BioWorld International Correspondent

Swedish drug discovery firm Karo Bio AB's shares fell 15.8 percent to close at SEK50.50 Tuesday, as investors digested news that partner Merck & Co. Inc. opted to discontinue development of the lead compound in their collaboration to find novel modulators of estrogen receptors.

The move followed "adverse findings in the final stages of preclinical testing," Karo Bio said. It did not disclose additional information. A second, unrelated compound remains in preclinical testing for a separate indication, and Merck, of Whitehouse Station, N.J., continues to evaluate additional chemical series that Huddinge-based Karo Bio supplied, which have differing properties and activities.

"Of course when compounds are discontinued it should be stated that it is a disappointment," Karo Bio President and CEO Björn Nilsson told BioWorld International. "We also recognize it's part of the game." Merck is continuing with the program, however, and, Nilsson said, is putting more resources into it. "This is alive and kicking," he said. "It is not a dead duck."

The program, which commenced in 1997, is based on finding modulators of estrogen receptors alpha and beta for a range of indications. Assuming two drugs would reach the market, the deal was valued at more than US$80 million, excluding royalties. Karo Bio gained its first preclinical milestone in July last year. The second compound triggered another milestone payment in May this year.

Analyst Anders Nordstrom at ABG Securities in Stockholm said the structure of the original deal provided some degree of insulation, as it was not based on the licensing of a specific molecule. "This is a setback in time and perhaps the timing of different milestones," he said.

However, investor impatience is beginning to mount. "There is concern in the market. Why haven't we seen more projects in the clinical phase?" Nordstrom said. A candidate obesity drug in development with Bristol-Myers Squibb Co., of Princeton, N.J., was withdrawn following a Phase I clinical trial last year. No other compound from its four collaborations with major pharmaceutical firms has entered the clinic.

The research phase of three of them - those with Merck, Bristol-Myers and Abbott Laboratories, of Abbott Park, Ill. - has now ended, while a collaboration in atherosclerosis with Madison, N.J.-based Wyeth has one more year to run. Karo Bio netted SEK118.6 million (US$14.2 million) in a rights issue earlier this year, to act as a buffer against the accompanying loss of research income. It held SEK273.6 million in cash and equivalents at June 30, which would fund its activities for the next 18 months without any additional income from milestones or new deals, Nilsson said.