Drug company Vectura Group PLC (VEC.LN) said Monday partner Novartis AG (NOVN.VX) began Phase III studies of QVA149, an experimental medicine for lung disease that combines Novartis's indacaterol and Vectura's NVA237.

The start of the trial triggers a $7.5 million milestone payment to Chippenham, England-based Vectura.

The combination product, known as QVA149, is being tested as a treatment for chronic obstructive pulmonary disease, or COPD.

NVA237 was licensed to Novartis by Vectura and development partner Sosei Group Corp. (4565.TO) of Japan in 2005.

The Swiss drug maker is also testing NVA237 as a standalone therapy in lung disease.

The Phase III program involves a study testing whether the combination product is superior to NVA237 alone in preventing a worsening of symptoms in roughly 2,000 patients with severe COPD, commonly known as smoker's lung.

A second trial will assess the long-term safety and tolerability of QVA149 in 339 patients.

The Phase III program was initially scheduled to start earlier but was briefly delayed after the U.S. Food and Drug Administration asked for more data on indacaterol.

Vectura Chief Executive Chris Blackwell said QVA149 should be filed for regulatory approval in 2012.

At 0811 GMT, shares in Vectura were up 2.25 pence, 6.8%, at 35.5 pence, outperforming a 2.9% higher Dow Jones U.K. Smaller Companies index.

The stock has lost more than 50% over the year to date because of investor concern over a decision by Novartis's Sandoz unit to hand over U.S. development of a product the companies were working on together called VR315 to Vectura.

Observers believe VR315 is a generic version of GlaxoSmithKline PLC's (GSK.LN) asthma medicine Advair and fear Novartis's decision reflects the difficulties it sees in bringing such a medicine to market in the U.S., where the regulatory pathway for copycat versions of inhaled medicines is unclear.

Also Monday, Vectura said it expects revenue for the year to March 31 to rise 25% on year to between GBP38 million and GBP42 million.

It added it expects to report a significantly narrower pretax loss and has roughly GBP64 million in cash to fund its drug programs. Vectura reports earnings June 7.

KBC Peel Hunt analyst Paul Cuddon said in a note to clients revenue was higher than he forecast although that is likely due to a payment from Novartis in relation to the VR315 program.

He added he expects Vectura's research and development spending to rise significantly now it is responsible for VR315 in the U.S.

Cuddon rates the stock "hold."

"We see few catalysts to justify buying the shares at the moment," he said.

Company Web site: www.vect6ura.com

-By Jason Douglas, Dow Jones Newswires; 44-20-7842-9272; jason.douglas@dowjones.com
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