With all of the dreams and promise of biotechnology, it's easy to let technological potential overshadow the probability of financial success. After all, the former indulges our sense of wonder and imagination, while the latter is boring and very difficult to gauge. As investors, we should be objectively focused on the latter, constantly trying to determine which technologies are dreams and which are assets.

Take, for instance, two-time Motley Fool Hidden Gems recommendation FlamelTechnologies (NASDAQ:FLML), a biotech company focused on providing the next generation of drug delivery. Flamel offers two proprietary drug delivery formulations, Micropump and Medusa, which improve pharmacological properties of existing drugs. While Micropump is designed to deliver small-molecule drugs, Medusa is designed to deliver biopharmaceuticals (i.e., proteins). Both technologies offer the promise of increased drug stability, improved safety, and superior bioavailability. Flamel's technology and the vast potential for pharmaceutical applications are enough to make the propellers on my head spin with joy.

Despite the enormous potential, there are no drugs using either Micropump or Medusa currently on the market. Since this is how Flamel will make money, this makes Flamel one of the riskiest Hidden Gems selections to date. Most Flamel investors are probably aware of the vast potential of Flamel's technology, but what is Flamel's probability of achieving success? Are Micropump and Medusa technologies dreams or assets? To help answer these complex questions, I've decided to query my favorite probability calculator: the Magic 8-Ball.

Question: Is Flamel Technologies valued for its dreams?
 Magic 8-ball: Concentrate and ask again.
Fair enough. That's a vague question, and I can understand why the Magic 8-Ball would require a more specific inquiry. Let's see whether we can come up with some more refined questions by looking a little closer at Flamel's business.

Recall that Flamel is in the business of drug delivery, which means it doesn't develop or market the active compounds in pharmaceuticals. Instead, Flamel markets its delivery technologies to pharmaceutical companies looking to improve upon formulations of marketed drugs. Why, you ask, would a company want to improve a drug that's already on the market? There are several reasons, but the most important has to do with life cycle management of pharmaceuticals. When a drug approaches patent expiration, pharmaceutical companies look to improve the formulation to protect market share from the onslaught of generics. Thus, Flamel markets its drug delivery technologies to pharmaceutical companies looking to successfully manage the life cycle of drugs that are soon to be off-patent. From such partnerships, Flamel receives revenues in the form of milestones (for clinical progress) and royalties from sales.

Take, for instance, the beta blocker Coreg, marketed by GlaxoSmithKline (NYSE:GSK) for the treatment of hypertension and congestive heart failure. Coreg loses patent protection in 2007, so developing an improved version of the drug is essential for GlaxoSmithKline to fend off cheaper generics. In early 2003, GlaxoSmithKline partnered with Flamel to produce a sustained-release Micropump formulation of the drug, called Coreg CR, that would reduce the pill regimen to once per day. So what value does Coreg CR bring to a company like Flamel, which currently lacks a source of predictable revenue?

Let's ask our omniscient orb of wisdom.

Question: Will Coreg CR fortify Flamel's top line?
 Magic 8-Ball: Signs point to yes.
Currently, Coreg CR is wrapping up phase 3 clinical trials, and GlaxoSmithKline recently announced that it expects to file a new drug application (NDA) with the FDA by the end of 2005. Glaxo expects the Micropump formulation of Coreg to hit the market by the end of 2006.

From late 2006 to late 2007, total Coreg sales (regular Coreg plus Coreg CR) figure to be roughly $1.1 billion to $1.3 billion. Flamel management has boasted on several occasions that during its first year of commercialization, the company stands to receive $20 million in royalties from Coreg CR. That should be quite a boost for a company that has struggled to break even on milestones from various partnerships.

Unfortunately, I'm concerned that Coreg CR's first year of commercialization may be its most lucrative. Although sales of Coreg CR may rise as it gradually replaces prescriptions of regular Coreg, generics are likely to seize a hefty share of the market toward the end of 2007. Nevertheless, of all Flamel's pipeline, Coreg CR is by far the closest to market. As such, I consider this to be the core value of Flamel's current business: It has a high probability of success and a fairly predictable effect on Flamel's revenues.

But there's more at stake here than just royalties and revenues -- there's the issue of market adoption. The long-term value of Flamel's business hinges on the company's ability to form multiple partnerships that result in several Micropump formulations on the market. The performance of Coreg CR will certainly be an indicator of market adoption, especially if the Micropump formulation succeeds in protecting sales from the generic blitz. Let's ask the Magic 8-Ball about market adoption for Micropump.

Question: Will Micropump technology gain market adoption?
 Magic 8-Ball: Cannot predict now.
Even if Coreg CR becomes a solid success, we can't discuss adoption of Micropump technology without bumping into two failed Micropump partnerships. Earlier this year, Flamel severed its partnership with Biovail (NYSE:BVF) to develop and market Genvir, a Micropump formulation of the herpes drug acyclovir. More recently, TAP Pharmaceutical Products terminated its partnership with Flamel to produce a Micropump version of lansoprazole, the proton pump inhibitor marketed as Prevacid. I'm guessing that Micropump's spotty track record is preventing the Magic 8-Ball from making a specific prediction.

I believe that 2006 will provide key indicators of the probability of Micropump adoption. Specifically, I'll be watching to see how Flamel picks up the pieces of the failed TAP partnership. Although Flamel's hands are tied until the TAP deal is officially terminated in December, clues to its revised proton pump inhibitor strategy have emerged in recent conference calls. Specifically, CEO Stephen Willard indicated that Flamel is currently working on Micropump formulations of other proton pump inhibitors. Furthermore, Willard mentioned that there may be interest in partnering such a Micropump formulation with Asacard, a Micropump formulation of aspirin. With the TAP deal dead, Flamel's ability to turn around and repartner with a proton pump inhibitor is absolutely crucial. Such repartnering would clearly indicate that Micropump technology is gaining market adoption.

While Micropump technology provides value to Flamel's business in the form of Coreg CR, market adoption is still a dream. Likewise, Flamel's second pillar, Medusa technology, has the potential to tap into the $50 billion (and growing) market of biopharmaceuticals. Let's see whether our handy Magic 8-Ball can whip up some prophetic wisdom for Medusa technology.

Question: Is Medusa technology currently more of a dream than an asset?
 Magic 8-Ball: As I see it, yes.
Like Micropump, Flamel's Medusa technology has suffered setbacks in the form of failed partnerships. Specifically, the company's Medusa formulation of long-acting insulin, called Basulin, has suffered two severed partnerships, the first with Novo Nordisk (NYSE:NVO) and more recently with Bristol-Myers Squibb (NYSE:BMY). As I see it, Basulin's failed partnerships are an indication that this Medusa formulation may not qualify as an improvement over existing delivery technologies.

The bitter flop of Basulin would be more palatable if other Medusa formulations emerge to prove the effectiveness of the technology. Currently, the only other Medusa formulations in clinical development are IFN alpha-2b XL, for treatment of chronic hepatitis C virus, and IL-2 XL, for treatment of renal cancer. Flamel recently announced preliminary positive phase 1-2 clinical data for IFN alpha-2b XL -- the Medusa formulation with once-a-week injection is well-tolerated with potentially fewer side effects than existing formulations, even at very high doses. While these results are encouraging, I'm concerned that the observed reduction in side effects and toleration at high doses, although consistent with improved pharmacokinetics, could also be a result of decreased bioactivity of the protein. Flamel management asserts that the Medusa formulation does not inhibit bioactivity of proteins, but so far none of the released data for Basulin or IFN alpha-2b XL confirm this assertion.

To be fair, the purpose of such early clinicals is more about safety, dosing, and therapeutic effect than determining bioactivity. Indeed, we may not see solid data on bioactivity until Flamel completes a phase 2a study comparing clinical efficacy of IFN alpha-2b XL head-to-head with PEGylated IFN alpha. Without partnerships, expect Flamel's cash reserves to gradually decrease while the company bankrolls these expensive clinical trials. Although costly, such clinical development will pay off if the data show that Medusa is superior to PEGylation. However, until I see data that prove Medusa doesn't reduce bioactivity, I'm unwilling to grant this technology the benefit of the doubt. If it can't prove itself to be a superior alternative to protein delivery technologies such as PEGylation, Medusa will remain more dream than asset.

The Magic 8-Ball has helped us look closely at Flamel's business, and it's helped us separate the dreams from the assets. Here's a summary of what this supernatural sphere has indicated:

  1. Coreg CR is currently the core value of Flamel's business.
  2. Market adoption of Micropump technology for delivery of small-molecule drugs would provide future value to Flamel's business. Look for hints of market adoption in the upcoming year.
  3. Medusa technology is still very much a dream, but upcoming clinical results should reveal whether the technology is truly superior to existing protein delivery systems. Still, don't expect Medusa technology to contribute to Flamel's value in the near future.

With all this sorted out, I think we're ready to ask our gracious globe the ultimate question.

Question: All things considered, is Flamel a good investment?
 Magic 8-Ball: Do I look like Jim Cramer? Leave me alone.

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Fool contributor Jason Mac Gurn owns a Magic 8-Ball and shares of Flamel, but he isn't sure whether either will lead to financial success. Jason doesn't own any shares of any other company mentioned in this article, but he is a big fan of finding value in biotechnology stocks. GlaxoSmithKline is a Motley Fool Income Investor recommendation. The Fool has adisclosure policy.