After a distinctly bilious spell, the Anglo-Swedish drugs group which makes Britain’s bestselling stomach ulcer treatment, Nexium, is toasting a return to rude health. Buoyed first by speculation that the drugs developer might fall prey to an opportunistic bid and then by revelations that it could be sitting on a cure for heart disease, shares in the pharmaceuticals giant have surged to four-year highs in the past week.

Meanwhile, in a less salubrious part of town, dark clouds are gathering over GlaxoSmithKline’s Brentford skyscraper.

It is to be hoped that the drug giant’s decision to withdraw suddenly from the bidding for Serono, Europe’s biggest biotechnology company, had little to do with the shenanigans swirling around Vodafone. But it remains a fact that GSK’s most experienced dealmaker, Sir Christopher Gent, spent a troubled week extricating himself from a deeply unpleasant row at the mobile phone group he once led, just as a deal with Serono’s management appeared to slip from the company ’s grasp.

A glance at the share prices of both AZ and GSK shows how dramatic the rerating of drugs stocks has been. The reality is as simple as it is stark: blockbuster drugs are getting harder to find and even harder to bring to pharmacy shelves. The low hanging fruit in drug discovery has all but been picked, leaving difficult-to-treat areas of medical science where the chances of finding a successful cure rely on creating compounds that often prove to be highly toxic.

Longer standing shareholders in AZ need no reminding of the punishing shift in the risk-reward equation. More than £30 billion was wiped off the company’s value as first Exanta, the blood thinner, and then Iressa, a lung cancer treatment, failed to get the nod in late 2004.

GSK, too, has suffered setbacks, notably a failed effort to develop a next-generation painkiller belonging to the same family of drugs as Merck’s now withdrawn anti-inflammatory, Vioxx. It is perhaps a measure of GSK’s slicker public relations machine that its disasters have failed to attract the attentions of the sector’s bears.

Jean-Pierre Garnier, GSK’s effervescent chief executive, is breathless in his efforts to sell his company’s pipeline to analysts. With six launches targeted for this year — the company claims a seventh but Rotarix, a vaccine to protect young children from severe diarrhoea, has been on the market for more than a year — GSK can rightly argue that its salesmen will be busier than rivals in the coming months.

Dr Garnier’s unshakeable confidence in his product pipeline leaves little room for caution. So far this year, the company has already lost one of three challenges from copycat makers looking to churn out cheaper versions of some of its best medicines. Generic companies have already won a ruling on Flonase, a hayfever treatment, and further court battles will determine the commercial prognosis for Wellbutrin XL, an anti-depressant, and for Zofran, used to treat nausea.

But the generic threat extends much further than the near-term horizon. According to some analysts, just one of GSK’s top-14-selling drugs is safe from generic attack beyond 2010. By 2015, it is possible that the company might face a potential sales gap of £19 billion a year or more. If this worst-case scenario were to play out in courtrooms around the globe, GSK would have launch seven new drugs, not only this year, but every year between now and the end of the decade. For a company that has brought only eight new products to the market in five years, that is a very tall order. The more so, given that Dr Garnier has recently parted company with Tachi Yamada, architect of the company’s survival and one of the best scientists in the business.

Dr Garnier himself will soon be leaving, and a fierce battle for succession is already playing out between several of GSK’s top managers, including David Stout, chief operating officer, and Dr Garnier’s preferred replacement, Chris Viehbacher, head of the drug giant’s American business, and Andrew Whitty, who is responsible for its European operations.

Meanwhile AZ quietly ploughs its own furrow under the modest but inspiring stewardship of David Brennan, who succeeded Sir Tom McKillop as chief executive at the start of the year. While GSK frets over succession, AZ is free to stride out along the acqusitions trail, bolstering its admittedly lacklustre pipeline with some clever acquisitions.

Mr Brennan has more than $6 billion of cash in the bank with which to do deals, and an appetite to make them work. In Jon Symonds, the finance director, he has a loyal and able lieutenant. With the chill winds of consolidation whipping across the channel from Europe, it is time to be bold. Investors should switch out GSK into AZ.

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