UPDATE 1-Toyama Chem may sell bird flu drug rights early

(Adds background and details)

By Edwina Gibbs

TOKYO, Aug 7 (Reuters) - Cash-strapped Japanese drug maker Toyama Chemical 4518.T may sell development and marketing rights to a promising bird flu drug candidate during early trials, its president said on Tuesday.

Midsize drug firms without the resources to fully develop drugs themselves usually wait until phase II trials have shown proof of concept -- evidence that a drug will be effective in humans as opposed to just evidence of safety -- before selling these rights.

While waiting until then would be the more lucrative option, loss-making Toyama may decide to sell the rights earlier depending on its cash position and talks with potential partners, President Masuji Sugata said in an interview.

"We may do it before proof of concept. If there is sufficient evidence that it is safe... we could see a deal wrapped up quickly," he said.

"We are going to have to make a decision looking at our cash problem."

Its bird flu drug candidate T-705 is in phase I trials -- early trials in healthy humans -- in the United States and Japan. Toyama hopes to complete the Japan phase I trials this autumn.

Sugata said the company was in talks with major foreign and domestic pharmaceutical companies, though he declined to be more specific.

T-705 has a different mechanism from the current class of drugs used to fight the disease such as Tamiflu, the current frontline treatment made by Swiss drug maker Roche Holding AG (ROG.VX), and GlaxoSmithKline's (GSK.L) (GSK.N) Relenza.

Other bird flu drug candidates being developed also belong to the same class as Tamiflu and include BioCryst Pharmaceuticals Inc.'s (BCRX.O) peramivir and Daiichi Sankyo Co. Ltd.'s (4568.T) CS-8958.

Public health experts are worried that the H5N1 avian virus may mutate into a form that can easily be passed between humans, and governments around the world have been stockpiling Tamiflu.

Experts are also keen to see alternatives developed due to concerns that the H5N1 strain could develop resistance to Tamiflu.

Toyama Chemical was hit last month by the news that U.S. drugmaker Schering-Plough Corp. SGP.N had withdrawn its new drug application to European regulators for the experimental antibacterial garenoxacin or T-3811, originally developed by Toyama.

Sugata said that he had talked with Schering-Plough last week and that the U.S. drug maker planned to continue developing the drug and there was no talk of dropping it.

A midsize drug maker whose main business is research and development, Toyama Chemical's earnings can swing wildly depending on royalty and milestone payments.

Sugata said he had no plans to embark on new fund-raising as it would not do the company any good to take on debt.

He also said he would not rule out a merger or acquisition opportunity if there were an approach.

((Additional reporting by Noriyuki Hirata, editing by Hugh Lawson; Reuters messaging: edwina.gibbs.reuters.com@reuters.net; Email: edwina.gibbs.@reuters.com; +81 3 3432-8720)) Keywords: TOYAMA BIRDFLU/ Keywords: TOYAMA BIRDFLU/

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