Shares in Elan and Biogen Idec plunged on Monday as the firms suspended sales of new multiple sclerosis drug Tysabri after a patient's death in the US.
The new treatment was tipped to be a top-seller
On the New York Stock Exchange, shares in Ireland-based Elan lost 70% while US partner Biogen Idec shed 43%.
The firms took action after the death from a central nervous system disease and a suspected case of the condition.
The cases cited involved the use of both Tysabri and Avonex, Biogen Idec's existing multiple sclerosis drug.
The companies said they have no reports of the rare condition - progressive multifocal leukoencephalopathy (PML) - in patients taking either Tysabri or Avonex alone.
Tysabri was approved for use in the US last November and was widely tipped to become the world's leading multiple sclerosis treatment.
"The companies will work with clinical investigators to evaluate Tysabri-treated patients and will consult with leading experts to better understand the possible risk of PML," the two firms said in a statement.
"The outcome of these evaluations will be used to determine possible re-initiation of dosing in clinical trials and future commercial availability."
The decision to suspend sales of the drug was welcomed by Christine Jones, chief executive of the UK MS Trust.
She said: "Clearly, it is vital to protect the interests and safety of patients at all times and we are pleased that such prompt action has been taken.
"Let us hope that the investigations that are to be carried out will shed light on the issue and clarify whether Tysabri has a role in the management of MS in the future."
Analysts had believed the product would provide a new growth opportunity for Biogen Idec, which had faced increased competition from rivals to Avonex.
Elan, once the biggest firm on the Irish stock exchange, was also expected to receive a boost, from the new product.
An inquiry into Elan's accounts in 2002 brought the group close to bankruptcy but the firm has been rebuilding itself since, with its share price increasing by almost four-fold last year.
"Most of the value in the company was in Tysabri," said Ian Hunter at Goodbody Stockbrokers in Dublin. "Now there's a question mark over it."
Elan finished down $18.90 at $8, while Biogen fell $28.63 to $38.65.
Shares in UK pharmaceutical firm Phytopharm closed down 19.84% at 151.5 pence on the London Stock Exchange on Monday, after it said a partner was set to pull out of a deal on an experimental Alzheimer's disease treatment.
Phytopharm said Japan's Yamanouchi Pharmaceutical was likely to end a licensing agreement, prompting analysts to raise questions over the level of its future cash reserves.