Long before Pfizer's ( PFE) decision to stop selling Exubera, Wall Street was already having second thoughts about inhaled insulin.

Now, with Exubera's failure, analysts are sharpening their focus on competing products, none of which are expected to reach the market until 2009 or 2010 at the earliest.

The brightest spotlight is on companies with experimental products in late-stage clinical trials. Do they keep spending hundreds of millions of dollars in the belief that they can do a better job than Pfizer, which just took a $2.8 billion pretax charge to drop inhaled insulin?

Exubera's inability to catch on "negatively impacts the other inhaled insulin products in development as it was necessary for Pfizer to ease the barriers in the marketplace for later entrants to be successful," says the independent publication BioMedTracker, which analyzes drug and biotechnology developments.

"We are lowering our estimates for all the drugs in the inhaled insulin market," the research publication said Oct. 18. "We think at least some of the new entrants will do better than Exubera, because some of its unpopularity was likely due to its bulky device and difficult dosing."

Although many observers had turned sour on Exubera well before last week, at one time, after it received U.S. regulatory approval in January 2006, there was considerable enthusiasm for it and its competitors.

Despite Exubera's big lead, analysts initially viewed its endorsement as good for the Eli Lilly ( LLY) partnership with Alkermes ( ALKS), Novo Nordisk ( NVO), and MannKind ( MNKD). Their experimental products are in late-stage clinical testing.

Enthusiasm was bolstered by analysts' belief in company-sponsored studies that said many diabetics wanted an alternative to injectable insulin.

"Some -- certainly including this analyst -- may have overestimated the motivation of diabetics to adopt the clinical and disease management advantages based on market research," says Andrew Forman, of WR Hambrecht, in a research report to clients.

Bullish analysts knew diabetes was growing at a significant rate, and they felt others could make a simpler device than the cumbersome inhaler from Pfizer's partner Nektar Therapeutics ( NKTR). They also figured that Exubera familiarize the Food and Drug Administration with inhaled insulin devices, accelerating future regulatory review.

After FDA approval, however, Exubera was hit by launch delays, manufacturing problems and a time-consuming educational effort for doctors and patients.

Insurers balked at paying for a product that was more expensive, but not more effective, than traditional insulin. After a big, last-ditch consumer marketing campaign produced little impact, Pfizer dropped Exubera, stopped work on a new inhaler and returned Exubera's rights to Nektar.

"It has now become clear that true convenience in the form of a discreet portable device is required in order to win over patients," Dr. Nick Karachalis, a cardiovascular analyst for the independent research firm Datamonitor, said last week. "A true therapeutic advantage compared to traditionally administered insulin needs to be proven to secure reimbursement."

Datamonitor has long been skeptical of Exubera, even when some sell-side analysts were predicting peak annual sales of $2 billion. "While inhalable insulins will see a reasonable level of uptake, they aren't the sure-fire blockbuster they were hyped to be," the firm said 12 months ago.

Some analysts still make the case for inhaled insulin. Exubera's epitaph is "too soon to write, in our view," Forman told clients last week. "Diabetes is a war over decades that's bigger than the battles over financial results or any one company's fortunes."

Others, though, are pessimistic. "If Pfizer felt that a smaller second-generation device had a chance of becoming a blockbuster, we do not think Pfizer would have abandoned the entire concept," says Jon LeCroy, of Natixis Bleichroeder, in a research report. "We do not see significant differentiation in the inhaled programs currently in development to allow any of them to be a blockbuster, especially in light of multiple players in the market."

Even the easiest-to-use inhaler must cope with crucial financial and medical issues. Will insurers reimburse for inhaled insulin if it costs more but doesn't work better than the injected version? And what about side effects, especially how long-term use of inhaled insulin affects the lungs?

Exubera patients had to undergo lung-function tests, and the product's label had warnings about potential side effects. Some people, such as smokers and those with lung ailments, were prohibited from using Exubera.

Clinical trials for competing products haven't gone on long enough to assure that these drugs won't affect the lungs. Analysts say the Exubera experience has sensitized the FDA to lung safety.

Among competitors, analysts appear to be the most impressed with the scientific progress of MannKind's Technosphere insulin. But MannKind hasn't found a partner to help absorb the research and development costs.

Back in August, MannKind executives told analysts that collaboration discussions were going slower than expected partly because potential partners were worried that Technosphere might get the same insurer rebuff as Exubera. Late-stage clinical trial results are expected in mid-2008, and MannKind might file an application with the FDA late next year.

The Exubera decision "is very bad" for MannKind because Technosphere represents almost all of its market valuation, says LeCroy. He has a sell rating on MannKind, a buy rating on Nektar and a hold rating on Pfizer.

"We do not think MannKind will be able to partner Technosphere and that the Exubera withdrawal was the final straw," he says.

The Exubera fiasco will have a "very limited impact" on Alkermes, which is developing AIR insulin with Lilly, says LeCroy, who has hold ratings on both companies. He says inhaled insulin only accounts for 5% to 10% of Alkermes' market capitalization, adding that the Lilly deal limits Alkermes' risk until the product reaches the market. He forecasts a 2010 launch.

Like Exubera, the AIR and Technosphere products use a powdered form of insulin. Denmark's Novo Nordisk is developing a liquid form of inhaled insulin called AERx. The company may issue results of a crucial test in late 2008, says the Danish investment banking firm SEB Enskilda. The firm says the Lilly-Alkermes team should issue late-stage clinical trial results next year.

Meanwhile, Nektar hasn't decided on its next move. It can't afford to act on its own, but how many other companies will step in where Pfizer failed?

At one point, there was another Exubera partner, but Pfizer paid $1.3 billion in January 2006 to buy out Sanofi-Aventis' ( SNY) interest, making the French drugmaker the only winner thus far in the inhaled insulin sweepstakes.

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