Biotech drug developer Kosan Biosciences Inc. said Wednesday that Pfizer Inc., the world's largest drugmaker, agreed to help develop a compound to treat gastrointestinal diseases.

Shares of Kosan rose 17.8 percent, to $5.75 in premarket electronic activity, after closing Tuesday at $4.88 on the Nasdaq. Shares have traded between $2.88 and $6.19 over the past 52 weeks.

Under the agreement, Pfizer will pay Kosan $12.5 million upfront and Kosan can receive milestone payments of up to $72.5 million. The agreement gives Pfizer worldwide rights to the compound. Kosan stands to make up to $250 million including royalties if the compound makes it to market for one indication. Kosan booked revenue of $13.4 million in 2005.

The companies will develop KOS-2187, a compound that stimulates the production of motilin, a hormone that is secreted by the small intestine and helps with movement in the gastrointestinal tract. Both companies will collaborate on filing regulatory paperwork to begin early stage clinical trials for the drug.

The compound has been shown in lab tests to be a good candidate as a treatment for gastro-esophageal reflux disease, or chronic heartburn, and diabetic gastroparesis, a condition when the stomach takes too long to empty its contents.

Kosan is entitled to other payments and milestones should Pfizer develop the compound for a second use.