UPDATE 2-Europe inspectors cite Genzyme plant deficiencies

* EMEA inspectors find one 'major' deficiency

* Company says will respond within 15 days

* Shares rise on takeover speculation (Adds background, analyst comment)

By Toni Clarke

BOSTON, Aug 31 (Reuters) - Genzyme Corp GENZ.O said inspectors working on behalf of European regulators have identified one "major" deficiency and several lesser ones at the company's Allston Landing manufacturing plant.

The Cambridge, Massachusetts-based biotech company released the news on its website on Friday. It said it would respond to the inspectors within 15 days with a plan and timetable for addressing their concerns, after which the inspectors would submit a final report to the European Medicines Agency (EMEA), the European drugs watchdog.

Bo Piela, a spokesman for Genzyme, said the company will not have to cease production of drugs made at the plant, which is located in the Allston neighborhood of Boston.

The nature of the findings was not immediately detailed.

Genzyme, which makes drugs to treat rare and chronic diseases, was forced to temporarily halt production at the plant in June due to a virus contamination. The shutdown of the 13-year-old plant caused a shortage of Cerezyme, a drug to treat Gaucher disease, and Fabrazyme, for Fabry disease.

Temporary disruptions to treatment are not harmful to most patients, but over time both diseases can cause life-threatening organ damage. Genzyme is the world's leading supplier of treatment for the disorders.

Representatives for the EMEA were not available to comment. The agency's offices were closed for a holiday Monday.

But analysts said the news was ominous.

"While we have urged patience until now, we are surprised that there are still significant deficiencies at Allston this late in the game," said Christopher Raymond, an analyst at Robert W. Baird. "We are lowering our Cerezyme estimates considerably through 2012 as we now feel the odds of continued delays at Allston Landing and longer-lasting fallout from said delays are now higher."

Raymond, who downgraded the stock to "neutral" from "outperform," said that historically, fewer than 10 percent of EMEA observations are categorized as "major."

Genzyme cleaned the plant and restarted it at the end of July and has said it expects to release the first batches of product in November and December and be able to fully supply patients -- some of whom have had to skip or reduce their doses -- by early next year.

The fear among analysts and investors is that the shortages will last longer than expected.

"Should Genzyme's manufacturing issues persist, the possibility of a friendly or quasi-friendly acquisition by a big pharma company definitely increases," said Geoffrey Porges, an analyst at Sanford Bernstein in a research report.

That prospect helped boost Genzyme's shares nearly 1 percent to $56 in afternoon trading on Nasdaq, reversing an initial decline of more than 3 percent.

Genzyme received a warning letter from the U.S. Food and Drug Administration in February about the manufacturing problems, and a May inspection found that not all of them had been resolved. The FDA is due to inspect the plant again.

"We see the risk to the FDA inspection as incrementally higher as a result of the negative surprise on the EMEA findings," said Geoff Meacham, an analyst at J.P. Morgan in a research report. "We remain neutral on Genzyme shares until there is more clarity on the multiple steps required for Genzyme to maintain and grow its market leadership position in the rare disease space."

Genzyme's manufacturing problems have opened the door to competitors. Shire Plc (SHP.L) and Protalix BioTherapeutics Inc (PLX.A) are both developing rival drugs for Gaucher disease.

"Without a Cerezyme shortage there would be minimal to no incentive for patients to switch enzyme therapy given that physicians and patients are satisfied and comfortable with Cerezyme," said Katherine Hew, an analyst with Datamonitor Financial Markets.

Genzyme shares fell more than 3 percent before rebounding and were trading up 47 cents at $56.00 in midafternoon dealings on Nasdaq. (Reporting by Toni Clarke; editing by John Wallace and Gerald E. McCormick)