Eli Lilly drops inhaled insulin program

NEW YORK (Reuters) - Eli Lilly & Co said on Friday it will terminate development of an inhaled insulin treatment for diabetes, which it was conducting in partnership with Alkermes Inc, after deciding that product's commercial potential was not strong.

Biotechnology company Alkermes said earlier in the day that it expected Lilly to drop out of their program to develop an inhaled insulin treatment for diabetes, sending Alkermes shares down more than 9 percent.

Lilly's decision marks the third setback in recent months for inhaled insulin formulations, once deemed potential blockbuster products because of their greater convenience than standard injectable insulin.

Cambridge, Massachusetts-based Alkermes, which makes the alcohol addiction drug Vivitrol, said Lilly has the right to terminate its license to the inhaled treatment, Air Insulin, at its discretion.

"While Lilly may elect not to commercialize Air Insulin, Alkermes believes that the phase 3 safety and efficacy trials should be completed," Alkermes said in a statement.

After Lilly's announcement, the company said it was evaluating the impact of the termination, which will become effective in 90 days.

Indianapolis-based Lilly said its decision was not due to safety concerns, "but rather was a result of increasing uncertainties in the regulatory environment, and a thorough evaluation of the evolving commercial and clinical potential of the product compared to existing medical therapies."

Lilly Chief Operating Officer John Lechleiter said in a statement that the company is beginning the process of halting ongoing clinical studies.

Lilly said it will record a first-quarter 2008 charge of around $90 million to $120 million, or 5 cents to 7 cents per share. The company said its adjusted earnings per share outlook remains unchanged at $3.85 to $4.00, while net earnings will range from $3.73 to $3.90.

Lilly's action comes just five months after Pfizer Inc abandoned Exubera, the first approved inhaled form of insulin, and returned rights to the product to longtime partner Nektar Therapeutics.

Exubera had dismal sales because patients were turned off by the clumsy device used to administer the powdered insulin and because doctors were concerned by the drug's tendency to slightly impair lung function.

Alkermes Chairman Richard Pops, in an interview with Reuters in October, said Air Insulin may have similar effects on lung function.

"We're assuming that pulmonary insulins in that regard are all pretty much the same," he said, although a conclusive picture of Air Insulin's safety will not emerge until two-year safety trials of the product end later this year.

A second setback for inhaled insulin came in January, when Novo Nordisk said it was halting development of its AERx product, meant to deliver inhaled droplets. The Danish drugmaker said AERx did not have adequate sales potential, given the limited commercial success seen with Exubera.

Morgan Stanley analyst Jami Rubin said on Friday Lilly's abandonment of AIR Insulin made good business sense.

"We are not (at) all surprised, and have never been strong advocates of the pulmonary insulin agents, following the poor launch and ultimate demise of Pfizer and Nektar's Exubera and Novo Nordisk's termination of its AERx program," Rubin said in a research note.

Rubin said Alkermes, known for its drug-delivery technology, is unlikely to continue development of Air Insulin without Lilly, "given that this represents the third termination of a pulmonary insulin drug."

But she said the sharp drop in Alkermes shares represented a buying opportunity for investors because Air Insulin had only paltry sales potential.

She said investors should be focused instead on another product Alkermes is developing with Lilly: a long-acting formulation of Lilly's Byetta diabetes treatment called Byetta

LAR.

"We estimate that Byetta LAR could be worth $11 to $12 for the (Alkermes) stock," Ryan said.

Alkermes shares fell $1.14 to close at $11.26 on Nasdaq. Lilly, a far larger company with an array of big-selling products, rose 2 cents to end at $49.70 on the New York Stock Exchange, and was slightly lower at $49.67 in after-hours trading.

(Additional reporting by Deena Beasley in Los Angeles and Toni Clarke in Boston; Editing by Andre Grenon)