Cancer drug Avastin -- a key Genentech asset now wholly owned by Roche Holding AG -- has failed in a major study to prevent the recurrence of colon cancer in patients who have undergone surgery.

The news is a blow for the Swiss group, which paid $46.8 billion for the remainder of the U.S. biotech company last month, and its stock fell 9 percent in morning trade.

Roche's annual global sales of Avastin, its most important drug, have soared to 5.2 billion Swiss francs ($4.4 billion) and analysts have estimated that sales could more than double if the drug was found to delay progression of the disease in early-stage cancer patients.

Despite the setback, Roche's head of pharmaceuticals, Bill Burns, said Avastin could still sell 8 billion to 9 billion francs by 2011, simply in treating advanced metastatic cancers.

The so-called C-08 study -- evaluating Avastin plus chemotherapy for treating colon cancer immediately following surgery compared with chemotherapy alone -- had been viewed as risky.

It was always the toss of a coin, Burns told reporters in a conference call, arguing the failure did not mean Roche had overpaid for Genentech.

We always factored in the entire transaction, he said. This study was never a binary event in the valuation of Genentech. Its a much broader, strategic deal than one study.

SHRINKING PREMIUM

WestLB analyst Simon Mather said he had attached $11 of the $95 a share Roche paid for Genentech to the success of Avastin in early stage colon cancer and the failure was a significant setback for Roche.

James Knight of Collins Stewart, who cut his recommendation on Roche to hold from buy, said the result called into serious question any value in using Avastin after surgery.

Roche has been trading at more than a 35 percent price/earnings premium to the European sector, reflecting its strength in cancer medicine. Deutsche Bank said this could now fall to 20 percent, valuing the stock at about 130 francs.

Avastin's setback could have an upside for Merck KGaA, according to DZ Bank analyst Thomas Maul, since the German company sells the rival drug Erbitux, which is also being tested in colon cancer patients after surgery.

By 0920 GMT, Merck shares were 0.3 percent lower in a sharply weaker market for drug stocks.

Although Avastin failed to meet its main target of lowering the risk of cancer returning, researchers at Roche and Genentech are not giving up hope on treating early-stage disease.

While we are disappointed the C-08 study did not meet its primary endpoint, our initial review of the data leads us to continue to believe Avastin may be active in patients with early-stage colon cancer, Hal Barron, Genentech chief medical officer, said.

Further details on the C-08 trial will be presented at the American Society of Clinical Oncology annual meeting, which runs from May 29 to June 2 at Orlando.

FURTHER TRIALS

The clinical trial had aimed to show the drug's ability to prevent colon cancer recurrence by wiping out microscopic cancer cells that may remain in the body after tumors have been removed by surgery, known as use in the adjuvant setting.

There are further ongoing Avastin adjuvant programs in early-stage colon, breast and lung cancers.

Roche succeeded last month in acquiring the 44 percent of Avastin developer Genentech Inc that it did not already own.

Despite the stock market crash, the Swiss company ended up raising its offer for the California biotech pioneer by about 7 percent -- a move some analysts attributed to a desire to secure a deal before release of the pivotal Avastin data and a potential surge in the price of Genentech shares.

The 2,700-patient C-08 trial, funded by the National Institutes of Health, was designed to show whether use of Avastin plus chemotherapy, followed by six months of Avastin alone, results in more patients being cancer free after three years compared with just treating them with chemotherapy.

A month of Avastin treatment costs about $4,400.

(Additional reporting by Ben Hirschler in London and Deena Beasley in Los Angeles; writing by Sam Cage; Editing by David Cowell and Andrew Macdonald)

($1=1.170 Swiss franc)

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