UPDATE 3-Novartis says FTY720 trial continues despite death

(Adds more analyst comment and details)

ZURICH, June 5 (Reuters) - Novartis AG NOVN.VX said two patients taking its multiple sclerosis drug FTY720 in clinical trials had problems with infections and one died, but the role of the medicine in the cases was unclear.

Independent experts recommended that clinical trials with the drug -- which unusually for an MS medicine is taken orally -- should continue as planned, the Swiss drugmaker said on Thursday.

“Novartis was recently notified of two infection-related incidents among FTY720 patients, including one fatality,” the company said in a statement.

Novartis shares closed 0.7 percent lower at 54.45 Swiss francs on Thursday, with traders citing rumours that FTY720 trials had been stopped on safety concerns. The Novartis statement was released after the Zurich bourse closed.

“The efficacy data looks good and comparable to existing agents,” said Sanford C Bernstein analyst Tim Anderson, who sees a launch of the drug in 2010 and sales of $1.2 billion by 2015.

“Existing MS drugs also have safety issues. Investors very much appreciate the tenuous balance of efficacy-risk with FTY720, but clearly a termination of this programme would be likely to hurt Novartis’s share price performance nonetheless,” said Anderson.

Shares of U.S.-based biotechnology company Biogen Idec BIIB.O, which sells MS drugs Avonex and Tysabri, were up 4 percent.

“The read-through is it would be good for Tysabri, it would be good for all the other MS drugs,” said Leerink Swann analyst William Tanner.

“FTY720 I think historically has been looked at as being kind of a category killer for some of the injectable agents. If there are some issues that are compromising the study then that’s going to be a problem,” Tanner said.

Novartis said it was in talks with health authorities and experts to try and improve awareness of the risks of infections and how these may be reduced.

“Both cases involved confounding factors, including the use of very high doses of steroids in the first patient and the delayed use of antiviral therapy in the second patient,” it said.

The company said FTY720’s role in the cases was unclear but could not be excluded, since its mechanism of action leads to suppression of the immune system, which can increase the risk of infection.

Novartis had previously said it expected to submit the once-daily therapy, currently in late-stage trials, for approval before the end of 2009. (Additional reporting by Lewis Krauskopf in New York; editing by Rory Channing)