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Why Smith & Nephew plc’s Latest Failure Should Worry AstraZeneca plc And GlaxoSmithKline plc

Medical play Smith and Nephew (LSE: SN) disappointed the market on Monday when it announced that testing of its GlaxoSmithKlineHP802-247 treatment in North America — a spray designed to treat veinous leg ulcers (or VLUs) — had failed at the Phase 3 stage.

And following the disappointing study, Smith and Nephew said that “a thorough assessment is underway to determine why the preliminary results of the first Phase 3 study are inconsistent with the strongly positive Phase 2a/2b results.”

Although the business added that “we remain excited by the prospects for advanced wound bioactives as unique treatments for unmet patient needs,” the news comes as a body-blow to the company which had been engaged in the study since September 2012.

Don’t put the house on the pipeline

Such setbacks are part and parcel of pharmaceuticals development, of course, so Smith and Nephew should not be hauled over the coals because of this. Still, the huge variance between the results of early- and late-stage testing of HP802-247 underlines the fact that the route from lab bench to pharmacy shelf is an extremely unpredictable and cost-intensive one.

And for the likes of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US), such problems are particularly perilous for their long-term revenues outlooks. Both companies have seen a spate of patent expirations across key drugs crush revenues in recent times, a phenomenon which is expected to endure during the medium term at least.

Indeed, City analysts expect turnover at AstraZeneca to erode 40% this year to $15.6bn, while at GlaxoSmithKline a combination of exclusivity losses — and of course lost revenues due to the Chinese corruption debacle — are anticipated to push sales 11% lower to £23.6bn.

Against this backcloth both pharma plays need the fruits of their sizeable R&D divisions and capital-intensive acquisition programmes to begin to pay off big time. But of course this is easier said than done, a point most recently underlined by AstraZeneca’s decision to dissolve its decade-old partnership with Targacept last week.

After testing for a Alzheimer’s Disease treatment failed during the summer — the latest study was the latest in a string of disappointments for the alliance — AstraZeneca has finally decided to pull the plug on the venture, leaving its smaller partner less than enthused.

Pharmaceutical firms of course take great pride in parading the strength of their product pipeline — GlaxoSmithKline lays claim to having more than 40 new molecular entities in late-stage testing, for example — but until these products actually hit the market then both sales projections and development costs can easily take a turn for the worse.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.