UPDATE 1-Forest adds diabetes drug in Phenomix deal

NEW YORK, Oct 23 (Reuters) - Forest Laboratories Inc (FRX.N) said on Thursday that it had reached a deal with Phenomix Corp to develop and sell an experimental diabetes drug, adding a potentially valuable new medicine to its pipeline.

Forest, which like many pharmaceutical companies is facing patent expirations on its most lucrative drugs, has been under pressure to build up its late-stage developmental pipeline, and its shares rose 1.2 percent after the announcement.

Under the collaboration agreement, Forest will make an upfront payment of $75 million to Phenomix for the right to share dutogliptin expenses and profits, if the drug is approved.

Phenomix could receive up to $340 million in upfront and milestone payments for the successful development and commercialization of dutogliptin in the United States.

Dutogliptin, which is undergoing late-stage clinical trials for type 2 diabetes, is a DPP-4 inhibitor, the same class of medicines as Merck & Co's (MRK.N) Januvia.

Merck said on Wednesday that third-quarter Januvia sales doubled to $379 million. But dutogliptin could be entering a crowded market as several companies are also developing DPP-4 inhibitors, and the class is not without its risks.

"Overall, we are expecting DPP-4 category sales in the U.S. to reach $5 billion by 2013, with dutogliptin positioned as a potential fourth or fifth entrant into the DPP-4 market," JPMorgan analyst Chris Schott wrote in a research note.

Schott said he did not expect the Forest/Phenomix drug to be any more effective than Januvia, but it could challenge rivals on safety and marketing.

The drug's safety profile so far has not turned up the skin toxicity issue that sunk Novartis' (NOVN.VX) DPP-4 Galvus and has cast a cloud over saxagliptin, which is being developed by Bristol-Myers Squibb Co (BMY.N) and AstraZeneca Plc (AZN.L), Schott noted.

Forest shares were up 27 cents at $22.78 on the New York Stock Exchange. (Reporting by Bill Berkrot; Editing by Lisa Von Ahn)