Hope for Diabetics -- and Investors

With one million new diabetes cases being diagnosed every year, it's no surprise to see Wall Street chase Amylin Pharmaceuticals (Nasdaq: AMLN  ) up more than 10% last week following reports of the company's successful late-stage human trial of its diabetes drug Exenatide. Exenatide offers many of the same benefits as Glucophage, which was a huge cash cow for Bristol Myers Squib (NYSE: BMY  ) before the generic version came out last year.

But what has gotten Exenatide its recent fanfare is its ability to control glucose levels and encourage weight loss for diabetics who are unresponsive to other oral medications. To give you some perspective on how lucrative this news could be for Amylin, there are currently 18 million diabetics in the U.S. alone. That's nearly the entire population of Australia. Medical costs top $92 billion. And that number is growing by a million people every single year.

While that might sound encouraging to diabetics, what do investors need to know about Amylin? It's not a pharmaceutical mammoth like Pfizer (NYSE: PFE  ) or Merck (NYSE: MRK  ) . Rather, it's a biotechnology company specializing in diabetes and metabolic disorders. Known primarily as a research outfit, it has an enterprise value of about $2.3 billion. It also has, however, a high-profile sugar-daddy in Eli Lilly (NYSE: LLY  ) . Lilly puts up the money for research and development via stock purchases, then split the profits with Amylin once the drug is marketed.

Background on Exenatide
We've been waiting 10 years to finally reference the wonderfully named Gila monster on Fool.com and, by leapin' lizards, we're going to do it today. If Exenatide proves successful, diabetics and Amylin shareholders alike will have the Gila monster, one of only two venomous lizard species in the world, to thank. About a dozen years ago, scientists isolated some active ingredients from its venom. Animal studies of the various compounds showed a particular one affected the pancreas -- the gland that secretes, among other useful things, insulin. Exenatide, formally called AC 2993 (where do they get these names?) was developed from that compound.

Trials success
In early Phase I studies on healthy volunteers, Amylin showed that Exenatide injections reduced food intake, slowed down the stomach's digestion and, most significantly, increased insulin release. Adult diabetics (Type II diabetes) produce their own insulin, but don't respond to it as well as non-diabetic people. They often need insulin shots to control their blood sugar as their disease progresses, so a medicine that increases the patient's own insulin levels can delay insulin therapy.

Recently, Amylin and Lilly completed a Phase III trial with Exenatide and adult diabetics. About 40% of the patients reduced their blood sugar markers to normal levels, with the average patient reducing her blood sugar marker one point (a significant reduction). Another benefit of the therapy was that patients averaged a five-pound weight loss over the seven-month trial. Weight loss is key to improving management of Type II diabetes. There were no really significant side effects except for transient nausea and mild hypoglycemia (low blood sugar).

Competitors
Because of the size of the market, there are many competing drugs, including GlaxoSmithKline's (NYSE: GSK  ) Avandia and Novo Nordisk's (NYSE: NVO  ) Prandin. Both of these drugs are pills, so they're easier to take than injecting Exenatide. However, these pills, like others on the market, have their own sets of more severe side effects and they do not contribute to weight loss. Additionally, Amylin is developing a longer-acting form of Exenatide that would only need to be injected once per month.

Many diabetics have to try several different combination therapies before finding one that controls their blood sugar levels, so if Exenatide is approved by the FDA, the chances are good that it will find a place with various combinations of other drugs. But the best hope for Exenatide to take market share is in the longer-acting form -- no one wants to give himself a shot twice a day.

The outlook
Amylin is not profitable yet, and has been burning cash to the tune of $105.5 million for the past nine months -- hence the need to partner with Lilly. As with any cash-burning biotech, an investor should carefully evaluate the market potential of late-stage products in development to get a feel for possible future profits. The rewards can be substantial, but so can the failures.

In addition to Exenatide, Amylin has another very promising diabetes drug in the pipeline called Symlin, developed for Type 1, or insulin-dependent diabetics. Symlin would be the first treatment developed for Type 1 diabetics since insulin was introduced over 80 years ago. The drug is expected to be approved by the Food and Drug Administration on Dec. 16. Interested investors -- and Gila monsters -- should watch closely.

Is Amylin a Hidden Gem that the market has overlooked or are its shares already overvalued? Let us know what you think on the Biotechnology discussion board.

David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He often contributes to Fool.com and is an active member of the TMF community as DavidMN. He owns shares of GlaxoSmithKline. He appreciates your comments at davidnierengarten@mac.com.

Amy Ary is a freelance writer living in Cape Coral, Florida, the only person in her neighborhood who does not have a subscription to Modern Maturity. You can email her a copy at: aja@microcomtech.net.


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