Nektar's New Old Drug

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Motley Fool Inside Value pick Pfizer (NYSE: PFE) closed the chapter on its inhalable insulin experiment with Nektar Therapeutics (Nasdaq: NKTR) today. In exchange for giving Nektar $135 million in cash, Pfizer no longer has to market Exubera.

Pfizer's marketing of Exubera has been a total disaster since its approval in January 2005. Insurers were unwilling to pay for the drug, and national health-care authorities, for example in the U.K., limited its use to only a small subset of diabetes patients. Sales of the drug were only $12 million in the first nine months of 2007.

But despite all this, there is still value with Exubera. While MannKind (Nasdaq: MNKD), Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) all have potentially better inhalable insulins in late-stage development, Exubera could still be a complementary backup compound for one of the established diabetes leaders like Merck (NYSE: MRK) or Sanofi-Aventis (NYSE: SNY).

Sanofi in particular may have an interest in reacquiring the rights to Exubera, as it has intimate knowledge of the drug after having been a partner on the compound before Pfizer bought out its stake.

With the smaller and easier to use inhaler that Nektar is testing in phase 1 trials, the right partner could probably eventually turn Exubera into a $100 million to $200 million a year compound. This is far from the $2 billion a year Pfizer was predicting, but would at least provide some royalty and manufacturing revenue to Nektar.

The $135 million that Nektar received from Pfizer, combined with its expected year-end cash balance of approximately $365 million, will be useful in paying down the $315 million in debt Nektar has coming due in 2012.

Any upfront payments from a potential Exubera marketing partner will likely be modest (if any), so Nektar needs all the cash it can get, now that raising capital has become much more expensive with its share price so low and profitability so far away.