UPDATE 2-Novartis eyes blockbuster sales for new lung drug

* All doses of QAB149 met main target in late stage trials

* Showed significant improvement over two approved medicines

* Development head says could be a billion-dollar seller

(Adds analyst comments, Vectura shares, further details)

By Sam Cage

ZURICH, May 21 (Reuters) - A new medicine from Novartis AG (NOVN.VX) significantly improved lung function when compared with two established respiratory drugs in late stage clinical tests, boosting hopes it could be a $1 billion-a-year seller.

The drug, known as QAB149, is being reviewed for approval in the European Union and the United States. Trevor Mundel, head of development at Novartis Pharma, said the drug could be on the market next year and has the potential to be a big seller.

"I think QAB becomes a very substantial opportunity," Mundel told Reuters. "I think heading towards a blockbuster."

Blockbusters are defined in the pharmaceuticals industry as products with annual sales of $1 billion or more.

All doses of once-daily QAB149 met their main target in Phase III trials for treating chronic obstructive pulmonary disease (COPD), or "smoker's lung", the Swiss drugmaker said on Thursday.

The medicine showed significant improvements over bronchodilators formoterol and tiotropium and significantly improved lung function from the first day of therapy to up to one year of treatment, Novartis said.

Formoterol is marketed under various trade names by companies including Novartis, Schering-Plough Corp SGP.N, and AstraZeneca Plc (AZN.L). Tiotropium is the generic name for Spiriva, marketed by Pfizer Inc (PFE.N) and Boehringer Ingelheim.

Novartis is planning to use QAB149 both on its own and as the base of combination treatments with other lung medicines.

One such combination product is QVA149 -- a mix of QAB149 and Vectura Group Plc's (VEC.L) NVA237 -- which is expected to enter Phase III clinical trials in the fourth quarter.

Another is QMF149, which combines QAB149 and Schering-Plough's mometasone, for which Novartis assumed worldwide rights in a deal announced earlier this week.

"Novartis has a growing respiratory pipeline, which we believe has not been a key investor focus ... QAB149 is the cornerstone for a large number of potentially valuable future combinations," analysts at Citigroup said in a research note.

Piper Jaffray analysts said the latest good clinical data boded well for QVA149 and Vectura's partnership with Novartis. Shares in Vectura rose 2.6 percent in early trade.

Novartis was untraded due to a holiday in Switzerland.

COPD is a debilitating and progressive respiratory disease that affects around 210 million people worldwide. It is commonly caused by cigarette smoke and is characterised by a persistent obstruction of airflow in the lungs which results in breathlessness. (Additional reporting by Ben Hirschler in London; editing by Hans Peters and Simon Jessop)