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Shares of

AstraZeneca

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fell Thursday even though the Anglo-Swedish drugmaker posted fourth-quarter and full-year earnings that beat analysts' expectations.

In addition, AstraZeneca forecast 2006 earnings of $3.40 to $3.60 a share, well above the Thomson First Call consensus of $3.27 a share. However, AstraZeneca's EPS prediction contains one big caveat involving a legal dispute over a top-selling drug that could be worth as much as 45 cents a share.

The caveat is the blood-pressure drug Toprol XL, which produced $1.74 billion in sales last year, or 7% of corporate revenue. AstraZeneca is fighting in court three companies that want to sell generic versions. Earlier this month, AstraZeneca suffered a setback when a federal court judge issued a summary judgment in favor of the generic companies, declaring two Toprol XL patents unenforceable. AstraZeneca has appealed.

The stock dropped $2.10, or 4.3%, to $46.86 by early afternoon. Volume of 2.2 million shares exceeded the average daily trade of 1 million shares during the last three months.

For now, the FDA hasn't ruled on any of the generic drug applications. If the FDA supports the challengers, they could start selling generic copies immediately. Should that happen, and AstraZeneca wins its litigation appeal, it could recover substantial damages from the generic producers.

Jonathon Symonds, AstraZeneca's chief financial officer, told investors and analysts Thursday that his company is proceeding as if Toprol XL will retain U.S. patent protection for the rest of the year. If generic competition started today, he said, it would cost AstraZeneca 45 cents a share. Symonds said he is trying to keep the Toprol XL calculations as simple as possible because he doesn't want to speculate on multiple scenarios.

The potential EPS hit by generic Toprol XL "appears to represent a greater earnings impact than many had expected," says Mark Purcell of Deutsche Bank in a research note. He says many analysts had been expecting a loss of 25 cents to 30 cents. In addition, the company's 45-cent warning excludes one-time inventory adjustments, he says.

Purcell is still keeping a buy rating, in part, because the generic challenge is quite complicated. For example, he says Toprol XL "is not a straightforward compound to formulate." In addition, one of the generic challengers must address manufacturing problems with the FDA before it can proceed, and another lacks sufficient manufacturing capacity. Purcell doesn't own shares. His firm says it does, or seeks to do business with companies mentioned in research reports.

Toprol XL is one of several drugs whose patents are being challenged. AstraZeneca filed suit in November in federal court against India's

Ranbaxy Laboratories

, claiming patent infringement for the ulcer drug Nexium. AstraZeneca is also evaluating an application by

Teva Pharmaceutical Industries

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to sell a generic version of Nexium. AstraZeneca has 45 days to sue Teva, which filed its application earlier this month.

Also in November, AstraZeneca sued Teva in federal court, alleging that the company's application for a generic version of the schizophrenia drug Seroquel constituted a patent infringement.

Healthy Quarter

For the fourth quarter of 2005, AstraZeneca reported an operating profit of $1.64 billion, or 77 cents a share, on revenue of $6.29 billion. The Wall Street consensus was 75 cents. For the same period in 2004, the company's operating profit was $1.27 billion, or 55 cents a share, on revenue of $5.8 billion.

For the full year, AstraZeneca's earnings of $2.91 a share beat the consensus by 3 cents. Full-year sales of $23.95 billion topped the average estimate of $23.83 billion.

David Brennan, the chief executive, said last year's performance was "exceptional," noting that AstraZeneca now has 10 drugs with more than $1 billion in sales vs. only two $1 billion-plus products five years ago. Like all Big Pharma companies, AstraZeneca faces a challenge in replacing drugs that have lost or will lose patent protection with new, big-revenue products.

"We will do more to further strengthen our product pipeline, and this is my No. 1 priority," Brennan said.

Among its biggest drugs, Nexium rose 18% in sales to $4.63 billion last year from 2004 in constant exchange rates. Seroquel rose 36% to $2.76 billion. Toprol XL sales jumped 24% to $1.74 billion, and revenue from the breast cancer drug Arimidex were up 44% to $1.18 billion. The cholesterol fighter Crestor gained 38% to $1.27 billion.

Symonds said the cholesterol market will be "in for turbulence" this year in the U.S. as two major brand name drugs, Zocor from

Merck

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and Pravachol from

Bristol-Myers Squibb

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, lose patent protection.

As generic copies proliferate and as managed care organizations encourage patients to take cheaper drugs, the makers of brand-name drugs face uncertainty. Given the competition, Symonds said Crestor's prescription growth may exceed its revenue growth this year.

Looking ahead, AstraZeneca expects to hear from the FDA later this year on its application for Symbicort, an asthma drug that produced $1 billion in sales last year in foreign markets, up 22% from the previous year.

Experimental products in late-stage testing for treating clogged arteries and sepsis are part of a flurry of

recent licensing deals, as is an Alzheimer's disease drug now in mid-stage clinical testing.

In December, the company asked European Union regulators to approve the blood thinner Exanta for patients who suffer from atrial fibrillation, a type of erratic heartbeat in which blood can coagulate in heart chambers and lead to stroke-causing clots.

Exanta was opposed by an FDA advisory committee in September 2004 and rejected by the FDA a month later, both saying the drug's benefits didn't outweigh the risks. Although the company is still talking to the FDA, it adds that it doubts Exanta will make it to the U.S. market.

AstraZeneca is working on another blood thinner called AZD0837. Clinical trials indicate it has fewer side effect than Exanta, but the drug doesn't remain in the body long enough to become a once-a-day product. The company wants to determine if the drug could be reworked via an extended-release formulation, but this effort will delay late-stage clinical testing by two years.