors celebrated the landmark settlement, pushing Glaxo's shares 52.5p higher to 849p, its highest for three years. The surge in the shares of what is now Britain's biggest company is estimated to have added 10 points to the closing value of the FT-SE 100, limiting the fall in the leading companies' index yesterday to 19.9 points.

The deal, which means two separate patents protecting the ulcer treatment are safe until 1997 and 2002 respectively, was the latest good news for the pharmaceuticals sector, which has already enjoyed its strongest year since 1991. Glaxo opted for an out-of-court agreement to avoid the risks involved in a highly technical case being decided by a jury of non-experts.

Sir Richard Sykes, deputy chairman and chief executive of Glaxo, said: "Our belief in the validity of our patents on Zantac remains firm. Glaxo Wellcome's policy of vigorously defending our intellectual property remains unchanged."

Genpharm, which wants to make a cheaper, generic form of Zantac, challenged the validity of the two patents in 1993. Glaxo claimed the differences between the two forms were substantial enough to require two patents. Genpharm contended the differences did not justify separate patents in a claim that would have allowed it to begin its own production.

Zantac's sales in the US, one of three markets where the patent was under threat, amounted to about pounds 1.1bn last year and loss of its protection could have hit profits by as much as pounds 400m in a full year, analysts said. That compares with profit forecasts of about pounds 3bn next year.

The terms of the settlement mean Glaxo Wellcome will pay Genpharm an undisclosed sum, spread over a three-year period. The company described the payment as not material to the group as a whole, but analysts thought the fact that the payment was phased over a long period indicated a substantial sum.

Glaxo has also agreed to sell specified quantities of ranitidine hydrochloride, Zantac's active ingredient, to E Merck, Genpharm's parent, between 1997 and 1999.

The settlement came on the day that the patent dispute was due to start trial in the US. Other litigation in Canada and the UK will also be discontinued as a result of the agreement. Analysts agreed that Glaxo would probably have won the case but welcomed the elimination of the risks of a jury trial.

Earlier this year, the Form One version of Zantac's patent expired in Germany, triggering a price war. The prospect of a similar battle emerging in the much more important US market has been a prime driver of Glaxo's share price in recent years. Traditionally the lifting of patent protection for prescription drugs cuts their sales by between half and three-quarters within a year.

Although analysts welcomed the settlement, they differed over the long- term significance. Glaxo still faces threats from other ulcer treatments, including generic cimetidine, which has replaced SmithKline Beecham's ulcer drug Tagamet and Astra's Losec. Overall sales of ulcer treatments are also expected to fall as long-term low-dose treatments are replaced by high-dose courses designed to cure the ulcer completely.

Worries over Zantac have been one of the factors leading to a sharp reduction in the number of American investors holding Glaxo shares. They were also given as an important reason for Glaxo's pounds 9.1bn takeover earlier this year of Wellcome, in Britain's largest ever successful hostile bid.

Investment Column, page 22

Market Report, page 23