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There's been a lot of debate over whether or not

InterMune's

(ITMN)

drug, Actimmune, is a truly effective treatment for the fatal lung disease, idiopathic pulmonary fibrosis. But few people have questioned Actimmune's safety -- until now.

The April issue of the

American Journal of Respiratory and Critical Care Medicine

carries a case report detailing four European patients with advanced IPF who died from respiratory failure after being treated with Actimmune. Three of the patients died shortly after starting therapy with the drug.

Although not conclusive, there is ample evidence to suggest that Actimmune was the cause of the severe side-effects seen in the patients, according to the article's authors, who conclude their report by recommending that doctors stop giving the drug to patients with advanced IPF.

An accompanying editorial in the same issue of the medical journal says the four patient deaths "raise concerns that need to be addressed by further studies examining the potential role of

Actimmune in the management of IPF."

Because the journal report and editorial were just published, it is not certain what effect this may have on Actimmune sales. But the new information raises the risk that doctors will curtail their use of the drug if they believe it could cause severe harm -- even kill -- some of their IPF patients, instead of helping them.

InterMune medical officer Dr. James Pennington says the new information, while important, should have no impact on Actimmune or the way doctors use it because the IPF patients who died were sicker than those who typically benefit from Actimmune therapy.

"We read the article with great interest and we're not sitting on any data that would refute or confirm the observations," Pennington said. "But in our study we didn't include patients with such severe disease and therefore didn't see any similar episodes."

If nothing else, the new safety concerns are sure to ratchet up the controversy over Actimmune, which has turned InterMune into one of the more volatile

battleground stocks in the biotech sector. With the first quarter in the books, InterMune investors -- both long and short -- will be paying close attention to upcoming Actimmune sales figures.

InterMune was trading at $20.97 per share in recent Tuesday trading.

Recall that Actimmune is approved by the Food and Drug Administration, but not as a treatment for IPF, a fatal disorder that causes lungs to fill with scar tissue. Yet InterMune has strongly encouraged off-label use of the drug by doctors treating IPF patients, based on data from a phase III study released last August. A subset of patients in this study with mild to moderate forms of IPF lived longer after taking Actimmune, compared to those taking a placebo. (The overall endpoint of the study was not met, however, which InterMune shorts have used to question Actimmune's efficacy.)

Fourth-quarter Actimmune sales grew 30% sequentially to $37 million. InterMune supporters say this validates anecdotal evidence suggesting doctors are convinced that Actimmune is an effective IPF treatment, especially because there are no other effective drugs for the disease.

But now, along comes new safety concerns. The four patient deaths were reported by Dr. Isabelle Honore, a French pulmonologist practicing at a Paris hospital, along with seven colleagues. All four patients, male, had advanced cases of IPF before starting on Actimmune therapy. All four developed acute respiratory distress syndrome, which led to fatal respiratory failure. Two of the patients died within seven and 11 days, respectively, of taking Actimmune. Another died after 49 days, while the fourth died after an unsuccessful lung transplant at three months.

As detailed in the case report, the doctors sought answers to the patient deaths by comparing them to six others who also took Actimmune but did not suffer respiratory failure.

"In our opinion,

Actimmune therapy was the most likely cause of acute respiratory failure in our four patients," writes Honore.

Because it is patients with mild to moderate forms of IPF that seem to be helped the most by Actimmune, the safety risk raised by the French patients -- all of whom had more advanced disease -- may not matter. However, as one InterMune short points out, there is a fine line between patients with moderate IPF and those with more advanced cases.

Doctors have some discretion here in characterizing a disease's state, and may be less willing to risk using the drug on patients who fall into a gray area. Also, insurance companies may seize on the increased safety risk as a reason to deny reimbursement for Actimmune.

InterMune's Pennington believes the article will be well read by doctors who treat IPF patients, but that it won't impact Actimmune use because the company has demonstrated the drug to be remarkably safe for patients with mild to moderate disease. By his reading of the article, the European patients who died after taking Actimmune were already so severely incapacitated that doctors were essentially trying anything out of desperation to keep them alive.

InterMune bulls on Wall Street continue to believe that Actimmune benefits outweigh any risks, and that its stock -- trading between three and four times 2003 revenue estimates -- is undervalued. Analyst Navdeep Jaikaria of investment bank Leerink Swann issued a bullish report on InterMune Monday, based on a proprietary survey of five doctors with experience using the drug.

"All five consultants find Actimmune to be a safe drug," Jaikaria writes. "In addition, they shared that they are observing stabilization of disease on Actimmune in most patients. The physicians also report that most patients in their practices continue to be on Actimmune and that the patient attrition rate is low. These physicians have not stopped Actimmune in any patient."

Despite his confident stance, Jaikaria is forecasting first-quarter Actimmune sales of $38.2 million, or a slight 3.3% sequential increase. The reason:

Extended efficacy data on Actimmune released in January that showed a narrower patient survival benefit than first reported last August. For the year, Jaikaria is forecasting Actimmune sales of $181.8 million, just above InterMune's guidance of $160 million to $180 million. Jaikaria rates InterMune outperform and has a consulting relationship with the company.

Banc of America Securities analyst Mike King is looking for first-quarter and 2003 Actimmune sales of $37.9 million and $161.3 million, respectively. He rates InterMune buy and has no banking relationship with the company. Jennifer Chao at RBC Capital Markets is forecasting first-quarter sales of $42.4 million and $193 million for 2003. She rates InterMune outperform and has no banking relationship.

InterMune reported Actimmune sales of $106 million in 2002, including $37 million in the fourth quarter.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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