Alliance Pharmaceuticals ( ALLP), a biotech firm already struggling to survive, said Wednesday night that it has halted development temporarily of its most promising product, an experimental blood substitute called Oxygent, because of a dispute with its partner, Baxter International ( BAX).

As a result, Alliance has fired 55 employees, or 40% of its workforce, tied to the work being done on Oxygent. While Alliance is seeking to end its partnership with Baxter and take back full control over Oxygent, the company acknowledges that the blood substitute will remain on the shelf until significant capital can be raised to begin new clinical trials.

Unfortunately, Alliance needs cash just to stay solvent. The San Diego-based firm is running on fumes, announcing two weeks ago that it was cutting costs and management salaries in order to preserve what little money remains in its coffers. Its only approved product is expected to begin generating sales this fall, but revenue will be minimal. Nasdaq has told the company that it is in danger of being de-listed. Its stock closed Wednesday at 48 cents per share, down 88% since the beginning of the year.

Earlier this month, reported on efforts Alliance executives made late last year to raise money to save the company. But it turns out that this controversial financing scheme only served to significantly dilute existing shareholder equity, while potentially enriching company insiders, including its chief executive and an outside director. Alliance's banker, which also profited from the deal, had family ties to Alliance management, and a majority of the company's "independent" directors were actually shown to be well-paid Alliance consultants.

Wednesday night, Alliance said it was unilaterally pulling out of a joint venture, PFC Therapeutics, created to develop Oxygent as a human blood substitute. Alliance co-owns PFC with Baxter. The details are somewhat complicated, but essentially, Alliance accused Baxter of undermining Oxygent's development plan by changing terms of the partnership and withholding payments -- in the form of cash and stock purchases -- to Alliance.

Alliance has given Baxter 90-days notice that it is terminating the Oxygent license agreement and taking back control of the product unless Baxter complies with the contract. Baxter could not be reached for comment.

If Alliance succeeds in winning back full control of Oxygent, it will have to raise money in order to start at least two phase III clinical studies. The company has said it may look for a new partner for the product; another possibility, of course, is that Alliance could simply try to sell Oxygent to someone else. Alliance spokeswoman Gwen Rosenberg wouldn't comment on how much money is needed to get Oxygent moving again, but she said the company is exploring several different options.

As of March 31, Alliance had $7 million in cash on hand and the company was set to run out of money when its fiscal year ended June 30. Rosenberg says the company has received some money from a corporate partner since then, but it won't be enough to last much longer. Rosenberg says the company is working to raise more cash, but says the company has not hired bankers to shop the entire company around.

Alliance is one of four companies that have blood substitutes in the latter stages of development. All of them have run into significant trouble. Biopure ( BPUR) is currently awaiting Food and Drug Administration acceptance of its approval application for Hemopure, but in the meantime, the company is down to nine months of cash.

The FDA already has refused to review PolyHeme, developed by Northfield Laboratories ( NFLD), forcing that company to come up with a new plan. It's also currently dealing with an increasingly nasty proxy fight from a dissident shareholder. Hemosol ( HMSL) has also been forced to deal with lengthy delays for its product, Hemolink, that have precipitated a cash crunch at the company.