The transgenic lambs that will be born during the coming weeks at a farm in Midlothian could provide a breakthrough for the treatment of such conditions as cystic fibrosis.
But PPL Therapeutics, the Edinburgh-based firm conducting the programme, has advised the Government of problems with the unusual birth weights and high death rates of the lambs.
The PPL team developed Dolly, the cloned sheep, and then Polly, the first transgenic sheep, which was made by a nuclear transfer programme involving sheep foetal cells being given a human gene. The other transgenic sheep are clones of Polly.
In a briefing document seen by The Independent Ron James, PPL's managing director, reports that in an earlier trial nine lambs out of 14 died, a mortality rate of 64 per cent compared with the normal rate for commercial flocks of 8 per cent.
Mr James wrote: "Many types of manipulation of embryos have been reported to increase foetal mortality and there is no specific reason to suspect that the perinatal deaths are a consequence of nuclear transfer per se. Nevertheless we recognise they compromise animal welfare."
He also notes "at least one lamb was larger than expected". One was 8.7kg, while others weighed barely 3kg. A company spokesperson said: "Nobody knows yet why it happened. They have some ideas and feel that some of the changes we are making now might well solve the problem. Everyone has been concerned about this."
The scientists feel that the abnormality may have been due to them producing Poll Dorset lambs using the smaller Scottish Blackface breed as surrogate mothers. The process involved taking foetal cells from Poll Dorset lambs and inserting a human gene.
The cells were maintained in the laboratory and tested to see whether the gene had been successfully integrated before they were inserted into the ewes' eggs, from which their own DNA had been removed. The eggs were replaced in the ewes and brought to birth.
The spokesperson said that the high death rate was a similar difficulty to that faced by those working in human in vitro fertilisation. "The problem with the lamb deaths refers back to the nuclear transfer manipulations, which is a bit like IVF in women; there's a lot of disturbance of the embryo with this technology."
In coming weeks between 20 and 30 transgenic lambs will be produced to form the PPL "foundation" flock from which it hopes to produce a plentiful supply of milk containing vital human proteins.
The first lamb of the flock has already been born.
Some of the sheep will carry the Factor IX gene, the blood-clotting agent absent in haemophiliacs. Others will have Alpha-1 Antitrypsin , the protein used to fight cystic fibrosis.
The milk from the animals is purified to extract the protein. The PPL spokesperson said: "It is a way of producing the human protein by the milk in the sheep as opposed to by cell culture. It should work out that the drug is cheaper by that method and some drugs can be produced that could not be produced by any other method."