(Removes reference to side effects on "other organs" in paragraph 8)
* Peak sales were seen at $2 bln by Vontobel analysts
* Roche decision follows setbacks for rival diabetes drugs
* Failure raises questions about Basel research unit
* Roche to review cardio metabolic research
* Says remains committed to Basel research hub
By Katharina Bart
ZURICH, July 10 Roche will halt development of a diabetes drug partly because of its undesired side-effects, marking another high-profile setback for the Swiss company as it struggles to diversify outside its core cancer drug portfolio.
The news is a fresh blow for Roche's Basel research operations, known as pRED, which have languished in the shadow of the work done at Genentech, the 2009 acquisition that cooked up Roche's four top-selling medicines in 2011.
Last year Roche scrapped development of pRED's dalcetrapib - a medicine aimed at boosting levels of "good" high-density cholesterol. Some industry analysts had estimated that dalcetrapib could have achieved $10 billion in annual sales.
"The news just raises more fundamental questions about the productivity of pRED," Kepler Chevreux analysts wrote.
Roche spokesman Alexander Klauser said the drugmaker would review its research and development for cardio metabolic diseases but added that the company remains committed to pRed.
"The fact is, Roche isn't particularly good in metabolic and cardiovascular drugs and should exit its research in these areas," Zuercher Kantonalbank analyst Michael Nawrath said.
The diabetes treatment - aleglitazar - belongs to a class of drugs that rival pharmaceutical companies had already pulled back from, raising the question of why Roche had pressed ahead with what analysts had considered to be a risky bet.
Patients in a late-stage trial of the drug suffered side effects to the kidneys and heart, Klauser said, adding that Roche could not yet quantify the financial impact of halting development.
AstraZeneca had scrapped development of a similar class of drug in 2006, the same year as Bristol-Myers Squibb stopped work on another after regulatory setbacks.
"In hindsight, it seemed odd how Roche put so many resources into a compound whose mechanism - given experience with at least three other drugs in the class - was at best questionable," Kepler Chevreux analysts wrote in a note.
Shares in Roche were little changed at 244 Swiss francs by 1240 GMT, in line with a flat European healthcare index.
Bank Vontobel, which had forecast 2 billion Swiss francs ($2.05 billion) in peak sales from aleglitazar, pruned its price target for Roche to 263 francs, from 270 francs, after the setback but confirmed its "buy" rating.
As it went into the 7,000-patient late-stage study of aleglitazar, Roche took steps to reduce the possibility that its product might have the same problems as other medicines in the class. In particular, it conducted a renal safety study to ensure that its product was free of the kidney problems that undermined AstraZeneca's drug.
Drugs such as aleglitazar are designed to turn on two protein receptors known as PPARs, one that regulates glucose and another lipids. These dual PPAR drugs have long fascinated researchers as a potential way to help diabetics to address multiple targets linked to heart disease. ($1 = 0.9735 Swiss francs) (Additional reporting by Paul Arnold, Ben Hirschler and Caroline Copley; Editing by David Holmes and David Goodman)