No cure in sight as ailing AstraZeneca makes healthy profits for the lawyers

Three months ago, when GlaxoSmithKline was beginning its 30 per cent share plunge, its bitter rival AstraZeneca appeared to be leading what one analyst then described as "a charmed life".

The drugs pipeline worries and legal blows that were smashing sentiment over GSK seemed to be bouncing off Astra's back, leaving the stock relatively unscathed. Unfortunately for Astra's chief executive, Tom McKillop, the charm has abruptly worn off.

He now finds himself at the helm of a company beset with three deep-cutting problems, and a distinct lack of obvious cures. Market rumours are gathering pace, and there are increasingly big questions over the company's future. Last month's mega-merger between Pfizer and Pharmacia reminded everyone that there is still plenty of scope for deals between big drugs companies, and the hot debate is whether Astra can face the future on its own.

The surprising revelation that hit the stock last week was that clinical trials on the cancer drug Iressa showed it was not effective as a combination therapy. There is a chance the drug, which had been touted as a possible blockbuster, may have a future as a stand-alone treatment, but the really big money prospects have been dealt a killer blow.

The news came just weeks after the group's second-quarter results were overshadowed by disappointment on Crestor, the group's cholesterol-busting treatment, the prospect of lengthy negotiations with the Food & Drug Administration in the US and a delay to the drug's launch.

The background to all this is the massive uncertainty produced by Astra's ongoing court case over the anti-ulcer blockbuster Prilosec, and the growing likelihood that the drug will shortly be exposed to attack from generic competition.

Although the group is still generating plenty of revenues and has some decent products to fall back on, this trio of threats is being taken seriously by the investors, and particularly by those who believe that Astra should now be looking for a partner.

The problems may at first look like isolated incidents, but their implications go much further.

Several of the more bearish analysts, including Nigel Barnes at Merrill Lynch, believe that the problems with Iressa may turn out to apply to the whole class of drugs of which it is the flagship.

These worries highlight a critical problem for the drugs majors and their pipelines. As JP Morgan's drugs analyst Rikin Patel says: "At a time when investors are increasingly concerned about the safety of the pharmaceutical industry, AstraZeneca has a high-risk profile. The company's ability to offset its patent burden with its pipeline looks increasingly in doubt."

The trouble for Dr McKillop is that the research and development side of his business has become a particularly frustrating game.

The 1980s were boom years for drugs discovery, but the patents of that era are running out and the quest for blockbusters seems harder than ever. Biotechnology initially appeared to offer a solution, but the quick conversion from theory to product has so far been elusive.

While Crestor was making all the noise, Astra used its quarterly results statement to quietly announce that another five early-stage products were being dropped from the pipeline. The delays to Crestor make Astra's pipeline issues seem all the more acute, and further demonstrate the high risk associated with working in an industry where the average cost of bringing a drug to market is $800m (£500m). Astra is now left with a large sales force, but no Crestor for it to sell.

The Prilosec court case represents another wider issue: the balance of courtroom influence has recently appeared to swing in favour of the generic challengers, who say they have every intention of pursuing the drugs companies wherever they can. The suit also reveales the extent to which the outcomes of these cases appear to be at the whim of the judge.

In combination, these issues have clearly opened up the question of Astra's continued single status. Bulls of the stock believe that even with its pipeline full of holes, the group has enough firepower with drugs like Exanta to hold its own and, at £34bn, a big enough market value to hold off any takeovers.

But a growing number now argue that Astra could now be forced to pursue some sort of deal just to give its investors a better pipeline.

Its recent problems are industry issues and the underlying concern now is that tough science and tougher lawyers are here to stay. It may not be the ideal solution, but the drugs industry has repeatedly fallen back on the mantra that bigger is better, leaving Astra either hunter or hunted.