The Food and Drug Administration staff said the drug, called tofacitinib, appeared to reduce swollen and tender joints during clinical trials. But the staff questioned the method of analyzing X-rays to prove the drug worked.

Analysts see tofacitinib as a potential blockbuster medicine, with peak sales of $2 billion to $3 billion a year, if its benefits are deemed to outweigh its risks. It could also help revive faith in Pfizer's research prowess; the world's largest drugmaker has not produced a major new medicine from its own labs since Viagra over a decade ago.

The FDA staff review comes ahead of a vote on Wednesday by an FDA advisory panel that will decide whether to recommend the drug as a treatment for people who have not had success with at least one other type of drug for the rheumatoid arthritis.

The FDA will make a final decision in August, taking into account the panel's recommendations.

The FDA staff said Pfizer's method of showing tofacitinib worked, by analyzing X-rays, did not mean the drug actually slowed down structural damage in people with rheumatoid arthritis, a potentially crippling condition in which the body's own immune system attacks the joints.

At the same time, tofacitinib was tied to a higher risk of malignancies, or cancerous cells that could spread, especially of lymphoma. The FDA staff said the risk of malignancies may get worse with higher doses or longer exposure to the drug.

The FDA staff said the risk of malignancies meant it was especially important to show tofacitinib actually slowed down structural damage from rheumatoid arthritis in order to ensure the drug's benefits outweighed its risks, "particularly since other therapies ... are available that may not have a similar malignancy risk," according to documents posted online on Monday.

The staff said tofacitinib was also linked to a higher rate of serious infections, such as pneumonia, likely because the drug suppressed the immune system. People taking the drug during trials also had higher levels of liver enzymes, serum creatinine and lipids, which could be a sign of liver and kidney damage or heart risks.

Mark Schoenebaum, an analyst at ISI Group, said in a research note that the increase in malignancy risk was a new piece of information about tofacitinib. Some other drugs for rheumatoid arthritis have also had this side effect, he said.

"We continue to expect a positive panel outcome, after extensive discussions of the issues mentioned above," said Michael Tong, analyst at Wells Fargo, in a research note. "We also note that FDA briefing (documents) are typically negative in tone."

Pfizer shares rose 0.5 percent in morning trading.

PIPELINE HOPE

Tofacitinib is one of Pfizer's biggest pipeline hopes. If approved, the likely cheaper pill would compete with widely used injectable medicines, including Abbott Laboratories Inc's $8 billion-a-year Humira.

Rheumatoid arthritis and related diseases have been one of the most lucrative areas for drugmakers, with more than $20 billion in annual sales.

An estimated 1.3 million Americans suffer from rheumatoid arthritis, according to the Arthritis Foundation. About 1 percent of the world's adult population has the disease.

Besides Humira, other treatments include Enbrel, made by Amgen Inc, and Johnson & Johnson's Remicade. All of these are costly, injectable drugs that block a protein called tumor necrosis factor (TNF) that is tied to inflammation.

Pfizer's treatment is a traditional chemical pill that works by blocking signals that activate immune and inflammatory responses in the body. It is the first in a new class of drugs called JAK inhibitors.

"As a new molecular entity targeting a novel pathway in (rheumatoid arthritis), tofacitinib may have a unique benefit-risk balance that cannot be inferred from previous experience with other products approved for (rheumatoid arthritis)," the FDA staff said in the documents.

Tofacitinib's most attractive feature over older drugs may be its dosing. Patients take it twice a day in tablet form, rather than having to inject themselves every other week, as with Abbott's Humira.

Pfizer is also studying the drug in conditions including inflammatory bowel diseases, psoriasis and dry eye.

(Reporting by Anna Yukhananov; Editing by Gerald E. McCormick and John Wallace)

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