By Ludwig Burger

(Reuters) -Novartis said it has agreed to acquire U.S. biotech firm Chinook Therapeutics for up to $3.5 billion to boost its late-stage drug development line-up, raising the stakes in the race for a rare kidney disease treatment.

Seattle-based Chinook’s shareholders will receive $3.2 billion, or $40 per share, in cash under the agreed deal, plus a contingent value right worth up to $300 million, depending on certain regulatory achievements, Novartis said on Monday.

The upfront payment represents a premium of 66.7% to Chinook’s Friday closing price. Chinook’s shares were at $40.1 in premarket trading on Monday.

Novartis CEO Vas Narasimhan is eager to raise the prospect of future blockbuster drugs after leading a push to slash costs and reshape the Swiss drugmaker to focus on fewer therapeutic areas and the most promising geographic markets.

Chinook, whose shares closed at $23.99 on Friday, has a leading compound designed to treat IgA Nephrophathy, or IgAN, a rare disease that can lead to kidney failure in young adults which has attracted a range of developers and is already the target of drug candidate developed by Novartis.

Narasimham has previously said he would look primarily at deal targets worth less than $5 billion.

The transaction is expected to close in the second half of 2023, Novartis said in a statement.

Chinook expects to see the pivotal readout in the fourth quarter of this year of a clinical trial in the third and last stage of development of oral drug candidate atrasentan to treat IgAN.

Chinook is also working on zigakibart, another experimental IgAN treatment that is injected, and plans to start a Phase 3 trial in the third quarter of 2023.

Narasimhan scored a major win this year when breast cancer drug Kisqali, one of two new drugs crucial to the group’s sales growth, was shown to help a wider patient group in a study.

The other drug hopeful is iptacopan, which is being trialled against a number of rare genetic disorders, including IgAN and another kidney disease.

Companies working on potential IgAN treatments include Roche, Vera Therapeutics, Ionis, Omeros and unlisted HI-Bio.

IgAN is a progressive autoimmune disease that mostly affects young adults and which can lead to kidney failure that requires dialysis or organ transplantation. No targeted treatment options are available, Novartis said.

In the United States, IgAN affects up to 21 people per million per year, with a higher rate among Asian populations. IgAN is the most common cause of kidney failure in Caucasian young adults, Novartis added.

Novartis is set to become more dependent on its drug development fortunes as it plans to spin off its generic drugs division Sandoz in the second half of 2023.

Chinook shares slumped, but quickly recovered, last month when short-seller Muddy Waters said it was betting on the stock to fall because atrasentan was unlikely to reach market maturity.

Muddy Waters said last week it remained short on Chinook.

(Additional reporting by Miranda Murray; Editing by Kim Coghill, Sonali Paul and Alexander Smith)

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