UPDATE 2-Lexicon Pharma's diabetes tablet shows promise

* Double dose lowered blood sugar faster than liquid form

* Plans to start another mid-stage study in Q2 2011

* Shares up 36 percent (Adds details; updates shares)

BANGALORE, Jan 6 (Reuters) - Lexicon Pharmaceuticals Inc LXRX.O said it would move ahead with development of a tablet version of its key drug for type-2 diabetes that showed encouraging data in a mid-stage study, sending its shares up 36 percent.

Coming on the heels of disappointing results from its arthritis drug in mid-December, the new study bolstered expectations that the company may as yet have a potential blockbuster on its hands, sending Lexicon’s stock up as much as a third in value.

“Producing a solid version of the drug is better as its potential competitors also have tablet versions, which are easier to store and consume,” Morningstar Inc analyst Karen Andersen said.

A liquid version of Lexicon’s drug, LX4211, had already shown promise in a mid-stage study last January.

The most recent study showed that while a single dose of the drug showed results that were consistent with the liquid version, a double dose of the tablet rapidly lowered blood sugar levels.

“Right now, I expect the drug to reach the market by 2015 and, if approved, then within five years sales could reach $2 billion globally,” analyst Andersen said.

She expects Lexicon to find a partner to market the drug this year.

"(A potential partner) could be someone familiar with the diabetes space but one who does not have something similar to this class of drugs. [It] could be someone like Merck MRK.N."

Lexicon said it plans to start another mid-stage study of the tablet version in the second quarter of 2011. The Woodlands, Texas-based company’s shares, which have fallen 10 percent since it reported disappointing results of a mid-stage study of the arthritis drug, were up 29 percent at $1.95 on Thursday afternoon on Nasdaq. They touched a high of $2.06 earlier in the day.

Nearly 15 million shares changed hands by 1310 ET, about 15 times their 25-day trading volume. (Reporting by Shravya Jain in Bangalore; Editing by Anthony Kurian, Unnikrishnan Nair)