Inhaled Insulin Dependence Leaves MannKind Gasping

Shares of the biotech free fall on fears its lead drug candidate may never make it to market.
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Daunting lung-cancer data prompted

Nektar Therapeutics

(NKTR) - Get Report

and

Pfizer

(PFE) - Get Report

to

kill further development of Exubera

Wednesday -- and raised questions for the viability of inhaled insulin in general.

Diabetes patients taking Exubera, a product already known for commercial weakness, had a higher incidence of new lung cancer than those not taking the drug in clinical studies. So what do the findings mean for a company that has an inhaled insulin product as its lead candidate and only late-stage prospect?

The news sent shares of

MannKind

(MNKD) - Get Report

diving $3.63, or 62%, to $2.22, setting new all-time lows for the stock in the process.

"We view this as an absolute disaster for MannKind and do not see a believable scenario in which the FDA would approve another inhaled insulin," wrote Natixis Bleichroeder analyst Jon LeCroy in a note to investors on Wednesday.

The initial idea of a needle-free approach to type I and II diabetes, which affects roughly 230 million people worldwide and nearly 21 million in the U.S., has clear appeal. But, MannKind investors were already itching with skepticism as they watched Pfizer and

Eli Lilly

(LLY) - Get Report

back away from the inhalable approach over the last several months.

Pfizer said in October that physicians and patients were slow to accept Exubera. They weren't the only ones -- the first FDA-approved inhaled insulin went through a lengthy regulatory review process. An FDA advisory panel voted 7-to-2 to recommend the agency approve it, and the FDA followed suit in early 2006. Although questions about whether inhaled insulin caused lung problems after prolonged use had triggered concern. (Pfizer later released interim study data in June of 2007, saying lung effects were temporary and reversed naturally after discontinuation.)

Now that Exubera is kaput, the spotlight turns to MannKind's lead product Technosphere. Technosphere is in phase III trials, but as Natixis Bleichroeder's LeCroy points out, beyond that MannKind only has phase I and younger programs.

LeCroy now assigns zero value to the Technosphere program, but says he expects MannKind to finish up the four existing trials. The only positive is that all of the cases were in former cigarette smokers, LeCroy wrote. And thus MannKind will likely appeal for a smoker exclusion in its label. Still, he doesn't expect approval.

Prior to Wednesday's news, MannKind's shares had already taken a beating in the last year, trading down nearly 60% from April of 2007.

Taking stock in Pfizer's dumping of Exubera in October and Eli Lilly's own withdrawal from an inhaled insulin venture, Jeffries & Co. analyst Salveen Kochnover downgraded MannKind on March 10 to underperform from buy and dropped her price target to $4 from $20.

"In addition to questions surrounding market viability, we feel that the likely exit of Eli Lilly provides a clear signal that the inhaled insulin market may not be commercially feasible," said Kochnover in a note to investors.

Digesting Wednesday's developments, Natixis Bleichroeder's LeCroy revised his price target for the stock to $1.25 from $6.50, based on a sum-of-the-parts model, valuing the company now -- post Exubera news -- at $138 million. However, elimination of potential revenue from Technosphere doesn't affect LeCroy's earnings-per-shares estimates negatively until 2011, due to offsetting operating cost declines.