Sniffing Out a Possible Diabetes Blockbuster

http://www.fool.com/news/commentary/2005/commentary05062706.htm

By Stephen D. Simpson, CFA
06/27/2005

Pricking your finger one to six times a day to test your blood glucose, injecting yourself with insulin as many as four or five times a day, risking hypoglycemia caused by your medicine, facing the possibility of devastating disease-related complications down the road -- any way you slice it, diabetes is a very serious and unpleasant disease.

The good news, though, is that a great deal of innovation and invention has led to better diabetes care, especially in the past decade. Blood glucose testing is much less painful than it used to be, insulin pumps can spare diabetics from multiple daily injections, and oral medications and lifestyle modifications have improved long-term survival outcomes.

Today we may be on the cusp of a major breakthrough in diabetes care -- the ability to deliver insulin through the lungs, via an inhaler, instead of through injection or subcutaneous infusion. Inhaled insulin has long been a Holy Grail of diabetes care, and if patients and health-care providers take to it, the sales potential could exceed $5 billion by the end of this decade.

The opportunity
Although not all diabetics require insulin injections, in the U.S. alone there are more than 4 million insulin users contributing to a multibillion-dollar-a-year market for companies like Lilly(NYSE: LLY), Sanofi-Aventis(NYSE: SNY), and Novo Nordisk(NYSE: NVO).

But let's dismiss one bull myth right off the bat -- that all people with diabetes are candidates to switch to inhaled insulin. Many insulin users only take one shot of long-acting insulin per day and don't use the meal-time insulin that initial inhaled formulations will replicate.

That said, Kelly Close, founder of Close Concerns (a diabetes-focused consulting firm), stresses that far more patients should be taking meal-time insulin, since such a small percentage -- about one-third -- are meeting their glycemic goals. With its relatively greater ease-of-use, inhaled insulin could be an excellent way to reach these patients.

Convenience is the biggest selling point for inhaled insulin, because users won't have to deal with the pain and hassle of injections, and most of the inhalation devices are quite portable (some more than others).

Greater convenience should, in theory, lead to better patient compliance, and the public health implications could be quite meaningful. If administering insulin is no longer as bothersome, more patients should be willing to take the insulin they need -- and more health-care providers will recommend it. Over the long haul, such compliance should reduce diabetes-related complications, resulting in lower costs to the health-care system and higher quality of life for patients.

Drawbacks
Of course, it's not that easy. The promise and concept of inhaled insulin are fantastic, but the reality imposes a few issues of its own.

For starters, the lungs aren't the most efficient entryway for insulin. Whether powdered (the predominant form) or liquid, pulmonary insulin delivery systems usually have to deliver 5-10 times the injected dose to achieve the same level of insulin in the body. This means a lot of valuable insulin is wasted.

And because these systems have been in development for years and are pretty sophisticated, you can bet that the companies making them expect a good return on their investment. Consequently, they won't come cheap.

Insurance companies may reject these premium prices, though. They may not want to pay for a system that is neither a perfect replacement for, nor any more effective than, injections. By the same token, the "price ceiling" for diabetes care has been rising of late. Insurers might be swayed by the cost trade-off of more expensive insulin, but better compliance and, theoretically, fewer costly complications down the road.

Second, convenience is very much a personal, user-by-user call. Consequently, some diabetics may quickly move over to the new inhaler devices, while others may choose to stick with their vials and syringes. Remember that many diabetics are elderly and there could be resistance on the part of both patients and doctors to change an existing regimen in favor a new "gadget."

Finally, there is the important question of potential damage to the lungs. Early studies of inhaled insulin showed scarring and fibrosis in the lungs. Since then, the formulations and inhalers have been improved, and recent studies have shown no major problems. Nevertheless, long-term studies haven't been done with today's equipment, and it's impossible to say what effect 10 or more years of use might have on the lungs.

The players
Without further ado, here are the companies working to make inhaled insulin happen:

Pfizer(NYSE: PFE)/Sanofi-Aventis/Nektar Therapeutics(Nasdaq: NKTR) -- Exubera
These three companies have collaborated to develop and market Exubera. Furthest along in the clinical process, Exubera is awaiting FDA and European approval. Decisions could come in the fourth quarter of this year.

Exubera has been shown to be as effective as injected insulin, and patients in the trials have, by and large, preferred to use it over injections when asked. Although the present device is roughly the size of a small flashlight, a smaller next-generation device is currently under development.

Unfortunately, Exubera has been shown to induce a noticeable short-term decrease in lung function. While this effect isn't especially serious, and appears to stabilize, it could be an issue for some patients. Consequently, some doctors may feel the need to run periodic tests to assess patients' lung function.

Sanofi-Aventis investors must also be aware of a critical point. There is a currently a dispute between Pfizer and Sanofi-Aventis regarding Sanofi's ongoing rights in the partnership (stemming from the acquisition of Aventis). Given Sanofi management's somewhat muted enthusiasm for the product, this Fool wouldn't be surprised by an agreement whereby Pfizer buys out Sanofi's interest in Exubera.

Lilly/Alk