UPDATE 3-Pfizer cancels development of two late-stage drugs

*Drugs dropped are for fibromyalgia and anxiety

*Says drugs didn't offer benefit over current treatments (Recasts, adds share price)

By Toni Clarke and Bill Berkrot

BOSTON/NEW YORK, Feb. 24 (Reuters) - Pfizer Inc (PFE.N) said it is dropping two drugs in late-stage development -- one for anxiety and one for fibromyalgia -- after data showed they would not work much better than existing treatments.

The dropped drugs are the latest casualties of the No. 1 drugmaker's sputtering research engine. Earlier this year the company halted a late-stage trial of a drug that failed to improve survival in pancreatic cancer patients and last year it dropped a late-stage obesity drug.

"This is just another sign that Pfizer's research and development operation is not as effective as it needs to be," said David Moskowitz, an analyst at Caris & Co. "If they are killing projects like this in Phase II, it is understandable. If they are killing them in Phase III, they need to go back and look at their decision process."

Pfizer said on Tuesday it is canceling its fibromyalgia drug esreboxetine, as well as a drug for generalized anxiety disorder known as PD 332,334. The company's shares rose 13 cents to $13.40 in morning trading on the New York Stock Exchange after falling to a new 52-week low of $13.21 at the open.

"I think people are so pessimistic on Pfizer right now that they are yawning over this - it's just another piece of negative Pfizer news," said Damien Conover, an analyst at Morningstar.

Pfizer, which is desperately searching for new products to replace its $13 billion-a-year cholesterol drug Lipitor, which goes off patent in late 2011, said it plans to focus on products that address unmet medical needs.

The company has struggled recently to produce any big-selling products from its own pipeline, despite an annual research and development budget of roughly $7.5 billion. As a result, it has offered to buy rival Wyeth WYE.N for $68 billion.

The company is also streamlining its product portfolio. While the latest dropped drugs may each have generated $1 billion-plus in annual sales, according to Conover, they still would not have done much to improve Pfizer's value.

"The drugs were important, but from a valuation standpoint it won't hurt Pfizer that much to drop them because it is so big," he said.

Pfizer said it will continue to pursue an application for its drug Lyrica as a treatment for chronic anxiety disorder. Lyrica is already approved to treat epilepsy and fibromyalgia, a condition characterized by chronic pain and fatigue.

The company said it plans to focus its attention on areas where there are few effective treatments. It said it is moving forward with an experimental drug, tanezumab, in broad areas of pain management. It is already studying the drug in patients with osteoarthritis.

In addition, the company sees potential opportunities for its experimental drugs to treat Alzheimer's disease and thrombosis.

(Reporting by Toni Clarke and Bill Berkrot, editing by Dave Zimmerman)