Bloody Nose for Nastech

Merck (MRK Quote) dropped out of a project to make a nasal-spray weight loss drug, sending partner Nastech Pharmaceutical(NSTK Quote) plunging 36%.

Nastech made the announcement Thursday and watched its stock sink $8.29 to $14.73 on volume of 5.6 million shares. Merck rose 29 cents to $35.25.

Nastech vowed to keep working on the drug, known as PYY3-36, adding that it had reacquired the compound's rights from Merck. According to Nastech, Merck canceled the agreement after preliminary results of early studies showed the compound isn't effective.

"Based on our review, Nastech believes that clinical trial results to date support the continued development of this important investigational product for the treatment of obesity, and we remain committed to the further advancement of the PYY clinical program this year," said CEO Dr. Steven C. Quay.

The Bothell, Wash.-based company added that research data show the drug can be delivered "with an acceptable nasal safety profile." The company said it hopes that further tests will identify "an appropriate dose or dosage regimen for intra-nasal PYY."

Nastech said it has the financial resources to continue developing the obesity drug "and to also advance its other ongoing programs." If the dosage tests are successful, Nastech will start a phase II clinical trial, the second of three sets of clinical trials before a compound is submitted for regulatory review. Then, it will look for another partner to help develop and market the drug.

Nastech expects to recognize $3.7 million in revenue in the first quarter due to the canceled deal with Merck.

Obesity is one of nine priority targets that Merck's CEO Richard T. Clark identified in December as part of the company's refocusing of its research and development strategy.