Shares in AstraZeneca Plc fell 1 percent Monday following news the U.S. Defense Department planned to stop using the company’s top-selling heartburn and ulcer drug Nexium from this summer.

Europe’s third-largest drugmaker confirmed Nexium would be dropped from the department’s formulary after the Washington Post first reported the story.

The paper said it was the first time the Pentagon had decided for financial reasons to ditch a licensed drug.

The switch from Nexium to cheaper alternatives is expected to save “many tens of millions” of dollars and could presage other difficult choices as Pentagon officials try to rein in a $5-billion-a-year pharmaceutical budget.

AstraZeneca said, on this occasion, it had chosen not to bid in Department of Defense formulary renewal negotiations for so-called proton pump inhibitor (PPI) ulcer drugs.

But a spokesman added it was bidding for business in other medical areas, such as hypertension.

Despite the loss of Nexium sales to the U.S. armed forces, the Anglo-Swedish firm said it believed Nexium would continue to do well in the all-important U.S. marketplace.

“AstraZeneca is confident that Nexium can maintain its recent progress in the U.S. market, which in the first quarter of 2005 saw dispensed tablet volume grow by 15 percent - nearly double the prescription market growth for the PPI class,” it said.

“Nexium is well positioned and enjoys favourable status in numerous formularies across the U.S.”

Nonetheless, industry analysts see pressures mounting on Nexium, which was AstraZeneca’s biggest-selling product in 2004 with worldwide revenue of $3.9 billion.

The medicine faces competition from cheap over-the-counter and generic copies of Prilosec, its chemically similar older ulcer drug that Nexium was designed to replace.

Critics argue there is no significant difference between the products, despite Nexium being more than four times more expensive. AstraZeneca, however, says clinical trials have established that Nexium is more effective at controlling acid and heals ulcers faster.

Diane Duston, a Washington-based public policy analyst for Prudential Equity Group, said the Defense Department’s rejection of Nexium could influence the federal Medicare insurance program, which next year begins reimbursing the elderly for prescription drugs.

“There could be a trickle-down-effect,” she said, in which the Nexium ban could prompt some private insurers that administer the new Medicare drug program to consider clamping down on “me-too” drugs.

She said insurers could deter their use by making patients pay a higher co-payment for such medicines, although it is unlikely they would outright ban reimbursement of the drugs.

Shares of AstraZeneca closed down 1 percent to 23.28 pounds in London. In New York, they were down 33 cents at $44.15 in afternoon trading.