AstraZeneca (AZN)

AstraZeneca experienced several setbacks in phase III drugs in 2006, halting development of drugs for diabetes, blood clots, and stroke. These setbacks seriously cloud the company's future potential.

AstraZeneca's $15.6B acquisition of MedImmune represented a whopping 53% premium to MedImmune's pre-speculation market cap. AstraZeneca excessive expenditure and assumption of debt may prevent superior acquisitions in the future and futher dim the company's prospects.

This time last year, AstraZeneca's future looked pretty bright. Nexium was selling like hotcakes, its other drugs were doing well on their own, and there were several promising drugs in the pipeline. Today, Nexium is still the number two drug in the world by sales, and some of AstraZeneca's other products are selling pretty well. The future isn't quite so bright, however, looking at the current state of the company's development pipeline. In 2006 and 2007, several promising candidates have reached late-stage clinical trials (and some have even made it to market), only to be axed due to safety concerns or poor efficacy. Blood thinner Exanta, lung cancer drug Iressa, diabetes drug Galida, and stroke drug NXY-059, are all examples of AstraZeneca's high-profile failures over the past few years. With each of these failures, AZN's development pipeline has become less and less impressive. One saving grace is that the last of Nexium's patents doesn't expire until 2020, but this still doesn't make up for the fact that there are no viable replacements on the way, at least not yet. Considering the need for new products, it's odd that AstraZeneca spent only $3.9 billion on R&D in 2006, less than any of its main competitors. Unless AZN increases R&D spending and starts pumping out some new moneymakers, things aren't looking too good in the long term.

Despite its profitable short-term prospects, AstraZeneca has a dim future. It's considerable reseach and development budget has failed to produce any groundbreaking drugs.