Aprile Pilon and Mark Zimmer started their biotechnology company two years ago with $50,000 of their own savings and a lot of faith.

"It was agony," said Zimmer, president and CEO of Claragen Inc. "We took the plunge and we didn't have intellectual property and had no money."

"It required a lot of faith that [success] would materialize and we would eventually make money," said Pilon, executive vice president.

In the past year, however, their faith has been rewarded in the form of $3.25 million in development funding, including more than $1 million in grants from the federal government and their home state of Maryland.

"A lot of companies that get into the biotechnology field look good on paper, but many don't have a good product," said Lucio Miele, a researcher who has been a part-time consultant to Claragen on how to win government approval of the company's nascent, unnamed drug. Claragen does, he said.

That drug is based on science developed at the National Institute of Child Health and Human Development in Bethesda, where researchers have made breakthrough discoveries on what is known as Clara cell 10kDacq (CC10 for short), a protein that is almost nonexistent in babies born more than two months early. Without CC10, babies' lungs become vulnerable to fatal or long-term lung diseases.

The lungs develop in the last trimester of pregnancy. As technology improves, so does the survival rate for premature babies, which means the pulmonary diseases the babies face are becoming more complex, boosting the demand for new methods of treatment.

Zimmer and Pilon invested in Claragen only after spending four months researching potential competition, talking to doctors, and measuring the size of the market for treatments for premature babies with neonatal lung disease.

By a conservative estimate, about 20,000 babies are born in the United States every year who develop emphysema-like conditions. The infants end up in the intensive care unit, and during the first three months of life the average hospital bill is about $200,000. If the CC10 Claragen has begun manufacturing can reduce the number of babies affected or the damage to the children by half, the College Park company is looking at a $2 billion market, Zimmer said.

To gain the rights to research the drug, Zimmer and Pilon paid $25,000 to the child health development lab at the National Institutes of Health, and agreed to underwrite the cost of research on CC10, which is about $120,000 annually. Additional start-up costs for the first 18 months totaled $350,000, including lab expenses and the legal work of incorporating and applying for patents.

By biotech company standards, Claragen has met several milestones since Zimmer and Pilon began. It has garnered $3.25 million in investments, including about $1 million in federal and state grants. It has manufactured and purified the bacterially derived CC10, and the Food and Drug Administration has granted the drug "orphan" status, essentially giving it patent protection for seven years.

Doctors say CC10 is unique in its treatment approach, and they don't expect harmful side effects in animal tests. The company will start the first round of clinical tests on at least two dozen babies by the end of the year, Zimmer said. The testing process is long, so the earliest the drug could be on the market is in four years, he said.

"It's an exciting time for us," said Jonathan Davis, director of the neonatology division at Winthrop University Hospital in Long Island.

Davis, who will conduct clinical tests with CC10, has tested other neonatal lung drugs, including an antioxidant developed by Bio-Technology General Corp. of Iselin, N.J. That drug and Claragen's could be effective as a drug "cocktail," since there are a lot of factors involved in premature babies' lung damage. "There is nothing I know of on the horizon that holds as much promise as these agents," he said.

Bringing a drug from labs to market is a difficult process that many start-up biotechnology companies don't understand, researcher Miele said. "It takes a team that understands the basic science as well as how to develop the product." According to Miele, Zimmer and Pilon are such a team, which is why he wanted to be compensated in part with stock options in the company.

Zimmer, who has a chemical engineering degree from the Massachusetts Institute of Technology and an MBA from Harvard, worked at Genzyme Corp. in Boston and Igen Inc. in Gaithersburg as marketing director and on product development. Pilon, the mother of three school-age boys, has a PhD in molecular biology. She spent many years researching CC10 through her jobs at the NIH and Igen, where she met Zimmer and Claragen's angel investor, Richard Williams.

Williams is an original founder and investor in one of Wall Street's biotech blockbusters, Amgen Inc., and has invested in six other biotech companies, including Claragen.

"You invest in people, not in products, because you could have a 10-cent pill to cure cancer and still fail," he said. "It was the extremely conservative approach to business that Mark Zimmer has shown previously, and the convincing science shown by Aprile Pilon," that persuaded him to contribute an initial investment of $100,000 and then an additional $2 million with other investors, he said.

Another of Claragen's funding sources was the Maryland Health Care Product Development Corp. in Rockville, a venture capital group established by federal and state funds that awarded a $750,000 grant last September after Claragen matched that amount with private investments.

Zimmer runs the business on low hype and low budgets, which is exactly what Amgen is known for on Wall Street, Williams said. Pilon studies medical literature relentlessly, integrating new knowledge with older theories, which Williams calls "gold mining" the field for drug opportunities. Williams said he is confident that Claragen as a company will succeed even if its first neonatal drug fails, because it's already developing five other promising drugs based on CC10 to treat adult lung and kidney disease.

If it lives up to its promise, by June Claragen will "graduate" from the University of Maryland's Technology Advancement Program, the incubator where its lab and office space is housed, and look for a new home in Maryland. Going public may be possible next year, when it has the clinical trial results and corporate partnerships to back it up, Zimmer said.

MARYLAND'S PUSH TO BRING LAB WORK TO MARKET

One of Claragen Inc.'s investors is the Maryland Health Care Product Development Corp., an "early stage" investment company funded by federal and state money.

"Our main objective is to support the commercialization of product development" in Maryland companies that use biomedical technologies developed by federal laboratories, said Blanche Johnson, president of the Rockville-based corporation.

The company was incorporated as a 501(c)(3) nonprofit in 1994, and since then its two full-time employees have reviewed about 500 candidates for potential investment. The corporation received a $5.5 million grant from the Department of Defense and a $350,000 grant from Maryland's Department of Economic Development to start the program.

So far, the company has invested in eight firms, seven of which have operations based in Maryland. The grants range from $400,000 to $1 million.