The latest headline-grabbing setback for

AstraZeneca

(AZN) - Get Report

-- the lung cancer drug Iressa doesn't provide a survival advantage over sugar pills -- has renewed analysts' worries about how much more bad news the Anglo-Swedish drugmaker can absorb. The stock is down 23% for the year.

"The negative Iressa news is a final blow to investor sentiment, in our view," said James Culverwell, of Merrill Lynch, in a Friday note to investors as he downgraded the stock to neutral from buy.

The Food and Drug Administration approved Iressa in May 2003, as a treatment for patients with non-small-cell lung cancer, who had failed at least two courses of chemotherapy. Now, the agency is considering whether to remove the drug from the market.

AstraZeneca's revelation Friday adds to several recent disappointments in the lab, before regulatory agencies and now in the marketplace. The Iressa results prompted Sir Tom McKillop, the company's CEO, to appoint an executive, John Patterson, to review R&D and regulatory activities. "I am determined to improve our development and regulatory performance, restore confidence in the company and value to shareholders," McKillop said Friday.

"The company is financially strong, said McKillop, adding that he was reiterating earnings per share this year of $2.10 "or a little better, before exceptional items."

But the news that post-marketing tests showed that people taking Iressa had survival rates that were no different than people receiving placebos was "the final straw" for Merrill Lynch's Culverwell. (He doesn't own shares; his firm has an investment banking relationship.)

"Iressa disappoints again," said Mara Goldstein, of CIBC World Markets, in a Friday report to clients reaffirming her underpeformer rating.

"We believe this could be the last straw for AstraZeneca's valuation," Goldstein said. "While cash flow is strong, we question the value of earnings per share growth ... due to the failure of new product flow."

AstraZeneca is "emerging from a difficult period" when well-selling drugs lost patent protection, Goldstein said. The company is benefiting from strong sales from such products as the heartburn drug Nexium and the antipsychotic drug Seroquel, she said. But the launches of new products, such as Iressa and the cholesterol drug Crestor, plus the weakness of its research pipeline, place 2005's earnings and valuation "at risk." (She doesn't own shares; her firm says it expects to receive or seek compensations for investment-banking services from AstraZeneca in the next three months.)

More Trouble Ahead?

Crestor is off to

a much slower start than Wall Street had expected since it was approved by the FDA in August 2003.

The drug has been under constant criticism by Public Citizen, a U.S. consumer group that wants the drug banned, alleging that it causes too many serious side effects such as kidney damage and a rare muscle-wasting condition. The British medical journal

The Lancet

has editorialized against the drug.

AstraZeneca has fought back, displaying clinical studies that demonstrate the drug's safety and effectiveness. The FDA says the drug is safe. Still, many analysts are worried that a steady stream of headlines -- especially in the context of the growing criticism of the FDA -- could dissuade some physicians and patients. And if the FDA decided to place new restrictions on Crestor's label, the decision would have considerable financial consequences.

Another big setback came

when an FDA advisory panel in September recommended against what AstraZeneca had hoped would be a revolutionary blood thinner. The drug, Exanta, was viewed as a major advance in stroke prevention over the anticoagulant known as Warfarin and sold under the brand name Coumadin by

Bristol-Myers Squibb

(BMY) - Get Report

.

Even though Exanta has been approved in Europe for patients undergoing elective knee and hip replacement surgeries, the FDA advisory committee said the drug's risks of liver damage outweighed its benefits. The panel rejected the drug for three different indications -- preventing blood clots in veins for patients undergoing knee replacement surgery; preventing stroke and other clot-induced complications of an irregular heartbeat called atrial fibrillation; and long-term prevention of blood clots in veins after a patient has gotten a standard blood clot treatment.

The rejection was repeated by the FDA in October, prompting the company to say it would review ways to resurrect the drug's prospects.

Two days before the FDA rejected Exanta, AstraZeneca said it would push back by one year to 2007 its expected launch of the diabetes drug Galida. AstraZeneca said there weren't any problems, but it decided to add an extra year of follow-up clinical studies due to "worldwide regulatory authority review of the safety and toxicology" of the drug class to which Galida belongs.

Merrill Lynch's Culverwell said the company's decision to review its R&D activities "clearly carries with it the risk of projects being terminated." He said "investor concern is likely" to focus on Galida and the experimental stroke drug Cerovive, now in late stage clinical trials, "which may be at risk."

Trying to Save Iressa

Culverwell said he believes AstraZeneca will "struggle to prevent the FDA from recommending " Iressa's withdrawal from the U.S. market. The company said it won't promote the drug while it talks with the FDA. The company noted on Friday that among the nearly 1,700 patients tested, the drug appears to have provided a survival benefit among Asians and among people who never smoked.

Iressa was approved by the FDA under an accelerated review program, known as Subpart H, which allows the FDA to endorse a product without having received tests that show long-term survival benefits. Many Subpart H drugs are designed for various advanced forms of cancer and HIV/AIDS.

In Iressa's case, the FDA looked at another test goal -- tumor shrinkage -- that the agency said was "reasonably likely to predict clinical benefit." AstraZeneca's clinical trials showed tumor shrinkage in 10% of the patients, "and this was thought likely to increase patients' overall survival time," the FDA said Friday.

Getting Subpart H approval, however, also means companies must conduct a post-marketing test "to verify the expected clinical benefit," the FDA says. This is the test that showed no statistically significant difference between the Iressa patients and the placebo patients. And if there's no clinical benefit, Subpart H enables the FDA to pull the drug from the marketplace.

Iressa faces an additional problem because two drugs on the market show expanded survival benefits. They are Taxotere, from

Sanofi-Aventis

(SNY) - Get Report

, and the recently approved Tarceva, from

OSI Pharmaceuticals

(OSIP)

,

Genentech

(DNA)

and Roche.