DRUGS group GlaxoSmithKline has warned the City it faces a challenging year as cheaper versions of its drugs continue to hit the market.

Glaxo said copycat launches caused sales of Paxil to fall 40 per cent in the final quarter of last year, while demand declined for another antidepressant, Wellbutrin.

Jean-Pierre Garnier, GSK chief executive, said sales of the drugs would continue to decline, describing 2004 as being "a year of transition".

He said the company was developing new drugs, with several key compounds entering advanced trials this year.

Glaxo said turnover for the year to December 31 grew by one per cent to £21.44bn, with positive contributions from its core divisions of pharmaceuticals and consumer healthcare, which includes sports drink Lucozade and Sensodyne toothpaste.

The group reported a 15 per cent rise in pre-tax profits to £6.33bn with savings from the merger of SmithKline Beecham with Glaxo Wellcome in 2000 now more than £1.8bn a year.

The company raised its total dividend by 1p to 41p following the report.

Anthony Platts, of stockbrokers Wise Speke, said: "Although profit and earnings targets have been met, the net increase in sales of only £229m is rather worrying.

"The competition from the generic drug manufacturers is really beginning to bite.

"The associated legal costs of fighting the generic drug companies in the courts is also weighing on earnings."

"The figures will not make good reading for the manufacturing site at Barnard Castle, which relies on a steady stream of new potential blockbuster drugs.

"There is hope on the horizon, however, as a large number of new drugs are set to be filed with the FDA in 2004 which could go on to gain blockbuster status."