A Defense Department rejection left Cleveland BioLabs ( CBLI) stock in the dust on Friday.

Shares plummeted nearly 60% after the Buffalo, N.Y., company's proposed treatment for the gastrointestinal effects of radiation sickness, Protectan CBLB502, wasn't chosen for a lucrative DoD contract award.

Protectan, which has yet to undergo clinical human testing, is the company's lead candidate for acute radiation syndrome. Had it been selected by the DoD, the compound's development would have gotten funding through approval at the Food and Drug Administration, according to the company's latest quarterly filing.

The DoD instead chose Maryland-based Osiris Therapeutics ( OSIR), granting it a $224.7 million package to develop an adult stem-cell therapy called Prochymal jointly with Genzyme ( GENZ).

"We are deeply disappointed by this unexpected decision," said Cleveland CEO Michael Fonstein in a press release, particularly given what Fonstein described as "aggressive" and detailed prior feedback on the proposal from the DoD.

Still, Cleveland vows to continue developing the drug, aiming for regulatory approval by 2009, and it intends on responding to any future DoD solicitations.

Chief Scientific Officer Andrei Gudkov also said the company plans on continuing talks with the Department of Health and Human Services and other friendly governments "who are interested in its potential to protect against terrorist threats and nuclear disaster."

Cleveland shares ended down $4.69, or 58.6%, at $3.31. Osiris jumped $1.29, or 10.3%, to $13.86, and Genzyme dipped 0.5% to $75.05.