Intermune's ( ITMN) day of reckoning is fast approaching.

The Brisbane, Calif.-based biotech firm is on the verge of releasing crucial test data on its chief product, Actimmune. If the drug proves to be effective against the often-fatal lung disease known as idiopathic pulmonary fibrosis -- an ailment with no effective current treatments -- sales will soar. Results could be released before, or right after, Labor Day.

Intermune is expected to sell about $100 million worth of Actimmune this year to IPF patients, on an off-label basis (the drug is commercially available because it already has Food and Drug Administration approval for two very rare congenital diseases). But if the company's phase 3 clinical study comes up aces and Actimmune gets FDA approval as a certified IPF treatment, sales could rise to around $750 million annually within the next few years.

That would be Intermune's ticket to the big leagues of biotech, transforming the company in much the same way that the drugs Enbrel and Synagis did for Immunex and Medimmune ( MEDI), respectively.

Intermune closed Friday at $20.14, which means it trades at about six times its 2002 sales forecast, below the eight times sales where biotech firms typically trade, yet still possibly rich if you factor in the uncertainty surrounding Actimmune's future. If Actimmune results are positive, investors will likely see Intermune as a cheap stock by just about any measure.

Of course, if the Actimmune test results disappoint, Intermune's biotech ticket won't be stamped. Without the drug in its roster, the company's revenue would fall, along with its stock price.

Idiopathic pulmonary fibrosis is an insidious disease marked by the gradual buildup of scar tissue in the lungs, interfering with a person's ability to breathe normally. The disease has no known cause, and current treatments such as steroids aren't considered very helpful. Ultimately, a person stricken with IPF dies unless a lung transplant is performed. There are about 50,000 IPF patients in the U.S., and about 15,000 new cases are diagnosed each year.

Actimmune was basically a do-nothing drug until 1999, when an Austrian doctor published a small study that showed vast improvements in IPF patients who were given Actimmune, known medically as Interferon Gamma-1b. Intermune quickly glommed onto the Austrian study and started developing Actimmune as a possible IPF treatment. While off-label sales took off, the company initiated a large, controlled and blinded phase 3 study to validate the drug's earlier results and get the FDA stamp of approval.

The study enrolled 330 IPF patients, half receiving Actimmune and half receiving a placebo. Intermune has estimated that over the 48 weeks of the study, the disease will worsen, or progress, in about 40% of patients in the placebo arm. For the trial to meet its primary endpoint, the company wants to show that Actimmune can reduce the rate of disease progression to 20%.

The study is also designed to measure several secondary endpoints, such as Actimmune's ability to improve lung function and overall patient quality of life.

Intermune says that around 2,000 IPF patients are currently taking Actimmune outside its clinical trial, which would seem to make it easier to predict the study's results. Not exactly -- anecdotal evidence from treating doctors suggests that the drug is modestly helpful to patients with mild or moderate forms of IPF, and those in more advanced stages of the disease find it ineffective. Unfortunately, it's not been possible to determine whether Actimmune works well enough to pass the statistical hurdles of the clinical trial.

"My impression is that in patients with mild disease, a number of them seem to have a stable or positive response," said Dr. Steven Sahn, speaking on a conference call last week organized by the investment bank Adams, Harkness & Hill to discuss Actimmune. "The stage of disease is critical here. At the end stage, the drug has very little effect, but in earlier stages it may have a beneficial effect."

Sahn treats IPF patients with Actimmune at the Medical University of South Carolina and is an investigator in Intermune's clinical trial. On the basis of his off-label experience with the drug, he believes Intermune's clinical trial will succeed.

Pat Flanagan, the Adams, Harkness biotech analyst who put the conference call with Sahn and two other doctors together for the bank's institutional investor clients, gives 35% odds that the Actimmune clinical trial is a complete success. Barring that, he believes there's a 45% probability that Actimmune shows positive trends but just barely misses meeting the study's statistical endpoints. He rates Intermune strong buy, and his firm has done underwriting for the company.

The outlook for Intermune will be cloudy if the Actimmune findings come back in the close-but-no-cigar category. Two of the doctors on the Adams, Harkness conference call said they would likely continue using the drug off label as before, while the third doctor said he wouldn't use the drug as aggressively. Moreover, all three doctors believed insurance reimbursement could become more difficult to obtain.

This cautiousness is reflected in Flanagan's Actimmune sales estimates. If the study works, he forecasts peak drug sales of $800 million to $1 billion; but if the drug only shows positive trends, the peak sales forecast falls to $300 million to $400 million.

"We're not playing this stock until after the results come out," says one hedge fund manager who's done extensive research on Actimmune but still can't find an edge going into the announcement of the study results. "From the numbers I've seen, it seems unlikely that there's going to be a big difference between the two groups, which makes it impossible to predict. Actimmune may have a modest effect on patients, but it doesn't make them better, it just seems to slow down the progression of the disease."

That doesn't necessarily bode ill for Intermune. Biogen ( BGEN) has built Avonex into a $700 million-plus drug even though it only slows, but doesn't cure, multiple sclerosis.

But then again, Biogen is working with an FDA-approved drug that it can market heavily to doctors, something that Intermune won't be able to do if the trial fails. That's why the upcoming Actimmune study is the most important event in Intermune's short history.

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