Pfizer

(PFE) - Get Report

has canceled its agreement with

Neurocrine Biosciences

(NBIX) - Get Report

to develop and market the experimental insomnia drug Indiplon.

The announcement comes a week after Neurocrine said it would need to conduct

additional clinical trials for a long-acting version of Indiplon and might require added studies for an immediate-release version.

Last week's news sent Neurocrine's stock reeling, and it prompted several analysts to speculate that Pfizer might walk away from the marketing and development agreement the companies signed in late 2002.

The long-acting product was viewed as the key to Pfizer's interest and to Indiplon competing against insomnia drugs, such as Ambien CR from

Sanofi-Aventis

(SNY) - Get Report

and Lunesta from

Sepracor

( SEPR).

Pfizer was counting on Indiplon to become an important part of its new drug lineup this year. Indiplon was the closest product to market for San Diego-based Neurocrine.

The companies made the announcement after the markets had closed. Neurocrine's already battered stock sank $3.43, or 24.8%, to $10.38. Pfizer ticked up 3 cents to $22.68.

Neurocrine's stock closed at $54.63 on May 15, the day before the company delivered the first piece of

bad news about Indiplon. On May 16, Neurocrine said, without providing much detail, that the Food and Drug Administration had rejected the long-acting version of the drug and provided conditional support for the fast-acting type.

Neurocrine will reacquire all worldwide rights to the experimental insomnia drug and independently develop it. "Neurocrine will meet with the Food and Drug Administration to finalize development plans for the resubmissions of each Indiplon

application and plans to commercialize Indiplon as quickly as possible upon approval," the company said.

Neurocrine said it will "review various business and commercial alternatives to expedite successful commercialization" of the drug. Pfizer will continue to support Indiplon for as many as 180 days to "ensure a smooth transition," Neurocrine said.

"While we are disappointed that we will not be working with Pfizer for the commercialization of Indiplon, Neurocrine is fully committed and prepared to develop and commercialize this product," said Gary Lyons, the company's president and CEO.

"With the clinical, regulatory and commercial investment we have received from Pfizer coupled with our experience in conducting the Indiplon clinical development program, we are well-positioned to complete development of this product to secure FDA approval, and we anticipate a seamless transition of responsibility," he added.