UPDATE 1-RESEARCH ALERT-M. Stanley cuts ImClone to underweight

(Changes source, adds details)

May 12 (Reuters) - Morgan Stanley downgraded ImClone Systems Inc (IMCL.O: Quote, Profile, Research, Stock Buzz) to "underweight" from "equal-weight," saying the biotechnology company's cancer drug Erbitux is likely to be a disappointment.

The brokerage said Erbitux data may not meet expectations for treating lung and colorectal cancer at the American Society of Clinical Oncology in early June, leading to a potential re-emergence of Amgen Inc's (AMGN.O: Quote, Profile, Research, Stock Buzz) Vectibix as a competitive threat.

Last April, Morgan Stanley had said Genentech Inc's (DNA.N: Quote, Profile, Research, Stock Buzz) blockbuster cancer drug Avastin faces a big challenge from Erbitux in treating lung cancer.

A modest survival benefit, 4-5 weeks compared with 2 months from Avastin, lack of progression free survival and lack of response rate improvement will be the key issues with Erbitux, the brokerage said.

"We do believe that Erbitux will be approved and used in the front-line lung cancer setting; however, given the reasons mentioned, we believe the Street has unrealistic expectations regarding the potential use of this drug and expect sales estimates will need to come down over time," it added.

The brokerage now estimates peak U.S. sales of the drug to be about $350 million.

Erbitux was initially developed for colon cancer but its sponsors now want to use it in a wider range of tumour types. It is sold in Europe by Germany's Merck KGaA (MRCG.DE: Quote, Profile, Research, Stock Buzz) and in the United States by Bristol-Myers Squibb Co (BMY.N: Quote, Profile, Research, Stock Buzz).

Morgan Stanley set a price target of $38 on the stock, which fell 5 percent to $42.60 in trading before the bell, after closing at $44.83 Friday on Nasdaq. (Reporting by Aditi Samajpati in Bangalore; Editing by Jarshad Kakkrakandy)