Celltech said the drug BAYX 1351, licensed from Germany's Bayer, "has not been shown to be effective in reducing mortality in septic shock". The news rocked the biotechnology sector with shares in Scotia, PPL Therapeutics, Cortecs and Cantab falling heavily.
Peter Allen, Celltech's finance director, said the news was a severe disappointment. David Bloxham, chief operating officer, said ruefully: "When we got a phone call from Bayer yesterday morning and realised the news was not good we considered jumping off somewhere high."
However, Peter Fellner, chief executive, said that there were no financial implications for Celltech as Bayer had fully funded the drug's pounds 100m development costs. "We remain financially strong", he said.
Dr Bloxham said he thought the outcome was more devastating for Bayer, which had publicly heralded the drug as its main product launch in 1998 and had already built a factory to manufacture it. "I understand there will be redundancies at Bayer," he said.
Dr Bloxham said Celltech would abandon the sepsis work, but would continue developing the same drug for the bowel condition Crohn's disease and would continue its leukaemia and arthritis programmes: "We still have other legs to stand on," he said.
Analysts said that though no one had been successful in developing a septic shock drug, the news was a blow for Celltech, particularly as the group was forced to abandon a drug for asthma less than two years ago. Ian Smith, an analyst with Lehman Brothers, said: "Celltech needs some new and exciting news to get its share price going again."
Mark Brewer, an analyst with Hoare Govett, pointed out that the septic shock market was notoriously difficult. "Every single biotechnology company who has got involved in septic shock has failed," he said.
He thought Celltech's remaining drug programme looked weak: "We are positive about their leukaemia drug, but we think there will be a lot of competition in the Crohn's market and there are better products being developed for arthritis by companies like Glaxo."
Analysts said the impact of Celltech's announcement on other biotechnology stocks highlighted the risks involved in the sector. Mr Smith at Lehmans said the market would now question how easy it was to predict whether a drug would make it to market: "This will make the City less inclined to assume success," he said.
Mr Brewer at Hoare Govett thought it would have implications for the queue of biotechs hoping to list in the UK. "Float prices may have to be scaled back," he said.
However, several prominent names in the industry argued that the sector as a whole would not be held back. John Padfield chief executive at Chiroscience, said the market was increasingly able to discriminate between high and low-risk biotech stocks.