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D iabetics have gritted their teeth and coped with it for decades, so long it's become routine: In the morning and sometimes before meals, they load up a syringe with chilled insulin and puncture a vein to pump it into their system. More than a million Type I, or "juvenile onset," diabetics have to perform this painful procedure. And it's increasingly required for Type II sufferers, who contract the disease later in life. With the most severe cases requiring four to six injections daily, some diabetics say they feel like pincushions.

But a promising new technology allowing insulin to be inhaled is emerging that will drastically reduce the need for needles and could eliminate them altogether for Type II diabetics. At least four companies are scrambling to get their version to the market.

Because of the vast number of diabetics -- some 12 million people have been diagnosed with the disease -- inhaled insulin has enormous market potential. Diabetes increased 33% in the 1990s and is growing by about 6% annually because of the aging of the population, its worsening diet and poor exercise regimens. Diabetes is the largest cause of non-age-related blindness and a major cause of kidney failure and lower-body amputations. It's estimated that one in seven health-care dollars is spent fighting diabetes.

Inhale Therapeutic Systems , a small San Carlos, California-based company, has grabbed some attention in medical circles, but so far not with most of Wall Street, for its inhaled-insulin delivery system. Partnered with pharmaceutical giant Pfizer and insulin-maker Aventis , ITS is in final, or Phase III, trials with the Food and Drug Administration. The company says it expects to file for final approval with the FDA next year and have a drug on the market in 2002. It has a lead of 18-24 months on its competitors.

Inhale's hand-held device is about six inches tall and a few inches wide, about the size of a small Perrier water bottle. Insulin is converted into a dry powder and packed into small foil tablets that are inserted into the device and pulverized at the push of a button in a chamber from which it can be inhaled through a small mouthpiece. The powder is several times finer than baby powder. It is trapped deep in the lung, from which it can quickly work its way into the bloodstream.

Inhale Therapeutic was founded in 1990 by John Patton, former head of drug delivery at Genentech, where he concluded that the lung was a better way to get proteins into the bloodstream than the stomach. He and co-founder Bob Platz, a pharmaceutical aerosol expert, recruited ex-Bush Administration official Robert Chess, former head of a dermatology company, to be chief executive. The company joined up with Pfizer in 1995.

Pfizer and Aventis have poured between $160 and $200 million into building an insulin-making facility in Germany for the Inhale project. In addition, by the completion of the clinical trials, Pfizer will have contributed $100 million in research and development aid.

The wild card, of course, is exactly how many diabetics will use the device. Many Type I diabetics, for example, would still require daily injections. That leaves between two and four million, most of them Type II. And if early clinical data are any indication, the vast majority of them would be more than ready to put down the syringe and pick up the inhaler. Following the Phase II trials, nearly 90% of the subjects agreed to continue the trials. Add to that the number of Type II diabetics who don't need shots-but could temper their symptoms with insulin-the market for insulin products could expand up to 50% beyond what it is today.

The hype surrounding inhaled insulin could be as huge as the market itself when the product hits the market in about two years, observes David Steinberg, a securities analyst at Deutsche Banc Alex. Brown in San Francisco. "By launch, every diabetic in America will know about this product," Steinberg said. It could be "Viagra-like." That's why most analysts believe there could be room for two or three competitors.

Projections of the dollar value of the market vary widely, which makes it difficult to price Inhale's stock, but it's clear the market is bullish. SG Cowen biotech analyst, Ian Sanderson, is projecting Inhale and its partners will reap $1.2 billion of the $1.7 billion inhaled-insulin market in 2004. Those projections assume about 11% of Type II diabetics and 2.5% of Type I will switch, and also that Inhale will charge them about $4.50 per day -- a figure the company will not confirm. Sanderson projects that Inhale will earn $11 million, or 20 cents a share, on revenues of $160 million in 2003 and $70 million, or $1.15 a share on revenues of $265 million in 2004.

After a lackluster initial public offering in 1994, Inhale's stock price has doubled in the last year. It fluctuates dramatically along with the rest of the biotechnology sector, so it's no surprise that it peaked in March and was trading 34% off its high at 46 Friday. Inhale, like most biotech companies, has never posted a profit and, although it has a small drug pipeline, it is a single-product company.

But that hasn't kept a small pack of health-care mutual-fund managers away from the stock. Of the 15 largest healthcare mutual funds, about half own it. "I think it is a cheap security," says one stockholder, John Schroer, manager of $2 billion Invesco Health Sciences Fund. Schroer is concerned that Inhale's current device is too large and unwieldy, but has high hopes for the next generation, which could be less than half the size. "If that's as successful as the bigger device, the stock is going to be a home run," he says.

Timing is critical

The key variable appears to be the timing of the drug's approval and market launch. Inhale has had a good, but not unblemished, record for meeting its early development deadlines. But nothing is a sure thing when dealing with the FDA. When it pushed back the timetable by about six months roughly 18 months ago, Inhale stock took a perceptible dip. Some analysts now mention fears that the FDA will request longer trials to check out possible toxic effects on the lungs from constant insulin inhalation. Although one analyst mentioned a rumor about potential cancerous effects, Phase II data drawn over a period of more than two years has showed no lung damage so far.

To be sure, Inhale is not without its critics, who say its lead time is exaggerated, its device is too large and difficult to use and its pipeline is not robust enough. Inhale also is in clinical trials with partners on three other drugs, but critics point out that none of these is even yet in Phase II trials and allege that Inhale is putting too many eggs into the insulin basket. And then there's the competition. Inhale's main competitors include Aradigm , Dura and Alkermes . Aradigm has partnered with insulin giant Novo Nordisk to make a liquid aerosol, and Dura teamed up with Eli Lilly on a dry powder product. Alkermes, for its part, is on its own until it advances into later-stage clinical trials. Outside the realm of inhaled insulin are smaller challenges from insulin pump maker Minimed and British firm Powderject , which already is selling a needle-less injection system that uses a tiny blast of air to pierce the skin. A handful of companies are also making improvements in insulin pills, and Lilly is developing tiny needles that make injections less painful and deliver a pre-set amount of insulin.

Aradigm is seen as the company most closely on Inhale's heels. Its device features more sophisticated monitoring systems using electronics to determine if a patient is taking the drug effectively. It can also deliver it in smaller increments, which the company says ensures a more precise dose. The delivery system doesn't rely on the patient to breathe in the medicine properly to get an exact dosage, while Inhale's product will require doctors to train patients how to breathe in the drug. Aradigm's device won't deliver the medicine until the machine senses the right amount of inhalation is already taking place. "We take the procedure out of the hands of the patient, removing them as a variable," says Aradigm Chief Executive Richard Thompson.

Aradigm is hoping to be in Phase III trials next year. Thompson points out that while being first is important, it doesn't equal dominant market share. He's not conceding the race, either. The fact that Aradigm has partnered with the world's largest producer of insulin ensures it will be ready to go to market as soon as clinical trials are completed, and analysts are unsure if Inhale can make the same claim. Aradigm also has more drugs in Phase II than Inhale.

Dura is likely next in line, especially considering it has pharmaceutical giant Eli Lilly on its side. Dura and Lilly won't say where they are in clinical trials, which leads some analysts to speculate it is behind Aradigm and significantly trails Inhale. Dura's device uses dry powder insulin mixed with lactose, but employs a small impeller that is activated by a patient's ingestion of air. Its makers say the machine does the work, unlike Inhale's product, which requires the patient to do the work. It is also small enough to fit in a pocket.

But Dura's claim to supremacy lies mainly in its product's portability and ease of use. "There are several ways to skin the cat and it's going to come down to patient preference," says Bob Schultz, Dura's vice president of technology strategy and partnering. He, too, doesn't think that being first will necessarily mean market dominance, and points out that "the pie is not shrinking, it's getting larger. Getting there first doesn't mean the largest piece." Dura recently was acquired by the Irish firm Elan , which it says will enhance its capabilities.

The partnerless Alkermes might be running fourth in this race, but claims it could be closest to completing a second generation device. It's about the size of a felt marker and uses neither fine powder nor liquid but larger, porous particles that can be breathed deep into the lung. This allows its device to be smaller and could give it the inside track on developing a long-acting insulin. Cambridge, Massachusetts-based Alkermes is a known leader in sustained-release injections and feels it can achieve the same lead in inhaled drugs. If an inhaled-insulin product is a blockbuster, then a sustained-release inhaled product could be huge.

Potent partners

Alkermes also grabbed three key partnerships this year -- Glaxo Wellcome , Lilly and MedImmune -- to make inhaled drugs that treat respiratory diseases, deliver human growth hormone and fight respiratory syncitial virus, respectively.

Another product, the insulin pump, is entirely different from inhaled insulin but still is indirect competition for all these companies. Already marketed by leader Minimed, these pumps deliver liquid insulin directly through a small catheter that remains inside the body. These are geared toward Type I diabetics who need steady and precise doses of insulin. It's considered the Rolls Royce of insulin-delivery systems, but a niche product that fewer than 10% of Type I diabetics use because of its high cost and intrusiveness.

With all due respect to the competition, the race seems Inhale's to lose. Inhale has three huge advantages: an early lead, Pfizer and formidable patents. The lead is important because there is such a huge pent-up demand; once patients are on one system, they will be loath to change to another. Pfizer is a marketing juggernaut, clearly excited about the product, which it considers a key pipeline component. As for patents, Inhale has many. Its stock price jumped in December, when it announced a broad patent on inhalable dry-powder insulin. While it has yet to be tested, Dura and Alkermes should take note. "People would want to look very carefully on how they approach the field," says Inhale Chairman Chess.

Inhaled insulin is likely only the first step in what could be a series of blockbuster drugs. Americans spend $15 billion annually on protein drugs, and while many won't work inhaled, "all are candidates," says Deutsche Bank Alex. Brown's Steinberg. "Inhale Therapeutic isn't undervalued now, but it's certainly not overvalued," he says. "We think the stock has 50%-100% upside over the next 24 months."

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