Yesterday, Rule Breakers pick InterMune (NASDAQ:ITMN) made a bet on lead drug pirfenidone; the company decided to whip out the checkbook to avoid having to pay future royalties on it. 

InterMune in-licensed pirfenidone from privately held Marnac in 2002. It has been testing pirfenidone as a treatment for idiopathic pulmonary fibrosis (IPF), which is essentially a hardening of the lungs that makes breathing difficult. Its cause is still unknown.

InterMune's other IPF drug candidate, Actimmune, failed in phase 3 testing earlier in the year. This means pirfenidone, which is in two phase 3 trials, is the lead value driver for InterMune; its only other drug candidate -- a hepatitis C drug -- is just completing phase 1 trials.  

The revised deal with Marnac means InterMune might have to pay up to $52.5 million in extra milestone payments if pirfenidone is approved in the U.S. and European Union, but it will avoid a 9% royalty rate it would have had to pay on sales of the drug.

With this deal, InterMune traded extra up-front costs for additional upside if sales of the drug outperform. If pirfenidone is approved in the U.S. and E.U., then under the revised deal, InterMune comes out ahead after a little more than $580 million in pirfenidone sales.

Other drugmakers like Sepracor (NASDAQ:SEPR) have compounds to treat pulmonary related disorders. Even autoimmune disease treatments like Johnson & Johnson's (NYSE:JNJ) Remicade have been used in some lung conditions affecting breathing.

But now there are no good drugs approved to treat IPF in the U.S. Last year, Marnac's partner for pirfenidone in Japan announced positive phase 3 results with the drug, and InterMune expects to announce its phase 3 pirfenidone results in late 2008 or early 2009.

If all goes well, pirfenidone should receive a six-month priority review from the FDA and possible approval in late 2009 or early 2010, depending on how long it takes InterMune to submit a marketing application. If, and that's a big if, everything works out with the drug, eliminating the royalty payments on its sales looks like a smart move.

More InterMune Foolishness:

InterMune is an active pick of our Rule Breakers newsletter. Johnson & Johnson is an active Income Investor pick. Not sure which newsletter to pick? Click here to take a free, 30-day test drive of any of our newsletters.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a 98.6 disclosure policy.