Shares in Elan plunged by 32.6 per cent in New York yesterday after its planned $850 million (€794 million) sale of two prescription drugs was thrown into doubt by a US Federal Trade Commission (FTC) investigation.

The FTC, the US equivalent of the Competition Authority, has announced an inquiry into whether Elan unfairly blocked generic competition for its muscle relaxant, Skelaxin.

Elan, engaged in an asset disposal programme to raise the funds needed to meet its liabilities, had agreed to sell the US rights to Skelaxin and sleep drug Sonata to Tennessee-based King Pharmaceuticals. The transaction was worth $850 million to Elan with the drugmaker due to receive $650 million as an upfront payment.

But the FTC investigation has cast doubts over whether the sale, expected to close toward the end of March, will now proceed as planned.

"Notice of the FTC's investigation raises serious concerns with respect to the consummation of our planned acquisition of Elan's primary care business," King chairman and chief executive Mr Jefferson J Gregory said yesterday.

Elan said it was reviewing the FTC notification and "evaluating its potential impact on the closing of the transaction".

Elan shares fell as much as 35 per cent in New York on the news before eventually closing 32.6 per cent lower at $2.52. In Dublin, they shed 25 per cent of their value to €2.33.

Mr Ian Hunter of Goodbody Stockbrokers said the news was negative for Elan in the short-term. "Whether the deal goes through or not, it's going to be delayed," he said, adding that if it failed it would halve the amount raised by Elan from its asset disposal programme to date.

But Mr Hunter noted King might still proceed with the Sonata purchase, which is not affected by the FTC inquiry, while Elan still has other units it can sell, such as its drug delivery business.

Elan chief executive Mr Kelly Martin said last night that it was premature to comment on whether Sonata might be sold separately, noting Elan had yet to speak to King's senior management. "Our goal and intent is to work with King to complete the transaction," he said.

He also said the setback should not impact on Elan's recovery plan, which set out to raise $1.5 billion by the end of this year.

"Within our asset disposal list, there are a large amount of products and businesses which we know have significant value. We are confident the recovery plan of raising $1.5 billion can and will be reached. We are very comfortable we will get there," he said.

Mr Martin said it was not clear at this stage how long the FTC inquiry would last, noting that some investigations lasted years while others took three to six months. But he said just one patent was being investigated, the inquiry was not public and a subpoena had not been issued.

Elan plans to proceed with next Tuesday's extraordinary meeting to approve the sale of the two drugs to King.