The Food and Drug Administration has given only conditional approval to a diabetes drug from Bristol-Myers Squibb ( BMY) and Merck ( MRK), saying it wants more clinical test data before it signs off on the compound.

The FDA's decision, announced by both companies Tuesday, should push back the launch of the drug Pargluva by at least a year, analysts say.

The agency's response isn't surprising because an FDA advisory committee in early September raised questions about potential heart risks, even though it voted 8-1 to support the drug as a stand-alone treatment.

Both companies stock prices' reflected the fact that the decision was expected. In afternoon trading, Bristol-Myers Squibb lost 8 cents to $22.40, while Merck's stock rose 16 cents to $27.24.

"The FDA has requested additional safety information from ongoing trials, or those completed since the safety data from the last formal regulatory submission, to address more fully the cardiovascular safety profile of Pargluva," the companies said. They are "eager to begin discussions with the FDA to address this issue and to determine what additional information may be necessary."

Pargluva represents a new approach to treating Type 2 diabetes, the most common form of the disease, in which the body doesn't make enough insulin to turn sugar into fuel for the body's cells. If this happens, too much sugar remains in the blood.

The drug could be the first FDA-approved product in the class known as dual peroxisome proliferators-activator receptor agonists, or PPAR. It also represents an opportunity for two Big Pharma companies that need hit products to offset existing and impending revenue erosion from generic competition to several major products.

"Pargluva appears to have a less favorable safety profile than currently marketed products," David Moskowitz of Friedman Billings Ramsey wrote in a Tuesday report maintaining a market perform rating on Bristol-Myers Squibb. "Given that the ongoing safety studies will not be complete until mid-2006," Moskowitz revised his estimated U.S. launch for the drug to the fourth quarter of next year.

The delayed launch prompted him to reduce his 2006 earnings estimate by 3 cents to $1.27 and his 2007 EPS prediction by 7 cents to $1.41. He doesn't own shares, and his firm doesn't have an investment banking relationship with Bristol-Myers Squibb.

Jon LeCroy of Natexis Bleichroeder predicted that the launch would be delayed to late 2006 from late 2005. Based on the comments from the FDA advisory committee, he says Pargluva will only achieve "sub-blockbuster peak sales" of $750 million a year.

His firm doesn't issue stock ratings, but he is reducing his 12-month fair value estimate for both companies' stocks due to "increasingly negative investor sentiment" regarding Big Pharma companies. His Bristol-Myers Squibb estimate is now $22.75, down from $26.50, and his Merck target price dropped $2 to $29.50.

"Both companies should face declining earnings in 2006," LeCroy says. He doesn't own shares, and his firm doesn't have an investment banking relationship with the drugmakers.

Although the FDA advisory committee approved Pargluva has a stand-alone treatment, it recommended against the drug being used with sulfonylureas, a product that prods the body to make more insulin and thus reduce blood sugar.

However, the panel did recommend that Pargluva could be used with metformin, sold as Glucophage by Bristol-Myers Squibb. Metformin helps control blood sugar by decreasing the amount of glucose absorbed from food and the amount of glucose made by the liver.

"Though Pargluva was recommended to be approved for use with Glucophage, which is certainly one of the most commonly used diabetic drugs, Glucophage is often used in combination with a sulfonylureas before adding on other drugs," says Sagient Research Systems of San Diego, whose BioMedTracker report analyzes biotech drugs. "Hence, we believe the restriction on Pargluva's use with sulfonylureas will hamper its efforts in the marketplace."

Sagient adds that "the concern over Pargluva's cardiac side effects is also likely to hamper the drug, because the theoretical reason for its use in the first place is to reduce cardiovascular risk." Sagient doesn't own shares of the companies and it doesn't have a financial relationship.