Updated from 9:26 a.m. EST

Genentech ( DNA) and Biogen Idec ( BIIB) said the Food and Drug Administration approved Rituxan, currently a lymphoma treatment, for moderate to severe rheumatoid arthritis.

The drug would be used in combination with methotrexate, a standard treatment for rheumatoid arthritis.

The Rituxan-methotrexate regimen would be for patients who haven't adequately responded to prior drug therapies or who are too sensitive to receive another medication, including Amgen's ( AMGN) Enbrel, Centocor's Remicade or Abbott's ( ABT) Humira.

To determine what constitutes a subpar response to a previous treatment, doctors and patients used subjective measures like fatigue, the ability to perform daily tasks and the number of swollen joints a patient had, according to Genentech medical director Sunil Agarwal.

"The FDA approval of Rituxan for RA marks an important milestone in our ongoing efforts to advance the understanding of B-cell-mediated autoimmune diseases," Genentech said in a statement. "This milestone, coupled with the additional new indication for Rituxan in diffuse large B-cell lymphoma, further establishes the companies at the forefront of novel B-cell research."

FDA clearance was based on a clinical trial comparing Rituxan and methotrexate to methotrexate alone. Patients on Rituxan received one course of the drug, plus a corticosteroid to prevent adverse reactions, and the results were assessed six months later.

According to the 500-patient study, 51% of the participants on the combination treatment saw a significant decrease in their rheumatoid arthritis symptoms compared with 18% of those getting the placebo. Rituxan is already Genentech's top-selling drug.

Rheumatoid arthritis is a debilitating autoimmune disease that affects more than 2 million Americans and hinders many daily activities of those who have it. The condition occurs when the immune system inappropriately attacks joint tissue, causing painful chronic inflammation and irreversible destruction of cartilage, tendons and bones, often resulting in disability. The disease can also affect the lungs, eyes and bone marrow.

Genentech's shares fell 43 cents to $85.26 Wednesday. Biogen Idec shares lost 50 cents to $46.75.

The sales teams of Genentech and Biogen have been at the ready ahead of the new approval, but Rituxan will be facing stiff competition for acceptance in the rheumatoid arthritis market. Bristol-Myers Squibb ( BMY) recently had a drug called Orencia approved for the same disease.

Bear Stearns biotech analyst Mark Schoenebaum says the new approval should be good for the earnings of both Genentech and Biogen. Every additional $100 million in sales of Rituxan could mean an added 2 cents to 3 cents for Genentech's earnings and an extra 6 cents for Biogen.

Schoenebaum reiterated his outperform rating on Genentech and set a price target of $98 by the end of 2006. He predicts the new indication will garner an additional $200 million in revenue in 2006, but that amount should triple by 2010. Last year, Rituxan brought in $1.8 billion in sales. Genentech and Biogen have been noninvestment-banking clients of Bear Stearns in the last 12 months.

Michael King of Rodman & Renshaw didn't seem terribly impressed by what the new approval will mean for Biogen. King says that while Biogen's stock might rise in the near term, "we see little to drive meaningful growth in BIIB shares." Rodman & Renshaw doesn't have an investment-banking relationship with Biogen but is seeking one.

Separately, RBC Capital Markets maintained its sector-perform rating on Biogen, but did raise its price target on the stock to $54 from $41. Meanwhile, research firm Thomas Weisel said in a report that the approval will have a limited impact on Biogen and Genentech. The firm said it believes Rituxan could collect $500 million in sales as a treatment for rheumatoid arthritis. Still, Weisel said conversations with doctors lead it to believe that neither Rituxan nor Orencia has a big advantage over the other.