Smith & Nephew in lawsuit provision

SMITH & NEPHEW, the Nivea to knee implants health products group, is setting aside pounds 2m a year to fund potential future legal claims in a move that it believes will be followed by the rest of the pharmaceuticals industry.

The decision was sparked by its dispute with Polteco, the US research firm, settled in January. Smith paid dollars 37.5m ( pounds 19.8m) after the US courts awarded dollars 96m against it for misappropriating trade secrets over a compound for false joints. The settlement was charged as an extraordinary item in its 1991 accounts.

In the annual report Eric Kinder, chairman, said the group believed it had 'no liability whatsoever' but the size of the exposure and the constraints of the appeal process meant 'mitigation of the amount of damages was a critical factor'. He added that management of legal affairs had been strengthened.

John Robinson, chief executive, said the provision reflected the fact that drug companies were facing an increasing number of lawsuits, particularly in the US. Most drug companies - including Glaxo, Wellcome and ICI - are involved in legal action in the US by rivals challenging the validity of their patents, while action by patients taking the drugs is also becoming more common.

Mr Robinson thinks Smith & Nephew is the first British company to make such provisions, although Johnson & Johnson, the US healthcare company, is believed to have a similar policy.

Wellcome and Glaxo both have in-house insurance companies to provide for claims, although both also take external cover. SmithKline also has insurance.

But the problems of getting external insurance were spelt out in the prospectus for the recent pounds 2.2bn sale of Wellcome shares.

It warned that product liability was a 'significant commercial risk' for drug companies, adding: 'The market for pharmaceutical general liability insurance, including product liability insurance, is limited.'

Smith & Nephew is due to announce interim figures today, with County NatWest expecting an increase in pre-tax profits from pounds 62.5m to pounds 66m and a 7 per cent rise in the dividend to 1.87p.

Meanwhile, SmithKline will next month introduce a test that cuts the time needed to detect the organism that causes most common forms of tuberculosis from up to eight weeks to two days.