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Sitting atop the Russell 2000 Index was a surprising name at the end of December - biotechnology company InterMune (NASDAQ:ITMN). The stock finished out the month with a 190 percent return. Much of that came in trading on December 17, when the biotech gained an eye-popping 145 percent in a single day, pushing the company's market capitalization past $1.8 billion.

Credit the jump to good news coming out of European operations that hadn't been expected until sometime in early 2011.

The European Medicines Agency's Committee for Medicinal Products for Human Use, or CHMP, recommended the approval of the company's experimental drug to treat a fatal lung disease, called idiopathic pulmonary fibrosis (IPF). That is expected to lead to overall European regulatory approval in the first quarter of the year.

Suddenly, a beaten-down company looked much better to investors -- and it could still be worth consideration. That said, remember that biotech stocks are among the most volatile in the market, so make sure you do your research and are comfortable with big swings in stock price if you buy them.

InterMune develops niche drugs for diseases affecting the lungs, such as IPF, and the liver. It's banking on its new experimental drug, Esbriet (the commercial name for pirfenidone) to become its billion-dollar baby. No effective treatment of IPF exists.

Investors who got in on InterMune early in 2010 have enjoyed a 179 percent return - but also endured a stomach-churning year of major rallies and drops. InterMune fell 75 percent after the U.S. Food and Drug Administration snubbed an advisory panel's recommendation to approve Esbriet last May. This week, the company said it would start a late-stage Phase 3 trial of the drug in the first half of the year.

InterMune is taking what's known as an orphan drug and developing it (including the risky, time-consuming and expensive trials) in the hopes of bringing an abandoned compound to market. Orphans also gain a seven-year exclusivity period once approved. The drug is already being sold in Japan by a partner, but drug makers usually find that it's much more difficult to pass muster with European and U.S. regulators.

CEO Dan Welch told Dow Jones Newswires that InterMune expects to go it alone when marketing Esbriet in Europe, where there are an estimated 110,000 patients with IPF. Expansion plans also include the U.S. There are a similar number of patients in the U.S., with 30,000 new cases diagnosed annually. InterMune says that IPF is more prevalent than ovarian cancer and is equal to all types of leukemias combined.

That's why the company is suddenly becoming a darling of Wall Street analysts. Following the news out of Europe, InterMune picked up two buy recommendations, one upgrade to buy and a previous buy recommendation reiterated. Baird put a 12-month price target of $47 on InterMune, 34 higher than the current stock price. A Wedbush analyst also suggested that InterMune could become a takeover candidate for Gilead Sciences (NASDAQ:GILD), or others.

The company hopes to surprise investors when it reports year-end results in early February by reporting a profitable fourth quarter. Analysts surveyed by Thomson Reuters think InterMune will provide $0.33 earnings per share, which could help cut the full-year loss to $1.13.

Last month's European recommendation goes a long way towards putting Esbriet back on track after getting derailed by the FDA.

I agree with the analysts who are bullish on InterMune, but warn that the downside here is also significant if things don't pan out with Esbriet. But if Esbriet makes it to market in Europe, I wouldn't be surprised to see another sudden surge is share price. And if the company's newest clinical trial proves effective, the FDA could issue its approval. This could give the stock another head-turning gain.

Disclosure: No position

Source: InterMune: European Market May Open Its Doors to This Biotech