Inhale Therapeutics

(INHL)

Tuesday acquired privately held

Shearwater Corp.

for $191 million in cash and stock, seeking to expand its drug delivery technology.

Inhale, like its name implies, is best known as the developer of technology for inhaled drugs. Its most advanced product, an inhaled form of insulin dubbed Exubera, is expected to be in front of regulators at the

U.S. Food and Drug Administration

by the end of the year.

Today's acquisition broadens the company's drug delivery platform into injectable drugs. Shearwater's technology improves the effectiveness of a drug, mainly by making its effects last longer in the body. The company does this through a process called advanced PEGylation, which essentially attaches a special chemical polymer to a drug, enhancing its effect.

Inhale is paying $72.5 million in cash and issuing 4 million new shares to acquire Shearwater. The deal is valued at $191 million, based on Inhale's Monday closing stock price of $29.57.

Shares in Inhale were up $1.66, or 5.6%, to $31.23 in Tuesday trading.

"This is a diversification strategy for Inhale," says

Robertson Stephens

analyst Robert Hazlett. "The success of drug delivery companies like Alza and Elan Pharmaceuticals has pushed others in the industry to become a one-stop shop. So, if a large biotech or pharmaceutical firm comes to Inhale for drug delivery solutions, they will have the technology to do anything that's needed." Hazlett has suspended his rating on Inhale because his firm advised Shearwater in the acquisition. Hazlett's previous rating was long-term attractive.

The acquisition of Shearwater adds 11 drugs to Inhale's pipeline, two of which have completed late-stage testing and are already in front of the FDA. The most advanced of these is a joint venture with

Hoffman-La Roche

for a drug to treat Hepatitis C, expected to be approved by the end of the year.

Inhale executives didn't offer details about Shearwater's financial performance, only saying that the company was "almost profitable." Inhale also said that the Shearwater deal could accelerate Inhale's profitability timeline once Exubera is approved.

Inhale is developing the inhaled insulin product with

Pfizer

(PFE) - Get Report

and

Aventis

(AVE)

, with some analysts predicting sales could reach more than $1 billion a year because patients will prefer inhaling insulin rather than injecting it.

Over the weekend, details of a study sponsored by Pfizer were released showing that the drug was still effective for patients two years after they started taking it. But also last week, Aventis disclosed that one patient in a 1,000-patient study developed scarring of the lungs, a potentially serious side effect, after taking Exubera.

In addition to Pfizer and Aventis, Inhale is working with other pharmaceutical companies to develop different inhaled versions of drugs.