So close, yet so far away. Merck (NYSE:MRK) was dealt another disappointment in its efforts to boost its pipeline of drug candidates yesterday when it announced it has discontinued development of diabetes compound MK-767, an experimental drug it was working on with Japan's Kyorin Pharmaceutical Co.

According to management, work on MK-767 -- which had been in Phase III clinical trials -- was discontinued after the drug showed development of rare, malignant tumors in mice. The trial was also being conducted on humans. While it isn't clear if there will be any negative effects on the human subjects, all patients have been notified to stop participating in the studies.

This is a big disappointment for Merck. After all, Phase III clinical trials are darn close to the end of the development line for drug candidates, and that's a long and difficult road indeed. (To learn more about the uphill climb toward drug discovery, check out this Foolish commentary on speculating in biotech.)

This news feels a bit like déjà vu. Just last week, Merck announced it would discontinue development of a drug for depression, leading some to wonder whether the company's pipeline was in trouble. This latest setback only underscores those concerns.

The only comforting note in last night's press release was Merck's assurance that it hasn't given up on the diabetes market, and has another planned treatment for the disease, a DP-IV inhibitor. However, that drug isn't expected to enter Phase III trials until the middle of 2004. If trials are successful, Merck said it expects to file for FDA approval of the drug by the end of 2006. Ouch. Not exactly instant gratification.

With the recent round of disappointing drug candidates, steep competition, and a slew of patents set to expire on tried-and-true blockbusters, Merck has a lot to contend with, and its sales growth going forward looks uncertain. Investors should watch developments closely.

Do you see glimmers of hope for Merck, or do you think other drug companies are more deserving? Take a stand on the Fool's Merck discussion board.

Alyce Lomax welcomes your feedback at alomax@fool.com.