Salix Pharmaceuticals‘ (Nasdaq: SLXP) drug partner Napo Pharmaceuticals has terminated the collaboration agreement between the two companies over Salix’s failure to advance a promising anti-diarrhea drug for AIDs patients drug fast enough for the California company.

Termination of the collaboration to develop the drug candidate crofelemer was effective November 4 — a year to the date of positive phase 3 clinical trial results announced by Salix that were supposed to pave the way for a new drug application filing for a candidate already on the Food and Drug Administration’s fast track. Napo said the termination leaves it free to find another partner or develop on its own what could become a blockbuster drug.

Triangle-based Salix entered the collaboration agreement in 2008 to develop Napo’s anti-diarrhea compound crofelemer. Salix paid Napo $4.5 million up front plus a $500,000 equity investment in the company. Napo stood to gain up to $300 million in additional milestone payments. Crofelemer was being studied to treat chronic diarrhea for people who have HIV/AIDS. Napo said that an estimated 40 percent of HIV/AIDS patients in the United States suffer from diarrhea. Besides HIV-associated diarrhea, the compound also has potential applications in diarrhea-predominant irritable bowel syndrome, acute infectious diarrhea and pediatric diarrhea.

The Food and Drug Administration recognized the unmet medical need that crofelemer could address and clinical trials were done under fast-track status and a special protocol assessment, an agreement between companies and the FDA that expedites regulatory review. But despite achieving positive phase 3 results last year, Salix has yet to file a new drug application for crofelemer.

“Napo believes Salix has materially breached the collaboration agreement by unnecessarily stalling the advancement of this compound,” Napo attorney William A. Brewer III, said in a statement. “Most notably, Salix has failed to file an NDA one year after a highly successful phase 3 clinical trial or to prepare for commercial manufacture of the drug — critical tasks that were fundamental to its responsibilities.”

On September 16, Napo sent formal notice that Salix had defaulted on the collaboration agreement. Napo said that it terminated the agreement based on “Salix’s failure to cure its breaches in a timely manner.”

Salix made little mention of crofelemer during a third quarter earning conference call dominated by the company’s announcement of the $300 million acquisition of Oceana Therapeutics. When asked about crofelemer, CEO Carolyn Logan said an NDA filing is expected by the end of 2011. But Napo’s displeasure with Salix’s inaction on a drug filing was evident well before the company terminated the colloaboration. In May, Napo sued Salix in New York for breaching the contract. Salix, which has said that Napo’s suit is “baseless and without merit,” has filed a motion to dismiss. To date, the court has not taken action on the matter.

In Salix’s third quarter report, the company reiterated that it disputes Napo’s claims the company breached the collaboration agreement.

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