AstraZeneca has one dreadful headache, and nothing in its drug cabinet looks likely to make the pain go away. Yesterday, Britain's second-biggest drug maker admitted it would face a $380m (£242m) writedown this year after two of its major new drugs failed to hit targets in mid and late-stage clinical trials. The diminished prospects for its ovarian cancer drug olaparib and an experimental antidepressant named TC-5214 will, Astra admitted, damage expectations for its annual earnings, now forecast to come in at the lower end of its previous range of $7.20 to $7.40 per share.
Still, analysts had already whipped the antidepressant out of their models after its first trial failure last month, and the cancer drug was known to be high risk. So that blow was just a sniffle compared to Astra's real ailment: the pharma giant is suffering from a "patent cliff" that will see at least half of its drug sales face generic competition by 2016.
It's started already. Astra's $1.5bn-a-year cancer drug Arimidex faced generic competition for the first time last year. Blockbuster heartburn drug Nexium has already started competing with generics in Europe. It, together with Seroquel, Astra's best-selling bipolar drug, bought in combined revenues of $10.3bn last year: both will have generic competitors in the crucial, US market from 2014.
The coming months will also put Astra's cholesterol-buster Crestor, which bought in sales worth $5.7bn last year, under the spotlight. Lipitor, its Pfizer-made rival which is the world's bestselling medicine, has just come out of patent. The flood of cheap, generic alternatives is likely to hit Crestor's sales, leaving Astra with another revenue hole it needs to fill.
How will the gap be filled? There is no obvious source. Even before yesterday's double bad news, Astra's pipeline was thin. In February, it called off late-stage trials of a prostate cancer drug, zibotentan. A year ago, it wrote off $445m abandoning a new respiratory medicine for children, motavizumab.
"AstraZeneca has had two years of product failures. We're concerned," said Navid Malik, head of life science research at Merchant Securities. "The pipeline is devoid of late-stage potential blockbusters... Astra's more-established products are going generic, and the cupboard is beginning to look bare."
The drug maker has had one big success: blood thinner Brilinta launched in Europe (where it is sold as Brilique) at the end of last year, followed by the US a few months later. Analysts think it could hit sales of $1bn by 2015. But overall, despite success in emerging markets, the company's revenues are forecast to decline over the next five years.
So far, profits are holding up: in the third quarter of this year, revenues at constant currency declined 2 per cent thanks to patent expiries, but pre-tax profit was up, in part thanks to major cost-cutting [see box].
When Astra started to announce job cuts in 2008, it helped the City warm to the stocks. But this year the shine has come off. Despite more cost-cutting and the fact that drug stocks are considered a safe haven in a downturn, its shares are still down over the past year. Yesterday's news sent them lower again, off 44p to 2,905p.
The City is questioning where growth will come from next.
Its chief executive, David Brennan, almost certainly needs to go shopping, and City whispers suggest Dublin-headquartered tax exile Shire could be a target: it is expected to post double-digit revenue growth over the next few years thanks to its high-margin, highly specialised drugs.
"The business is growing very significantly," says Mr Malik. "An acquirer could take out a lot of its costs and drive revenue growth.
"Astra could be the one to do so. It needs to do something."
Bad medicine: Jobs go
This week AstraZeneca said it was axeing a quarter of its US sales staff – some 1,150 jobs – to further cut costs. That was a second wave of job losses as the drug maker, which employs 61,000 people around the world, continues its ambition to axe 10,400 jobs in the next three years. Doing so will, Astra says, save $1bn (£637m) a year. The UK has felt the pain of the job cuts too: Astra closed its research facility in Loughborough last year with the loss of 1,200 jobs. Meanwhile, it is expanding in emerging markets. In October, AstraZeneca set out plans to spend $200m in China, creating the most expensive factory it has ever built.