Investors should prepare for a chain reaction among several pharmaceutical stocks if the Food and Drug Administration delivers its verdict on the first inhaled insulin in a few days.

Pfizer

(PFE) - Get Report

and its partner

Nektar Therapeutics

(NKTR) - Get Report

will benefit the most if the agency approves their drug Exubera.

But analysts also suggest that the stocks of many competitors could rise or fall on the decision, which is expected Jan. 27.

"Expected Exubera approval lifts all ships," says Andrew Forman of WR Hambrecht & Co. in a recent research report. "We believe that an approval for Exubera would be positive for all developers of pulmonary insulin ... in confirming

that a path to market exists." Forman predicts the U.S. inhaled insulin market could reach $3.6 billion in sales by the end of the decade.

Big companies such as

Eli Lilly

(LLY) - Get Report

and Denmark's

Novo Nordisk

(NVO) - Get Report

will be watching closely.

So will smaller companies, including

Alkermes

(ALKS) - Get Report

which is Lilly's partner,

MannKind

(MNKD) - Get Report

, a solo act so far, and

Kos Pharmaceuticals

( KOSP), a company that's developing inhaled insulin on its own.

Although Pfizer recently bought out one inhaled-insulin partner,

Sanofi-Aventis

(SNY) - Get Report

, for $1.3 billion, some analysts suggest that the French drugmaker could get back in the game by making a deal with an unattached player.

Dual Use

Pfizer, Nektar and the other companies say inhaled insulin could improve patient compliance vs. injectable insulin. Assuming the FDA approves Exubera, Wall Street will be looking at several key issues: How many patients will switch to inhaled insulin? How quickly will they switch? What restrictions or warnings will the FDA impose on Exubera, especially in regard to potential lung problems? And how much will Pfizer and Nektar charge?

In September, an FDA advisory panel voted 7-2 to support Exubera as a treatment for type 1 and type 2 diabetes.

The following month, a medical advisory panel to the European Union's drug regulatory agency endorsed Exubera for both types of diabetes. Type 1 diabetes is caused by the body's inability to produce insulin, the protein hormone that helps turn sugar into fuel for the body's cells. Type 2 diabetes is caused by cells ignoring insulin or the body's failure to produce enough insulin.

However, it's never safe to make an assumption with regulators -- especially the FDA, and especially with a new class of a drug or device. The FDA was supposed to rule on Exubera in late October, but the agency asked for a 90-day extension.

Considerable Competition

Pfizer and Nektar have about a two-year lead over their competitors in the regulatory process, but analysts still believe that the inhaled insulin market could accommodate several players. Investors looking beyond Exubera should pay attention to upcoming announcements from several companies.

For example, Lilly, whose AIR insulin is considered in second place, will issue fourth-quarter earnings Jan. 26 and may discuss its product's progress. Lilly initiated a 24-month phase III clinical trial in July and a 12-month clinical trial in August. Phase III testing is the final clinical trial before a company seeks regulatory approval. Forman says the Lilly-Alkermes product appears on track for a 2009 launch.

Novo Nordisk, the world's leading seller of insulin, issues its fourth-quarter earnings report on Jan. 27. The company hasn't commented on whether it will take its AERx product to the final clinical trial stage.

"We expect the company to confirm that AERx is expected to move to phase III shortly," says Sachin Jain, of Merrill Lynch, in a Jan. 23 research report. Jain is neutral on the stock.

Moving ahead with the most time-consuming and expensive clinical trials isn't a slam-dunk. Novo Nordisk, which uses inhaler technology developed by

Aradigm

(ARDMD)

, employs a liquid form of insulin rather than the powdered form featured in most inhaled products.

Early clinical trials

experienced some setbacks, and Aradigm's inhaler is considered cumbersome by some experts.

"Given the size of this device, we do not feel AERx will be a popular product," says Sagient Research Systems, a San Diego-based firm that analyzes biotechnology products.

International Ties

William Tanner of Leerink Swann recently told clients that Novo Nordisk "has significantly cut back development activities" on AERx, thus making the company "potentially interested" in MannKind's product called Technosphere Insulin. He says Sanofi-Aventis, as well as Japan's

Sankyo

or

Takeda

might be interested in making deal with MannKind, whose Technosphere appears "superior to other inhaled insulin formulations." Tanner has an outperform rating on MannKind.

Lack of a partner is one reason why some analysts have offered

downbeat reviews of MannKind. The company did though deliver good news to investors Jan. 17, announcing favorable results for a phase II clinical trial. MannKind's product reduced blood sugar, didn't cause lung problems and didn't cause weight gain over 12 weeks of study. Two investment banks raised their ratings, and several others became more optimistic.

If Technosphere can repeat these results in future tests, it could become "best-in-class," says Thomas Wei, of Piper Jaffray, who elevated MannKind to outperform from market perform.

Wei says MannKind's stock will be helped by FDA approval of Exubera, favorable phase III results and a partnership agreement. Phase III results are due to be reported by midyear. So far, MannKind hasn't expressed an interest in a partner.

WR Hambrecht's Forman recently raised his rating on MannKind to hold from sell, echoing many of Wei's comments. Forman predicts that Kos Pharmaceuticals will seek a partner for its inhaled insulin product, which is still in phase II testing. Sagient Research says the Kos product differs from competitors because it features a canister that holds many insulin doses.

"Based on the characteristics of the device, this should be a popular product, but as a late entrant, we feel this product will lag slightly behind AIR Insulin and Technosphere," the research firm says.

Sagient Research Systems doesn't own shares in or have financial relationships with the companies whose products it covers.

Sachin Jain of Merrill Lynch doesn't own shares of Novo Nordisk. Merrill managed a public offering of the company's securities within the last 12 months.

Andrew Forman of WR Hambrecht doesn't own shares of MannKind or Nektar Therapeutics. His firm was a comanager of a Nektar public offering.

Thomas Wei of Piper Jaffray doesn't own shares of MannKind. Within the last three years, the firm participated in a public offering for the company.

William Tanner of Leerink Swann doesn't own shares of MannKind. His firm has had an investment-banking relationship with the company.