Updated from 8:38 a.m. EST

Genentech ( DNA) and Xoma ( XOMA)said Monday that their drug Raptiva had failed to meet the goals of clinical testing for treating psoriatic arthritis, an inflammatory disease of the joints.

Genentech's stock was able to absorb the bad news; but shares of the much smaller Xoma were pummeled. Recently, Genentech's shares were down $1.46, or 1.4%, to $103.39, while Xoma's shares sank 66 cents, or 12.9%, to $4.49, highlighting the differing importance of Raptiva on the companies' fortunes.

Although the injectable Raptiva reached the U.S. market in November as a treatment for moderate to severe psoriasis in adults, the preliminary results of the test announced Monday represent a setback to the companies' strategy of securing government approval for multiple uses of the same drug.

Federal law allows doctors to prescribe a drug for any disease once the Food and Drug Administration approves a medication for a single use, but companies can only market the drug for FDA-approved purposes. Therefore, an FDA endorsement of multiple uses gives companies an important marketing advantage.

The latest test didn't deter UBS analyst Meirav Chovav from maintaining her prediction that Raptiva would produce $100 million in sales this year, $180 million next year and $250 million in 2006. Chovav, who has a buy rating on Genentech, told clients Monday that the results weren't surprising given the negative results reported last May in a test of Raptiva for rheumatoid arthritis, also an inflammatory disease. The latest test, she added in her research report, showed that "the drug was well-tolerated, with no worsening in the signs or symptoms of psoriatic arthritis after treatment." (UBS has had an investment banking relationship with Genentech in the last 12 months. Chovav's research report says that "the analyst covering this company, a member of his or her team or one of their household members has a long common stock position in Roche," the Swiss drug giant that owns more than 50% of Genentech.)

The psoriatic arthritis test failed to meet its goal of patients demonstrating a 20% improvement in the signs and symptoms of the disease after 12 weeks of treatment. This was a Phase II test -- the second of three rounds of clinical trials -- before a drug application is submitted to the FDA.

The preliminary results among 107 patients showed 28% who received Raptiva met the 20% improvement threshold while 19% who received a placebo met the threshold. The difference in scores, however, wasn't statistically significant.

The clinical trial was the second disappointment for Xoma in recent days. Last week, it reported fourth-quarter and full-year earnings that fell below analysts' estimates.

The company lost 24 cents a share for the quarter ended Dec. 31, 5 cents worse than the consensus estimate, according to Thomson One Analtics. For the full year, the company lost 78 cents a share vs. the consensus prediction of 74 cents. Year-end revenue dropped to $24.4 million from $29.9 million in 2002. (Genentech recently reported 2003 revenue of $3.3 billion, while its shares have basically tripled in the past year.)

Last week, Xoma warned that it expected a higher loss this year due to the increased selling and marketing costs for Raptiva as well as for greater research costs on two experimental drugs. The news prompted several analysts to reduce their stock price targets and 2004 earnings estimates. Xoma's deal with Genentech calls for Xoma to get 25% of Raptiva profits.

Fortis Securities analyst George Farmer cut his rating on Xoma last week to 'reduce' from 'hold,' acknowledging the financial results, expressing concern about competition against Raptiva in the overall psoriasis market and predicting that the psoriatric arthritis test would fail. On Monday, he reaffirmed the lower rating.

Even though Raptiva was just approved by Switzerland for treating psoriasis, Farmer told clients Monday, "we believe Raptiva will have difficulty winning approval in the rest of Europe without the completion of additional clinical trials." (He doesn't own shares, although his firm has provided investment banking services for Xoma in the last 12 months.)

The Swiss drug company Serono ( SRA) has the rights to market and develop Raptiva outside the United States and Japan. Serono's stock dropped 39 cents, or 2.5%, to $15.47 in U.S trading Monday.

More from Stocks

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Is Tesla's Stock Set to Nearly Double to $500?

Is Tesla's Stock Set to Nearly Double to $500?

Tesla's $78,000 Model 3 Is a Bargain. Here's Why

Tesla's $78,000 Model 3 Is a Bargain. Here's Why