UPDATE 2-Genmab slumps as Glaxo-partnered drug hits setback

* Arzerra fails to show hoped-for benefit in lymphoma study

* New and bigger clinical trial may be needed

* Genmab loses expected Glaxo milestone payments

* Genmab shares down 26 percent, Glaxo stock flat

(Adds more analyst reaction, sales forecast, latest shares)

By Ben Hirschler

LONDON, Aug 18 (Reuters) - Disappointing clinical results sent shares in Danish biotechnology company Genmab GEN.CO tumbling 26 percent on Tuesday as investors questioned sales prospects for its key drug Arzerra in treating blood cancer.

Arzerra's failure to help patients with non-Hodgkin's lymphoma (NHL) as much as hoped will also hit Genmab's bottom line in 2009, since it will not now get expected milestone payments linked to the indication from partner GlaxoSmithKline GSK.L.

Glaxo, the world’s second biggest drugmaker, bought global rights to Arzerra in December 2006 in a deal worth up to $2.1 billion, a record sum for a biotech product agreement at the time.

Glaxo stock was flat and industry analysts said it was large enough to absorb the setback without any significant impact.

Analysts still expect Arzerra to reach the market shortly as a treatment for chronic lymphocytic leukemia (CLL), since it was recommended by a U.S. expert panel in May and regulators are set to give their verdict on this first use by the end of October.

But the disappointing results from Genmab and Glaxo’s Phase III clinical in NHL could “taint physician perceptions” of the drug, according Piper Jaffray analyst Richard Parkes.

He cut Genmab stock to “underweight” from “overweight” and said there was now a risk Genmab would require additional finance or would have to significantly cut its investments in critical areas.

Analysts at stockbroker Jefferies, who cut their rating on Genmab to ‘hold’ from ‘buy’, said the setback meant “off-label” use of Arzerra by oncologists for other diseases was less likely.

The keenly awaited trial results, announced late on Monday, showed the top 1,000 milligram dose of Arzerra in patients with NHL who did not respond to the established drug Rituxan produced an overall response rate of just 10 percent -- well below expectations. [ID:nLH684750]

“We believe Genmab and partner GSK will almost certainly not be able to pursue regulatory filing with these data, requiring a larger Phase III study in NHL patients for approval; potentially a long-term head-to-head trial against Rituxan,” Jefferies said.

Genmab said it now projected a full-year operating loss of about 650 million Danish crowns ($123 million) instead of a 400 million loss forecast earlier because of the exclusion of payments from Glaxo based on Arzerra’s progress in NHL.

Genmab and Glaxo have been hoping to position Arzerra as a rival to Roche ROG.VX and Biogen Idec's BIIB.O blockbuster treatment Rituxan in the treatment of blood cancers.

Savvas Neophytou of Panmure Gordon said he still expected the drug to achieve total oncology revenues of 500 million pounds ($820 million) by 2012.

Both Arzerra and Rixtuxan belong to a class of medicines known as anti-CD20 antibodies.

Arzerra is also being developed for rheumatoid arthritis.

Genmab is due to report financial results for the second quarter later on Tuesday. (Editing by Dan Lalor; Editing by Jon Loades-Carter) ($1 = 5.266 Danish crowns) ($1=.6093 Pound)