Drug maker Bristol-Myers Squibb (NYSE:BMY) and French drug delivery technology company Flamel Technologies (NASDAQ:FLML) announced an exciting licensing and commercialization deal today for Basulin, Flamel's new controlled-release insulin now entering Phase 2 human trials. Shares of Flamel -- which trade as ADRs in the U.S. -- surged over 27%.

Not only will Bristol-Myers pay for all future Basulin development and manufacturing and secure worldwide rights, but Flamel snares $20 million up front and $145 million in future milestone payments (common industry features whereby one partner pays the other if and when a drug passes through clinical trial stages, FDA review and approval, and marketing). If and when Basulin is approved and starts selling, Flamel will earn double-digit royalties on revenues.

Flamel's two drug delivery technologies -- Micropump and Medusa -- aid the controlled release of small molecule and protein drugs, respectively. Maintaining consistent blood levels of a drug and reducing dosage frequency are ongoing challenges, and insulin's onset, peak time, and duration are especially critical. Less-frequent dosing of a more dependable drug would greatly benefit diabetes patients who must inject themselves.

Because of Flamel's technology, the parties hope that Basulin will be the first approved insulin that is both recombinant DNA (protein) and controlled release. This could represent the biggest step forward from current types of insulin since Genentech (NYSE:DNA) discovered and Eli Lilly (NYSE:LLY) marketed genetically engineered Humulin.

The potential $165 million payoff, representing almost half of Flamel's pre-deal $348 million market cap and just about doubling its cash on hand at the end of the June quarter, bolsters the company's ambitions for eventual profitability and positive cash flow from operations.

Bristol-Myers, which needs all the help it can get for its drug development pipeline, is willing to shepherd Basulin through at least five more years of trials and the uncertain period of FDA review. The potential market -- all people with Type 1 and Type 2 diabetes who inject insulin -- justifies the risk. Year 2001 worldwide diabetes drug sales were $6 billion, and Basulin would compete with Lilly's Humulin, now used daily by more than 4 million people.

Many drug makers want to advance the insulin market and profit, not least Pfizer (NYSE:PFE) and Aventis (NYSE:AVE), which is now testing Nektar Pharmaceuticals (NASDAQ:NKTR) inhaled insulin in Phase 3 trials. Of course, the bigger drug makers are safer, and the biotechs with new technologies -- the Flamels and Nektars -- higher risk.

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