The Institute for Quality and Efficiency in Health Care (IQWiG), an independent scientific institute that provides recommendations to the Germany's reimbursement authority, said treatment with Esbriet, also known as pirfenidone, showed no "additional benefit" or effect on the mortality rate or quality of life.

InterMune, in a press statement, said it had a number of important concerns with the methodology applied by the committee, and plans to vigorously challenge the IQWiG assessment during the 90-day review period that has now begun.

Esbriet, which has a so-called "orphan drug" status in Europe, was approved by the European regulatory authorities in March, as a treatment for idiopathic pulmonary fibrosis -- the scarring or thickening of the lungs without a known cause. The company launched the drug in Germany in September.

Orphan drugs are those approved for the treatment of rare medical conditions. Under German law, such drugs are deemed as having an additional benefit, leading IQWiG to assess the Esbriet additional benefit as given "but not quantifiable," the company said.

"As a next step, we will now carefully analyze the IQWiG report and provide a detailed response by January 5, 2012," Markus Leyck Dieken, InterMune's senior vice president and general manager for Germany, said in a statement.

However, the company's shares had already lost a third of their value earlier in the day on media reports about the committee decision. At least three brokerages cut their price targets on the stock saying that the final report, which is expected next year, will likely have an effect on the reimbursement of Esbriet.

"We wonder if other EU countries would wait to price/reimburse the drug until IQWiG's final assessment/potential re-pricing in Germany," Jefferies analyst Eun Yang said in a note to clients. Yang predicts the final decision will not be significantly different from this preliminary one.

Accordingly, the analyst lowered his 2013 Europe Esbriet sales estimates to $51 million from $92 million, while cutting his price target on the stock to $10 from $18.

Brisbane, California-based InterMune is studying the drug in a late-stage trial for approval in the United States, after the country's health regulators asked for a new efficacy data on it.

Brean Murray Carret analyst Brian Skorney, who has a price target of $42 on the stock, said the FDA's decision on U.S. approval would not be influenced by the German body's assessment.

Earlier on Thursday, Goldman Sachs cut its sales expectations for Esbriet on an analysis of the drug's launch, calling the European launch "staggered." The brokerage reduced its price target on the stock to $22 from $29.

InterMune shares closed down more than 30 percent at $12.74 on Nasdaq, after touching a 52-week low of $12.60 earlier on Thursday.

(Reporting by Vidya L Nathan in Bangalore; Editing by Sriraj Kalluvila and Richard Chang)

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