By Mary Welch

Staff Writer

In a deal worth about $11 million to Connetics Corp., the Palo Alto, Calif.-based company spun out InterMune Pharmaceuticals Inc. by selling the majority of its ownership to outside investors.

“We set up the company as a subsidiary about a year ago, after we in-licensed Actimmune from Genentech [Inc.],” said John Higgins, Connetics’ vice president of finance and administration. “The technology was attractive to us from an in-licensing opportunity but it didn’t fit in with our business plan, which is late-stage product development and commercialization.”

The new company in Palo Alto is staffed by a handful of former Connetics employees and headed by Scott Harknen, former Connetics senior vice president of product development. The company will focus on developing Actimmune for infectious diseases such as tuberculosis and fungal diseases such as candidiasis.

InterMune intends to file a biologics license application this year for a second indication, osteopetrosis, a life-threatening congenital bone disorder. Actimmune (interferon gamma) already is approved for management of chronic granulomatous disease (CGD), an immunodeficiency disorder that leaves patients susceptible to bacterial and fungal infections.

InterMune recently in-licensed rights to a drug program relating to pseudomonas antigen technology, and is seeking to expand its pipeline by bringing in additional drugs targeting infectious and fungal disease indications.

“It’s a great opportunity for both companies,” Higgins said. “For Connetics, we retain revenue rights, and play a role in an exciting new developing company. For InterMune, it provides the financing and opportunity for them to independently focus on developing Actimmune and other drugs for infectious and antifungal diseases.”

Three investors paid $6 million to buy 90 percent of the ownership of InterMune. The investors were Sanderling Ventures, of Menlo Park, Calif.; BioAsia Investments LLC, of Palo Alto; and Charter Ventures LP, also of Palo Alto.

Under the spin-out agreement, Connetics will retain approximately 10 percent equity in InterMune and receive an up-front $500,000 cash payment and about $4 million in additional cash and equity payments over the next three years. InterMune also will pay Connetics for some infra structure services, such as human resources and accounting. Connetics retains the commercial rights and revenue for Actimmune for CGD for three years and, after that, will receive a royalty on sales. Revenues for that indication in 1998 were about $4.5 million.

The up-front payments, additional cash and revenues are expected to total more than $11 million over the next three years, Higgins said.

Genentech, of South San Francisco, developed Actimmune, which received FDA approval in 1991 for the CGD indication. Connetics licensed the rights in May 1998.

Connetics also retained the rights to Actimmune for potential dermatological applications.

“We believe this is an attractive area for Actimmune,” Higgins said. “We have no formal plans to develop it this year, but we did carve it out for future development.” n