Emisphere Technologies

(EMIS)

is kicking its oral, liquid version of the blood-thinning drug heparin to the curb after a late-stage test proved to be a failure.

But company executives insist that Tuesday's bad news doesn't invalidate its core technology -- the ability to turn injectable drugs into pill or liquid forms. Emisphere says it is continuing to develop pill versions of heparin and insulin, even as it shuts down the liquid heparin product.

Investors were, clearly, not ready to embrace Emisphere's happy talk. Shares plummeted $6.76, or 57%, to $5.16 in late Tuesday trading. Emisphere is now trading at its net cash value, which means investors are completely writing off the value of the company's oral drug carrier technology.

As reported earlier, Emisphere's oral version of heparin was shown to be

less effective in preventing blood clots compared to Lovenox, an injectable version of the drug marketed by

Aventis

(AVE)

.

TheStreet.com

wrote in February about the possibility that Emisphere's clinical trial would fail.

On a Tuesday morning conference call, Emisphere CEO Michael Goldberg expressed shock over the test's failure and blamed everything but the company's experimental drug for the bad outcome. He said more patients taking the oral heparin inexplicably dropped out of the study, compared to patients taking Lovenox. Some doctors might have also given other blood-thinning drugs to Lovenox patients, which unfairly improved their outcomes.

Goldberg was raising the possibility that doctors and patients didn't abide by the trial's procedures, but he also acknowledged that the evidence is only anecdotal and will be very difficult, if not impossible, to verify.

"We've learned some valuable lessons from this study," he said, one of which is that "a bad tasting oral medicine may not be better than injection for some patients."

Goldberg said analysis of the failed trial bolsters his confidence that the company's technology can deliver clinically beneficial doses of heparin orally, which will allow it to continue development of a heparin pill.

But this version of the blood thinner is still in early human trials, so the company has not yet proven it works. Results from a phase I study should be ready in the third quarter, according to Emisphere President Alan Dunton. A pill form of insulin is also in early, phase I trials.

Emisphere says it will cut staff and reduce other expenses to preserve cash as it attempts to regroup, although executives declined to offer a specific plan. Emisphere had $119 million in cash at the end of the first quarter, but it owes $30 million to Irish drugmaker Elan, due in 2006.

Emisphere was clearly counting on a positive result from its liquid heparin study to validate its core technology. Instead, the company's future has been plunged deeper into doubt.

Even two of Wall Street's biggest Emisphere bulls seem to be having second thoughts. J.P. Morgan biotech analyst Corey Davis downgraded the company Tuesday to underperform from buy. Carol Werther at Adams, Harkness & Hill cut her rating to market perform from buy. Of course, this new sense of caution does little to make up for the losses racked up by their clients. Davis' firm has a banking relationship with Emisphere.