* Lundbeck extends alliance with Japan's Otsuka
* Signs deal for Alzheimer's drug
* Says drug could sell over $1 bln annually in United States
* Shares hit highest in 7 months
By Mette Fraende and Stine Jacobsen
COPENHAGEN, March 26 (Reuters) - Danish pharmaceutical group Lundbeck agreed to develop an Alzheimer's treatment with Japanese partner Otsuka, a deal it hopes will help offset falling sales of drugs that are losing exclusivity.
Lundbeck shares jumped nearly 12 percent on Tuesday after the company announced the deal for the drug, known as Lu AE58054, and slightly raised its 2013 outlook.
Chief Executive Ulf Wiinberg said the drug had the potential to generate sales of over $1 billion per year, the definition of a blockbuster, in the United States.
Lundbeck is relying on new drugs in its pipeline to offset falling sales of its antidepressant Cipralex, sold as Lexapro by Forest Laboratories in the United States, which has been coming off patent in various markets.
"Lu AE58054 is the first one that we do, but potentially there can be two more," Wiinberg said.
He said he hoped to launch the treatment for Alzheimer's, a degenerative brain disease that causes progressive memory loss, in 2017.
Lundbeck will receive an initial payment of $150 million from Otsuka, and will also be entitled to as much as $675 million in regulatory and sales milestones.
As a result of the deal, Lundbeck said it now expected 2013 revenue in a range of 14.4 billion to 15 billion Danish crowns ($2.49 billion-$2.59 billion) from a previous outlook of 14.1 billion to 14.7 billion crowns.
It also raised its operating profit outlook from a range of 1.9 billion to 2.4 billion crowns from 1.6 billion to 2.1 billion crowns.
"The announcement validates management's strategy in our view and suggests recently downgraded mid-term guidance will prove far too conservative," Deutsche Bank said in a research note to clients.
Last December, Lundbeck cut is mid-term revenue outlook to about 14 billion crowns in 2014 and operating profit of between 0.5 billion and 1.0 billion crowns.
It has also warned that earnings will stall until 2015 due patent expiry, cheap generic competition and healthcare reforms in various countries.
Shares in Lundbeck rose nearly 12 percent to a high of 110.80, its highest level in more than seven months, compared with a 0.4 percent rise in the STOXX Europe 600 healthcare index .
The latest deal with Otsuka, which Lundbeck already has an alliance with, covers the United States, Canada, East Asia including Japan, major European countries and Nordic countries, Lundbeck said.
Both companies will share sales, development, and commercialization costs.
They plan to begin a clinical programme for Lu AE58054 later in 2013 and subsequent studies are expected towards the end of the year.