Novartis

(NVS) - Get Report

has moved to broaden its development of hepatitis C drugs by acquiring the rights to an experimental medication from

Human Genome Sciences

(HGSI)

.

The deal could be worth up to $507.5 million in milestones and other payments to Human Genome, whose stock climbed 64 cents, or 6.3%, to $10.83 by early afternoon Tuesday. More than 13.8 million shares had been traded, or more than four times the daily average for the past three months.

Shares of Novartis dropped 87 cents, or 1.6%, to $55.03 on a day when most Big Pharma stocks were down.

Novartis is paying potentially big money for Albuferon, which has had

mixed results in early clinical trials for treating the chronic liver disease. By year-end, Albuferon is expected to enter the third and last stage of clinical testing before a drug application is submitted to regulators.

"Albuferon will serve as a best-in-class basis for combinations with other compounds in our hepatitis C portfolio and hopefully shape future treatment developments," Thomas Ebeling, CEO of the Swiss drug giant's prescription pharmaceuticals unit, said in a prepared statement. "This is an important step forward in our mission to bring more effective and safer drugs to patients suffering from hepatitis C."

Novartis and Human Genome will co-promote Albuferon in the U.S. Novartis will have exclusive rights to market and promote it in the rest of the world. Human Genome, based in Rockville, Md., will get an upfront payment of $45 million and other payments based on reaching certain development goals and sales targets.

"This collaboration is a significant step forward in our company's progress toward commercialization," said H. Thomas Watkins, president and CEO of Human Genome, in a prepared statement.

An Expanding Portfolio

The federal Centers for Disease Control and Prevention estimates that 3.9 Americans have hepatitis C, an infection that can lead to chronic liver disease, liver cancer or the need for an organ transplant. Novartis says the disease afflicts more than 170 million people worldwide. In the U.S., the main cause of the disease is needle-sharing by infected intravenous-drug users.

"This new addition demonstrates Novartis' ambition in a huge market," says a research note from Natexis Bleichroeder, whose analysts don't own shares. The firm doesn't have an investment banking relationship.

Albuferon brings to four the number of hepatitis C drugs that Novartis is testing, as it looks for different approaches to attack the disease. One product is valopicitabine, which Novartis is pursuing with

Idenix Pharmaceuticals

(IDIX)

. Novartis owns 56% of Idenix, of Cambridge, Mass.

Earlier this year, Novartis exercised an option to license the Idenix drug, also known as NM-283. It will pay Idenix as much as $70 million in licensing fees and $455 million in milestone payments.

Last year, Novartis began collaborating with

Anadys Pharmaceuticals

(ANDS)

in early-stage testing of the drug ANA975. The Anadys and Idenix drugs are still at least three years away from applications for regulatory approval.

Novartis also bolstered its hepatitis C efforts on Monday when it signed a licensing deal with

Genelabs Technologies

(GNLB)

of Redwood City, Calif. Novartis will work with Genelabs to develop a liver-disease drug, paying $20 million over two years and as much as an extra $175 million in milestone payments. If any product comes to market, Genelabs would get a royalty based on sales.

Many of the compounds being tested by Novartis or its partners "have complementary mechanisms of action ... which, when used in combination, may lead to better rates of sustained viral response," says Edward Tenhoff of Piper Jaffray in a research report. He has an outperform rating on Human Genome Systems. He doesn't own shares.

Improving Options

The hepatitis C market is now controlled by

Schering-Plough

(SGP)

and the Swiss drugmaker

Roche

, both of which make injectable drugs called pegylated interferons. These drugs are administered once a week. They often are given with the generic antiviral pill ribavirin, which boosts their virus-battling abilities.

Research by Novartis, its partners and many competitors focuses on developing drugs that are more convenient, more effective or less prone to side effects than the pegylated interferons.

For example, Albuferon fuses interferon alfa and albumin, a human blood protein. Clinical trials suggest that Albuferon plus ribarvirin could result in dosages being given every two weeks or perhaps every four weeks, Novartis says. The Albuferon treatment has "the potential for an improved efficacy and safety/tolerability profile compared with the current standard of care

of pegylated interferons plus ribavirin," Novartis said.

The other research goal is to find something that does a better job against the most prevalent version of hepatitis C. There are six forms of the virus. Existing drugs do a good job of fighting two types that account for about 20% of hepatitis C cases in the U.S. They can cure about 80% of these cases. However, another type accounts for about 70% of the U.S. cases, and existing drugs cure only about half of those treated, Novartis says.

Novartis is trying to attack hepatitis C with different types of drugs. Albuferon is injectable, but the company's collaboration with Idenix features a pill called a polymerase inhibitor, which targets an enzyme the virus needs to reproduce. Novartis' work with Anadys concentrates on a pill. Anadys says it could replace interferons and be used with other antiviral medications. The primary goal is to reduce the side effects of existing treatments.