Berna withdrew the product from the Swiss market in October 2001 amid reports of the side effect, and will not reintroduce it or seek marketing approval elsewhere, it said in a statement.

Berna said the decision would have no financial impact on 2002 results and that it would seek to develop a successor product that could enter clinical trials this year, but the news knocked its image and its shares.

Berna stock dropped 16% to 24.40 Swiss francs before edging up a little to 25 francs by 1005 GMT.

"Basically the drugs they have now are very old fashioned, low-profitability vaccines, but they were trading midway to a biotech valuation on things like Nasalflu and other things coming up," said Bank Julius Baer analyst Denise Anderson.

"When you see the one (new product) that was furthest along get into trouble, then it makes people nervous."

Berna reiterated its earlier forecasts of around 200 million Swiss francs in 2002 sales and an EBITDA operating profit margin of 10%.

Its proposed takeover of Rhein Biotech was not affected, it added, holding to its financial targets for the merged enterprise.

But traders said the product stumble could heighten discontent among big Rhein shareholders, some of whom already had a low opinion of the proposed takeover that would create one of the world's leading vaccine makers.