The Curse of Amylin's Diabetes Drug Approval

Correction: Amylin's newly approved diabetes drug Bydureon is priced at an 11% premium to Byetta, not a 20% premium as previously stated.

SAN DIEGO ( TheStreet) -- Last week, after more than two and a half years, two FDA rejection letters, and at least a dozen amendments to the application, Amylin Pharmaceuticals ( AMLN) received FDA approval for Bydureon, a once-weekly formulation of its existing diabetes drug Byetta.

Bydureon's approval reminds me of a favorite healthcare aphorism: "The worst thing a company can do is bring a drug to market." Commercialization means hope must yield to reality. For Amylin and Bydureon, reality isn't pretty.

Investors can be forgiven for only dimly remembering the rapturous excitement over Bydureon's initial phase II data, announced in August 2005, which implied the drug might be vastly more effective than Byetta with fewer side effects. Unfortunately, subsequent pivotal studies failed to replicate these early results. One of Amylin's Phase III studies even showed Bydureon to be less effective than Novo Nordisk's ( NVO) Victoza, a key competitor. Oops.

Wall Street peak sales estimates for Bydureon have followed a similar trajectory, sliding from $2 billion to about $900 million now ($1.3 billion if you include Byetta sales).

Although Amylin and formulation partner Alkermes ( ALKS) deserve congratulations for winning Bydureon's approval, I believe the drug will miss even analysts' lowered sales targets.

Before I dissect the drug's potential, let's note a few minor positives. First, the company successfully avoids mention of the failed study against Victoza in the FDA-approved label (though you can bet Novo's sales reps will make these data well known to doctors). In fact, the only efficacy data in the Bydureon label are from the solidly successful first Phase III trial, which showed improved efficacy versus Byetta. That makes Bydureon's labeled efficacy look okay, but only if you're a doctor who hasn't done extracurricular reading.

Second, the drug is priced at an 11% premium to Byetta. If Amylin only switched existing patients, Bydureon would generate sales of $575 million (based on Byetta's $518 million run rate.) Third, Bydureon causes less nausea and vomiting than Byetta (though other adverse effects do occur more frequently; some meaningfully so.)

So it's not all bad news for Amylin. However, the key question remains: Can Bydureon reignite physician excitement and reverse the ongoing decline of Amylin's diabetes franchise? I think the answer is no.

Amylin has two key problems that investors bullish on the stock are either ignoring or downplaying too much:

1. Bydureon has a questionable clinical benefit over its competitors in a crowded Type 2 diabetes market. Even Wall Street's lowered sales targets project that Amylin's diabetes franchise (Bydureon and Byetta) will more than double. For that to happen, Amylin must grow its market share meaningfully, yet Bydureon seems poorly positioned to move earlier in the diabetes treatment algorithm. Bydureon is less convenient than oral DPP-IV inhibitors like Merck's ( MRK) Januvia (patients almost always prefer pills over injections) and Bydureon doesn't lower blood sugar levels as effectively as Novo's Victoza. Doctors will likely struggle to justify prescribing Bydureon over these alternatives.

2. Bydureon's formulation creates problems for patients. Bulls have long believed Bydureon's once-per-week injection schedule is a critical advantage over competing diabetes drugs. If all else were equal, I might be inclined to agree. Unfortunately, I suspect the benefits of less frequent injections (Victoza is injected once-daily and Byetta twice-daily) will be offset by the disadvantages of Bydureon's formulation -- a viscous slurry that must be reconstituted prior to injection.

Victoza and Byetta are injected using a pre-mixed pen-like device. Patients select the appropriate dose and inject. Simple. In contrast, Bydureon patients receive a kit that includes a vial filled with powdered drug, a saline-filled syringe, a special adapter for transferring the syringe liquid into the powdered-drug vial, and two needles (the second serves as a backup should the first get clogged.) Before injecting Bydureon, patients have to connect the vial to the syringe with the adapter, mix the two ingredients, shake vigorously, detach the adapter, attach needle to syringe, pull the viscous drug into syringe, and then, finally, inject. Not so simple, even for experienced diabetic patients.

Amylin insists injecting a sizable volume (2 mg) of Bydureon causes few issues for patients but the data suggest otherwise. The needle used is larger and more painful than the tiny needles typically used to inject insulin or Victoza. Bydureon also caused far more injection-site reactions than Byetta in Amylin's own head-to-head studies (and of course, patients in clinical trials are extensively coached in the best way to inject the drug, something that doesn't happen in the real world).

Amylin and Alkermes clearly had to work hard to create Bydureon, but the results are a mixed bag that diminishes the advantage of a once-weekly injection schedule.

In the interest of brevity, I'll touch briefly on other potential problems: Amylin must market Bydureon without a partner, since Eli Lilly ( LLY) abandoned ship in late 2011 after a decade-long collaboration. Bydureon causes twice as many efficacy-sapping anti-drug antibodies as Byetta. Then there's the mysteriously absent "Section 15" in the Bydureon label. (Even conspiracy theorists have yet to notice that the drug's label seems to be missing a section; my guess is the FDA nixed something at the last minute.)

We could also just take a step back and consider the simplest view: Amylin submitted the Bydureon New Drug Application (NDA) under section 505(b)(2), a regulatory pathway intended to streamline FDA approval for reformulations of marketed drugs. (This explains why Bydureon's long-term safety database is very limited.) By using this route to land Bydureon's approval, Amylin tacitly acknowledges that the drug is a slightly but not drastically different version of Byetta. As such, why should we expect something vastly different from the drug's sales trajectory? It is almost always better to have more, rather than fewer, treatment options, but does that make Bydureon a blockbuster?

I doubt it.

One last word: Amylin bulls believe the company is a hot takeover target. I think not. Given the considerable investment necessary to sell Bydureon, an increasingly competitive landscape for diabetes drugs, and the uncertainty of success, I don't see what makes Bydureon such a compelling asset. It's impossible to say with certainty that Amylin won't be taken out, but at these prices there are probably better bets to make.

Disclosure: Sadeghi has no position in Amylin or any other stocks mentioned in this column.
Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza's Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.