Updated from 8:22 a.m. EST

Medimmune said Monday that it would stick with FluMist, its inhaled flu vaccine, conceding that the product wouldn't produce meaningful financial results until the 2007-2008 flu season. FluMist has been a flop, but the company insisted that an improved version of the drug launched in September could eventually produce annual U.S. sales of $500 million.

As a result, the company issued financial guidance for 2004 that fell well below analysts' predictions, triggering a beating of Medimmune's stock. Recently, shares were down $1.69, or 6.6%, to $24.

Medimmune, of Gaithersburg, Md., predicted 2004 earnings per share of 50 cents to 60 cents, caused in part by the reduced revenue role of FluMist and the acceleration of research and development spending on creating a second-generation flu vaccine that will reach more people. R&D will rise to 20% of sales, up from 16%, but the company said some tests on the new version of FluMist are promising.

The consensus estimate by analysts polled by Thomson Analytics was full-year EPS of 94 cents. The company earned 76 cents a share last year.

The company said 2004 sales would be $1.12 billion to $1.16, barely moving ahead of last year's $1.05 billion. Medimmune is being driven primarily by Synagis, a drug for treating respiratory disease in infants, which recorded $849 million in sales last year.

"FluMist continues to have the potential of being an important product" not only for the company, but also for public health, said David M. Mott, Medimmune's president and chief executive. But for the next three years, the company will look at FluMist as if it were a late-stage experimental drug.

FluMist will return to the market this year, but Mott predicted revenue of only $45 million to $55 million, which includes revenue from FluMist sold during the 2003-2004 flu season. That's far lower than the $120 million to $140 million Medimmune and its marketing partner, Wyeth ( WYE), had predicted for the current flu season.

Wyeth's marketing clout had encouraged many on Wall Street to predict that FluMist would be a success. It hasn't been.

The drug -- at $46 a dose -- was priced at least twice that of traditional flu vaccines, and markups by physicians' offices often widened that gap. FluMist was only approved by the Food and Drug Administration for healthy people between the ages of 5 and 49, thus missing the most vulnerable flu patients -- the elderly, the very young and the very ill.

Insurers were reluctant to reimburse for FluMist, and the company experienced some cumbersome shipping and storing issues in its efforts to convince pharmacies to stock the product. Sales came up short, despite the eventual offering of rebates and the signing of a contract with the federal government to provide low-cost FluMist after the supply of flu shots had run out during a brutal flu season.

Analysts still lack a clear idea of what will happen to Wyeth. Mott said he had hoped the relationship would have been resolved by Monday. "The dialogue is continuing," he said. That means no decision has been made on the pricing or the amount of production of FluMist for the next flu season.

Several analysts have suggested that Medimmune should part company with Wyeth, saying that Medimmune would have a better chance of at least breaking even without having to share the profits with the giant partner. (Recently, Wyeth shares were up 28 cents, or 1%, to $39.78.)

Separating from Wyeth, some say, would enable Medimmune to charge less for FluMist and achieve a profit without having to produce as much of the vaccine. (Of course, Medimmune would have to hire more sales representatives.)

Even Mott sounded like a Wyeth breakup was in the works, offering comments Monday such as "the speed and decision-making with one party would be enhanced."

Mott said Wyeth has a "different focus" on FluMist than Medimmune. "The equation for them is much more challenging," he added, because FluMist won't contribute meaningfully to sales or earnings growth until the 2007-2008 flu season and because Wyeth's marketing deal expires in mid-2014 (when the FluMist U.S. rights return to Medimmune).Wyeth made the original FluMist deal in 1999 with the tiny vaccine-maker Aviron, which was acquired by Medimmune in 2002. The deal was later revised.

Mott also said Monday that if Wyeth bowed out, Medimmune would have to write off $75 million relating to the marketing and promotional agreements as well as take an annual hit to earnings per share of 10 cents to 20 cents through 2007. But EPS would rise by 20 cents during 2009, the company said

Medimmune said Wyeth has completed a preliminary analysis of two clinical trials comparing the second-generation FluMist to injectable flu shots. "In each trial, the revised version showed statistically superior efficacy against culture-confirmed influenza with no statistically significant increase in wheezing episodes," the company said.

The results are especially encouraging, Mott said, because the wheezing side effects issue will play an important role when the FDA considers if the vaccine can be used by young children and people over 49.

One of the tests surveyed 2,200 infants and children from ages six months to 71 months with a history of recurring respiratory infections. They had a 53% lower incidence of flu than did children receiving standard flu shots.

Another test examined 2,200 children ages six years to 17 years who had a history of asthma. Those receiving the revised FluMist had a 35% lower incidence of flu versus those who received flu shots.

These tests represent the third -- and final -- phase of human testing before a drug is submitted for approval to the FDA. Medimmune also is excited about the drug called CAIV-T because it is refrigerator-stable. The current FluMist must be frozen.

Shipping the vaccine and the containers to store it proved troublesome for pharmacies, thus impairing the Medimmune/Wyeth marketing strategy of giving people quick access to the vaccine without having to make an appointment with their physicians.

"We are only moderately disappointed with the lowered guidance, but we are optimistic about the positive test results," said Michael King of Banc of America Securities, in a research note issued Monday. "The company's announcement provides greater clarity for investors to handicap the stock and we believe Medimmune still retains a favorable risk reward profile."

(King has a buy rating on the stock. He doesn't own shares, but his firm is a market maker in Medimmune and expects to receive or seek compensation for investment banking services within the next three months.)

But Medimmune's forecast didn't persuade Dennis R. Harp of Deutsche Bank Securities who cut his rating Monday to sell from hold. Harp told clients in a research note Monday that he was disappointed with the lower 2004 financial guidance, which prompted him to drop his 12-month price target to $18.

FluMist will be "a drag on earnings" until at least 2007, and the stock will be affected by the slowing sales growth of Synagis, the respiratory disease drug and Ethyol, a drug to ease kidney damage caused by chemotherapy treatments for certain types of cancer. (He doesn't own shares, but his firm is a market maker in Medimmune's stock.)

Medimmune also suffered a ratings cut by CIBC World Markets on Monday to sector underperform from sector perform.

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