Metabasis Gets Whacked

Thump. "Ow!"

That first sound was developmental stage drug maker Metabasis (NASDAQ:MBRX) hitting the floor. It recently heard from its partner, Daiichi Sankyo, that its diabetes drug, CS-917, had failed to show an effect in a recently completed phase 2 trial.

The second sound was Metabasis screaming as partner Schering-Plough (NYSE:SGP) kicked it while it was down. Schering-Plough ended its deal with Metabasis by dropping its lead Hepatitis B drug, Pradefovir. Needless to say, Metabasis' stock plummeted yesterday, losing more than half its value.

In the placebo-controlled trial, CS-917 failed to lower glucose levels in type-2 diabetes patients who took the drug for three months. But the drug may not be completely dead; there were promising results from previous phase 2 trials that measured glucose levels during a shorter timeframe. The company indicated that patients tested in this trial started with lower levels of glycosylated hemoglobin, a measure of glucose load, than in previous trials. The company may run additional studies on patients with higher glucose loads, although it would limit the market value of the drug if it were approved to treat a limited subpopulation of diabetes patients.

The Schering-Plough news wasn't a huge surprise. Metabasis was informed earlier this year that ongoing animal studies revealed that Pradefovir increased the incidence of tumors, and the company stopped the dosing of patients in an ongoing phase 2 trial.

Metabasis originally licensed Pradefovir to Valeant Pharmaceuticals (NYSE:VRX) in 2000, which sold the rights to Schering-Plough last December for $19.2 million. Talk about good timing by Valeant.

Metabasis' pipeline isn't completely dead, though. It has one diabetes drug in early phase 2 clinical trials and two more drugs in very early-stage clinical development. It also has pre-clinical development deals with Merck (NYSE:MRK) and Idenix Pharmaceuticals (NASDAQ:IDIX) to develop drugs for patients with Hepatitis C infections.

Its financial picture doesn't look so rosy. At the end of last quarter, the company had $71 million in cash, which certainly isn't enough to get a drug through clinical trials. At some point in the future, Metabasis will likely need to sell more shares or find another partner willing to provide a cash infusion.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy is rock solid.