By Bill Berkrot

(Reuters) - An experimental once-weekly medicine for type 2 diabetes developed by Eli Lilly and Co proved as effective in lowering blood sugar as Victoza from Danish drugmaker Novo Nordisk in an eagerly anticipated late stage study.

The Lilly drug, dulaglutide, achieved the primary goal of the 599-patient study by demonstrating so-called non-inferiority to the highest approved dose of Victoza after 26 weeks, according to initial results released by the company on Tuesday. Lilly shares rose more than 1 percent before retreating.

Dulaglutide, considered one of the more important medicines in Lilly's pipeline of drugs in development, is awaiting U.S. and European approval decisions.

"It is our hope that we will have approval this year," Lilly's Senior Medical Director Sherry Martin said in a telephone interview.

Once weekly dulaglutide and Victoza, which is taken daily and known chemically as liraglutide, belong to a class of injected diabetes drugs called GLP-1 receptor agonists. They work by increasing the release of insulin after meals and by slowing absorption of food in the gastrointestinal tract.

"Dulaglutide is the only GLP-1 agonist to show non-inferiority against liraglutide's highest-approved dose in a Phase III trial," Enrique Conterno, president of Lilly Diabetes, said in a statement.

BMO Capital Markets analyst Alex Arfaei noted that the other weekly diabetes drug from the class did not fare as well in a similar study.

"The positive surprise here is that so far dulaglutide had shown a similar clinical profile to competitor Bydureon in terms of A1C (blood glucose) lowering and Bydureon failed to show non-inferiority versus Victoza," he said, referring to AstraZeneca's weekly diabetes treatment from the same class.

John Boris, an analyst with Suntrust Robinson Humphrey, raised his sales forecast for dulaglutide to $1.6 billion by 2020 from $1.1 billion following the non-inferiority result.

He believes Lilly will be able to undercut Novo's Victoza pricing with payors since the study used a lower dose - 1.5 milligrams versus 1.8mg for Victoza - and that the weekly dosing will give it an additional competitive advantage.

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"Those are two powerful tools," said Boris, who sees the GLP-1 market growing to $5 billion by 2020.

Victoza, which now owns about 70 percent of the market for GLP-1 drugs, had sales of more than $590 million in the fourth quarter, putting it on track to exceed $2 billion this year.

Dulaglutide in previous studies proved superior in reducing blood sugar compared with placebo and a variety of other diabetes treatments. But analysts had been especially anxious to see how it would fare against future main rival Victoza.

DETAILS LATER THIS YEAR

Patients in the Award-6 trial were already taking metformin, the most commonly prescribed initial treatment for type 2 diabetes.

Details of the study, such as the exact magnitude of glucose reduction, the percentage of patients who reached blood sugar target levels and amount of weight loss seen with each drug, will be presented at a medical meeting later this year.

Side effects were similar for patients in both treatment groups, with the most frequently reported adverse events gastrointestinal-related, such as nausea, the company said.

"There are no new safety signals," Martin said.

The potential market for type 2 diabetes drugs is enormous and growing. An estimated 382 million people worldwide have diabetes, according to the International Diabetes Federation, with type 2, which is often associated with obesity, accounting for 90 percent to 95 percent of all cases.

Eli Lilly shares were up 47 cents, or 0.8 percent, at $58.50 on the New York Stock Exchange after earlier climbing as high as

$58.84.

(Reporting by Bill Berkrot; Editing by Cynthia Osterman)