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Flamel Flames Out Again

When companies partner with one another, it is with the expectation that each has a role to play. Each is expected to perform its part conscientiously and expeditiously. When one partner doesn't hold up its end of the bargain, it results in delays, lost opportunities and, most importantly for companies, lost revenues.

Such is the case with the just-severed deal between pharmaceutical Biovail (NYSE: BVF  ) and nanotech developer Flamel (Nasdaq: FLML  ) , a recommendation of Tom Gardner's Motley Fool Hidden Gems small-cap newsletter. The two had partnered to develop an oral treatment for herpes using Flamel's patented time-release Micropump technology, called Genvir. Biovail would shoulder the costs for development, manufacturing, and marketing -- at the same time paying Flamel royalties for the North American rights to the drug. It is a typical structure for a partnership like this.

At the time of the announcement, back in April 2003, Biovail had announced its intention to start phase 3 clinical trials by the middle of the year. But, by the end of the year, the company had not yet begun the process, and by mid-2004 it was becoming apparent to all that Biovail was dragging its feet. The partnership was officially dissolved yesterday when Flamel announced it could no longer tolerate the delays and took control of Genvir to shop to another partner. As mentioned, the delays led to lost opportunities and lost revenues.

One has to question why Biovail was unable or unwilling to perform its end of the bargain. We're actively discussing these reasons on the Hidden Gemsdiscussion boards. Is it because Biovail is a tortured company these days, racked with so much debt ($585 million, at last count) and so little cash (just $44 million) that it was simply unable to finance the marketing of new drugs? Or is it slightly more sinister than that? Biovail also markets the competing herpes treatment Zovirax through a partnership with GlaxoSmithKline (NYSE: GSK  ) . Just a few years ago, Biovail extended its exclusive agreement with GlaxoSmithKline from 10 years to 20 years at a cost of $40 million, but there has been a dramatic drop in sales this past year. Biovail has also been haunted by SEC investigations into its accounting practices, and it has responded to complaints about its corporate governance.

Even so, not all of the blame can be laid at Biovail's door. This is yet another instance of a failed partnership for Flamel. Last June a much ballyhooed deal with Bristol-Myers Squibb (NYSE: BMY  ) fell through after Squibb reorganized its business and pulled out of marketing Flamel's controlled-release insulin treatment Basulin. That actually marks the second failed partnership for Basulin; Novo Nordisk (NYSE: NVO  ) backed out of a partnership with Flamel for it a few years ago. GlaxoSmithKline also ended an agreement in 2003 for Flamel's augmentin formulation, which has never found another partner.

In each of these cases there were reasons offered that had nothing to do with the efficacy of Flamel's nanotechnology. The science works. The question becomes, is it workable enough to serve as the foundation for a business model?

To be sure, Flamel has been one of the biggest disappointments of Hidden Gems, where Tom Gardner's stock picks are beating the market 4-to-1. Flamel is down a discouraging 36% (not including the after-hours trading yesterday, which drove the stock down an additional 13% to $14 a share).

Nanotechnology holds great promise, but then so did Betamax videotapes. Still, a new partnership for Genvir (or Basulin and augmentin, too, for that matter) would stir new life into the hopes for these drugs. Flamel announced a deal with TAP Pharmaceuticals to develop a proton pump inhibitor at the same time the Bristol-Myers agreement dissolved, and it still has a deep drug pipeline and an undisclosed deal with Merck (NYSE: MRK  ) to develop and market a Micropump-based drug. GlaxoSmithKline is still a partner for a beta-blocker.

Certainly there is huge potential here, but also the great possibility for a flameout. Flamel has exhibited all the signs of an upstart company in an upstart industry: huge volatility, manic dives, grandiose partnerships, and disappointing dissolution of agreements. It's not a ride for the faint of heart.

Take a nanosecond to read through these related articles on Flamel and nanotechnology:

Want to know what Tom Gardner thinks about Flamel? Take a 30-day free trial to Hidden Gems and find out.

Fool contributor Rich Duprey has been accused of having an attention span that lasts a nanosecond. He owns shares in Flamel and Merck, but does not own any of the other stocks mentioned in this article.

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