UPDATE 1-Novo shares hit by terminated insulin project

COPENHAGEN Jan 15 (Reuters) - Shares in Denmark's Novo Nordisk (NOVOb.CO) fell as much as 4 percent on Tuesday after it said it would halt development of its AERx inhaled insulin product and narrowed the range of its full-year sales guidance.

The world's largest maker of insulin said on Monday the AERx system it has been developing as an alternative to traditional injections was unlikely to offer significant clinical or convenience benefits.

Novo -- facing tough competition in diabetes care from larger pharmaceuticals firms including Sanofi-Aventis (SASY.PA) and Eli Lilly (LLY.N) -- said it decided the product did not have adequate commercial potential, given the recent failure of Pfizer Inc's (PFE.N) inhaled insulin drug, Exubera, to attract patients.

"We've come to the conclusion that a breakthrough in inhaled insulin takes more than AERx," Novo Chief Science Officer Mads Thomsen told a conference call, adding that there had been no safety issues with the system.

Thomsen said Novo Nordisk would instead boost research targeted at inhalation systems for long-acting insulin formulations and genetically improved versions of the natural hormone GLP-1, which stimulates insulin production.

Thomsen said Novo had identified a candidate for such delivery, but said trials were still in the preclinical phase.

Novo will take a hit of 1.3 billion Danish crowns ($259.6 million) to 2007 operating profit on the project termination and will lay off most of the roughly 300 employees working on the product in Hayward, California.

"This decision is not a big surprise, as the first inhaled short-acting insulin in the market, Exubera of Pfizer, was a commercial flop and Pfizer stopped the marketing of Exubera about one year after the launch in the U.S. market," Vontobel said in a research note, while its "hold" rating on Novo's shares.

By 1025 GMT, Novo Nordisk shares were 3.7 percent lower at 316.50 crowns, underperforming the Copenhagen market's top-20 OMX index .OMXC20, which was down 1.8 percent.

Novo Nordisk bought the full development rights to AERx from Aradigm (ARDM.OB) in 2004.

Novo Chief Financial Officer Jesper Brandgaard said the group now expected full-year sales to rise 12-13 percent measured in local currencies against the previous outlook of 11-14 percent.

Brandgaard also said that the group would review the size of its sales force in the United States, currently at 1,900 people, in the second half of 2007, seeking perhaps to raise it for the anticipated launch of its GLP-1 analogue Liraglutide, currently still in Phase III trials. (Reporting by Kim McLaughlin; editing by Rory Channing)