UPDATE 2-Insmed's lung infection drug fares no better than rival, shares fall

* Drug shows smaller improvement in lung capacity vs rival

* Shares fall 13 pct (Adds analyst comment, updates share movement)

July 1 (Reuters) - Insmed Inc's experimental lung infection drug fared no better than a competing drug developed by Novartis AG in a lung function test, sending shares in the company down 13 percent in morning trade.

Insmed's drug, Arikace, was being tested as a treatment for a bacterial lung infection that often affects cystic fibrosis patients.

Insmed said in a statement that the trial met its main goal of showing that Arikace was not inferior to the competing drug.

But a presentation posted on Insmed's website showed that patients taking Arikace displayed a smaller improvement in lung capacity than those on TOBI, Novartis's drug for the same infection. (link.reuters.com/qeq39t)

The difference was narrow enough for Arikace to meet its "primary endpoint of non-inferiority compared with twice-daily TOBI".

"I think there may have been some expectations for a superiority result versus tobramycin (TOBI) and that's probably something a few investors were focused on," Wedbush Securities analyst Gregory Wade said.

Arikace, a treatment inhaled once daily, showed a lower mean change in forced expiratory volume in one second than the twice-daily TOBI.

The forced expiratory volume test measures lung function by calculating the volume of air exhaled by a person during a forced exhalation.

The late-stage study, which included 302 patients and was conducted at 70 sites in Europe and Canada, reported adverse events consistent with those seen in similar studies.

Insmed Chief Executive Will Lewis said the company would file for regulatory approval for Arikace in Canada and Europe during the first half of 2014.

"It looks like it has met the efficacy standard for approval in Europe so we would expect that it would be successful there. What remains to be seen is whether the U.S. cystic fibrosis market is accessible with this data set," Wade said.

The therapy is the only candidate in Insmed's pipeline.

Cystic fibrosis is a genetic disorder that primarily affects the lungs and digestive system. It causes the production of thick mucus that clogs the lungs and leads to life-threatening lung infections.

Insmed is also testing Arikace in a mid-stage study for non-tuberculous mycobacteria (NTM) lung disease. The company said Arikace received a fast-track designation from the U.S. Food and Drug Administration on June 28.

A fast-track designation expedites regulatory review of drugs that aim to treat serious diseases and fill unmet medical needs. (Reporting by Esha Dey and Pallavi Ail in Bangalore; Editing by Saumyadeb Chakrabarty and Robin Paxton)