InterMune Swoons

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Yesterday, drugmaker InterMune (Nasdaq: ITMN) announced that it was discontinuing development of its lead drug, Actimmune, as a treatment for a rare lung disease called idiopathic pulmonary fibrosis (IPF) after it failed in phase 3 testing.

The decision to stop testing Actimmune was made by a data monitoring board when an interim analysis of the phase 3 study showed Actimmune failed to improve survival in patients taking the drug versus placebo.

This negative study result will have more of an impact on InterMune than just the discontinuation of the drug's development. Actimmune is FDA-approved for two rare diseases and brought in $90 million in revenue last year. Unfortunately, "the vast majority of (this) revenue comes from off-label prescriptions of Actimmune for IPF," so this failed study should hit InterMune's top line heavily as off-label use of the drug in IPF declines.

So what does this failed study mean for InterMune shareholders? The net damage from the failed trial will be an increase in share dilution as Actimmune sales decline and InterMune loses a source of income to fund its research and development spending.

There are 80,000 IPF sufferers in the U.S. alone, and as of now, there are no approved treatments for the disease. Had Actimmune been successful in this clinical trial, its market potential would have been in the low hundreds of millions of dollars, based on the drug's current cost for a course of treatment.

The bright side of the equation is that InterMune does have another promising treatment for IPF called pirfenidone, which produced strong clinical trial results back in December. The results of this clinical study won't be out until the first half of 2009, but at least InterMune's chances of developing a treatment option for IPF are still alive.

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Fool contributor Brian Lawler owns shares of InterMune, but thankfully no other company whose shares dropped more than 20% today. The Fool has a disclosure policy.