Updated from 10:04 a.m. EDT

A staff report by the Food and Drug Administration raised significant concerns Thursday about liver damage stemming from long-term use of an experimental drug made by AstraZeneca ( AZN).

The staff report, issued a day before an FDA advisory committee meets to discuss the experimental blood thinner Exanta, could be a serious blow for the U.K.-based drug company.

The FDA staff report's documents on safety and efficacy on Exanta "look downright bad," said Dr. Tim Anderson, a drug industry analyst for Prudential Equity Group, in a research report to clients Thursday. "Prior to seeing the documents, we had forecasted odds of approval at 60/40. The odds may now be lower."

Anderson said his sales forecasts for Exanta are well below the Wall Street consensus, and "now even our estimates feel too high." He predicts Exanta's sales in 2008 will be $825 million vs. the consensus view of $1.6 billion. "Even if this drug gets approved, it is very likely that few physicians will use it unless additional clinical trial work were to show better results," he added.

AstraZeneca's stock was down $1.90, or 4%, to $45.15

AstraZeneca is seeking FDA approval for Exanta for three uses: preventing blood clots in veins for patients undergoing knee replacement surgery; preventing stroke and other clot-induced complications of the erratic heartbeat disease called atrial fibrillation; and long-term prevention of blood clots in veins after a patient has gotten a standard blood clot treatment.

AstraZeneca began marketing Exanta in Germany on June 21, having secured European Union regulatory approval in late 2003 for preventing blood clots in patients who had undergone elective hip or knee replacement surgeries. This is a narrow use of the drug, but it's also one for which liver problems would be less likely to arise because patients won't take the drug for a long time. The EU approval calls for the drug to be administered orally for 11 days.

The FDA staff report on Thursday indicated that there didn't appear to be any risk of liver damage -- measured by an increase in a liver enzyme -- during short-term use of Exanta. Short-term use is defined as less than 12 days.

But the agency also noted that company-sponsored tests of the drug during knee replacement surgery -- for which the drug would be used short term -- also revealed that elevated enzymes showed up in some patients six weeks after surgery. "Whether delayed onset of severe liver injury after short-term ... treatment could occur is unknown, since no additional routine study visits were conducted," the FDA said.

But the big market for Exanta and AstraZeneca will be in chronic uses, such as atrial fibrillation or the installation of a mechanical heart valve. These patients would have to take Exanta for the rest of their lives. AstraZeneca is seeking European Union approval for expanded applications of the drug.

The FDA "will likely restrict access to this drug, and probably deservedly so," said Anderson, who has a neutral rating on the stock. (He doesn't own shares of AstraZeneca, and his firm doesn't have an investment-banking relationship with the company.)

Anderson also noted than one FDA reviewer questioned whether Exanta is better than a placebo in terms of efficacy for preventing blood clots in patients with atrial fibrillation. He said the viewer also questioned whether Exanta is better than today's primary pill, which is sold generically as Warfarin and under the brand name Coumadin.

Much of the FDA staff report focused on potential liver damage, as measured by significant increases of an enzyme called ALT. The prospect of liver damage is a key issue in the FDA's evaluation. The agency is bound to be cautious because some drugs with lower liver-damage test results than Exanta's have been approved, only to be withdrawn later by manufacturers, says a recent research report by Bear Stearns.

The FDA says that drug-induced liver injury is the top cause of acute liver failure, a rare disease that can produce critical illness in a few days, cause death or necessitate a liver transplant. It's the leading reason why drugs are removed from the market and why the FDA requires restricted use of certain drugs and special monitoring of patients.

The FDA staff report Thursday said the severity and rate of liver toxicity "is substantial with long term treatment" of Exanta, adding that preliminary analyses "suggest the risk of severe liver injury begins within the first month of therapy."

The FDA staff report noted that AstraZeneca had submitted a plan for monitoring potential liver damage from Exanta, but the report said the plan "does not address the possible risks" of delayed liver toxicity after short-term use of Exanta or the risk of heart attack that an FDA report on clinical safety had detected. In addition, reversal of Exanta-induced bleeding "was not addressed by the sponsor," the staff report said.

The staff report recommends that the advisory committee ask a lot of questions on Friday, including whether more tests are needed to assess liver toxicity and the risk of heart attack, as well as the crucial question: Do the benefits exceed the risk?

The FDA is expected to act on AstraZeneca's request in late October. The agency doesn't have to follow its advisory committee's recommendations, but it usually does so.

Depending on how well Exanta performs, Merck ( MRK)could get a royalty of as much as 20% of sales. That's the residue of a joint venture that Merck formed in 1994 with then independent Astra. The joint venture was restructured into a partnership in 1998, and the partnership was restructured after Astra merged with Britain's Zeneca in 1999.