Shares in Karo Bio have plummeted on the news that Merck & Co has decided to discontinue development of a compound in its collaboration with the Swedish biotechnology firm which is targeting oestrogen receptors for new treatments in the field of women's healthcare.

The New Jersey-headquartered firm has turned its back on an investigational compound which entered Phase I trials in 2006 and Karo Bio noted that although generally well-tolerated, its product profile was deemed to be unsuitable for further development. However, a back-up compound has already been approved for entry into preclinical studies.

Karo Bio's chief executive, Per Olof Wallstrom, said it was “unfortunate” that the clinical candidate has been discontinued but “this is part of the drug development process”. He added that his firm is “pleased with Merck's commitment to the programme and to the fact that the set back is not related to the mechanism of action or the treatment concept". The collaboration is based on the discovery of the oestrogen receptor beta, and the joint discovery phase concluded into 2002, with Merck taking responsibility for development of selected compounds. Karo Bio has rights to milestones when the project reaches important development stages and to royalties on future sales.

Karo Bio is downplaying the termination but investors see it as very bad news and its shares sank just over 20% to 9.90 Swedish kroner. It is the second time in a couple of weeks that the firm’s stock has taken a hit because at the end of June, it announced development of its KB2115 compound, for the treatment of dyslipidemia, will be delayed as a result of toxicity problems.