Metabasis Therapeutics ( MBRX) fell more than 50% Tuesday on disappointing data from its type 2 diabetes candidate and a parting of ways with Schering-Plough ( SGP) over hepatitis B treatment pradefovir.

The biopharmaceutical company said its phase IIb trial on CS-917 in patients with type 2 diabetes failed at its primary endpoint, significantly lowering a measure of glucose, in both doses tested.

"We are certainly disappointed with the CS-917 results, but we are hopeful that further review of the data will give us insight that will allow the continued development of this potentially important new approach for treating type 2 diabetes," said Metabasis CEO Paul Laikind, who noted in a conference call that the company has more questions than answers about the top-line results at this point.

"Although it certainly remains to be seen as we go through the data, I think most of the scientists who are familiar with the program here don't view this as a failed product," Laikind said, "They view this as a failed study."

The investigative drug is being developed by Daiichi Sankyo pursuant to a licensing agreement with Metabasis. The companies said they are continuing to evaluate the data and that fasting blood sugar levels of patients at the start of the phase IIb trials were considerably lower than those in the phase IIa trials, so they're exploring whether this may have impacted the results.

Additionally on Tuesday, Schering-Plough ended an agreement made in December with Metbasis and Valeant Pharmaceuticals ( VRX) for pradefovir, an investigational drug for chronic hepatitis B. All rights for pradefovir will be returned to Metabasis.

The decision to terminate the agreement is subsequent to 24-month carcinogenicity studies in mice and rats that showed an increased incidence of cancer at higher doses of pradefovir.

"Schering-Plough had not yet initiated their clinical development activities on pradefovir when the carcinogenicity study results came to light, thus while we are certainly disappointed, we are not overly surprised by their decision," Laikind said.

Laikind said the decision doesn't mean the development and approval of pradefovir isn't feasible. "Over the coming months, we will carefully review the clinical and toxicology results and other factors to determine the future of pradefovir," he said.

Metabasis' CFO John Beck said that he hasn't updated guidance -- and won't do so now -- from the beginning of the year that held the expectation of burning between $43 million and $48 million in cash in 2007. He noted, "When we looked forward, that put us in a position where if that continued, we would have cash to hit key value driving events into 2008, but would be looking to bring additional cash into the company."

"I can say that as of this moment, based on this news, we have taken steps to freeze all non-essential discretionary expenditures and freeze hiring, so we will continue to look at those types of initiatives as we complete this analysis," Beck said.

Metabasis lost $3.92, or 56.8%, to $2.98 in recent trading, while Valeant added a penny, or 0.1%, to $17.49, and Schering-Plough edged down 6 cents, or 0.2%, to $32.34.