ZURICH -(Dow Jones)- Renewed takeover speculation helped shares in Actelion Ltd (ATLN.VX) recover Friday after Europe's largest biotech company said it was discontinuing the development of its sleeping pill almorexant, which had been viewed as a potential multi-billion dollar blockbuster.

"The stock suffered at first on this news, but it was hardly unexpected," a trader said. "But it is still being supported by takeover rumors."

Discontinuation of the medicine's development on safety grounds is the latest blow for Actelion, which has suffered a series of drug trial setbacks in recent months which have turned it into a takeover target.

The Swiss company has said it wants to stay independent and isn't interested in a large shareholder, amid speculation U.S.-based Amgen Inc (AMGN), Eli Lilly & Co (LLY) and Bristol-Myers Squibb Co (BMY) would make bids.

Thero Weckroth, analyst at Kepler, said the failure increased the likelihood of an Actelion takeover.

"There is now more pressure on the company to deliver as a standalone entity," he said.

"By the end of 2012, big pharmaceutical companies will have free cash flow of $200 billion. That needs to go somewhere, and they will go for external growth," he said.

Vontobel analyst Andrew Weiss said potential buyers may make new approaches to Actelion in the wake of the almorexant failure.

The crucial time for Actelion would come when the data for successors to Actelion's pulmonary hypertension drug Tracleer come at the end of this year, he said.

Tracleer is Actelion's biggest seller, responsible for 84% of the company's CHF1.48 billion revenue for the first nine months of 2010.

Talk of a takeover of Actelion arose at the end of last year after the biotech's own costly R&D efforts repeatedly failed.

Anti-brain bleeding drug clazosentan failed to meet study goals, and the failure to extend the use of hypertension medicine Tracleer, which generates the bulk of its sales but will lose patent protection by 2015.

Analysts had views almorexant as having potential sales of $2 billion in its first indication to treat insomnia, while later potential uses to treat Alzheimer's Disease and sleep-related depression increased revenue forecasts to $4-6 billion.

"We've known about the safety concerns for a long time, and this news has been a long time in coming, which is never a good sign," said Sarasin analyst David Kaegi.

The only positive for Actelion is that it may save research costs on almorexant, and the news is likely to be neutral for the shares, he added.

Actelion, based in Alischwil, Switzerland, had been developing almorexant with GlaxoSmithKline (GSK), but the project had already hit a snag in December 2009 when it was hampered by safety issues.

The companies said Friday they were ending clinical development of the Phase III investigational dual orexin receptor antagonist following a review of data from additional clinical studies to establish the tolerability profile.

GSK and Actelion said they remained committed to conducting further research to better understand the potential of orexin receptor antagonism in sleep disorders and other conditions.

"Both companies will continue to work on the discovery and development of new orexin receptor antagonist therapies, based on the orexin alliance formed in July 2008," they said in a statement.

Actelion shares opened 2.6% lower Friday before recovering and at 1035 GMT stood up 1.6% or CHF0.85 higher at CHF52.80 in a flat market. The shares have lost 6.12% of their value in the last 12 months.

(Neil Maclucas in Zurich contributed to this article)

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