The group warned that austerity drives across Europe, which have seen medicine prices slashed by more than 7 per cent, will impact the development of new drugs across the continent.
Glaxo issued the warning as it announced moves to overhaul its European business to weather difficult trading conditions.
It said it was unclear if there would be any impact on jobs and would give further details of the review before the end of the year.
But it stressed it continued to expect to increase staff numbers over the next two years in the UK, where it is headquartered and currently employs around 15,000 people.
The group has around 23,000 staff across Europe, excluding the UK.
Third quarter sales slumped 9 per cent in Europe, largely as a result of government cutbacks, which dragged on the wider group performance, with overall sales down by 5 per cent to £6.5bn.
Glaxo said that while it hoped better performances in emerging markets and Asia would see a return to sales growth in the fourth quarter, the worse-than-expected conditions in Europe will mean full year sales are likely to remain flat against previous forecasts for an increase of around 2 per cent.
Sir Andrew Witty, chief executive of Glaxo, said: “There’s a risk that these aggressive price reductions are going to undermine the incentive for innovation in Europe.”
He added: “It’s not reasonable for governments to believe they can continue to make these sorts of price reductions and delay new medicines without having unintended consequences.”
Prices have been worst affected in Greece and Germany, but Glaxo said governments cross-reference their prices across Europe, which means one country can influence the whole continent.
It added that systems for getting new medicines on to the market were also impacting business, in particular in the UK.
Glaxo posted a 13 per cent fall in underlying operating profits to £2bn in the third quarter, when exchange rate movements are stripped out.
It is cutting costs across the group to offset tough trading conditions and the impact of competition from cheaper generic rivals and said it had delivered savings of around £2.5bn of the £2.8bn targeted by 2014.