InterMune is an emerging pharmaceutical company located in Brisbane, CA south of San Francisco. The company is small--fewer than 200 employees, but it has recently enjoyed great success.

On January 4, the company filed an NDA with the US FDA for pirfenidone, an oral, small molecule therapy for the treatment of idiopathic pulmonary fibrosis--a rare lung condition. The NDA was granted priority review with a PDUFA date of May 4, 2010. The drug itself was already approved in Japan for the same condition. Japan is one of the toughest countries in which to get marketing approval, so it was reasonable to expect that the risk of failure was minimized.

On March 9, the FDA advisory committee voted by 9-3 in favor of pirfenidone. In Europe, a marketing authorization application (similar to an NDA) was validated on March 24, meaning that a review of the application for approval would begin.

May 4, Tuesday, is the day to watch: it's the date that the FDA will grant to decline marketing approval for Pirfenidone. So what will happen on Tuesday? It’s anyone’s guess, but InterMune has some things going for it:

- There is no other treatment for the condition; that’s a big plus and could help get the drug approved.

- Sure, the drug has had mixed results in the clinic, but frankly few drugs go sailing through the approval process unscathed.

- Finally, the drug has been approved elsewhere. While concerns have been raised about safety, there are data available on a broader patient population that can help shed some light on these concerns.

The stock has run up on anticipation of good news from the FDA. Since March 1, shares have climbed from under $15 to as high as $49 each.

Of course the big imponderable is still the decision by the FDA on Tuesday.

Given legitimate concerns about the safety and efficacy of the product, the FDA should really ask InterMune to conduct another, larger trial. Of course, if data from Asia can be considered in the decision, it could help sway the decision. Given that this therapy is the last best hope for many people suffering from a terrible lung condition, the FDA could grant some latitude and approve the drug. The agency might even request extra warnings.

Ultimately, with a binary decision such as drug approval, and with reasonable arguments supporting both outcomes, the best way to play this stock could be with options: a long straddle. We'll see.

At the close on Friday, ITMN sold at $42.1 a share. A $40 put is selling for an expensive $8.20; a $45 for an equally expensive $8.10 (May expiration). It seems that others have adopted this approach! Prices all the way through October are pretty high.

The take home lesson with InterMune seems to be that the risk should have been assumed much earlier--prior to the decision by the review committee. That's almost always the way with biotech companies. If FDA does grant approval on Tuesday, a straddle could be profitable--but likely not dramatically so. If approval is delayed or declined, again there's a profit to be made. Though if approval is declined, the stock could drop to under $30 a share.

There is one other possibility: there is a chance, maybe around 25%, that the FDA won't honor the PDUFA date. In the past year or two, PDUFA dates have been slipping. If you're willing to assume that risk, then selling May options is for you!

I'd say that there's a greater than 50/50 chance that approval will be granted, but it looks like profits have been taken.

There are other drugs in other companies waiting in the wings. I'll post about a company called Biocryst soon.