Editor

"If you talk to any of the global insulin companies, and certainly if you look at Pfizer - which didn't develop insulin, but they bought inhaled capability - they will say the future of the business is devices," said Robert Gonnelli, chairman and CEO of Valeritas Inc., last week.

Them's fightin' words for biotech, but Gonnelli's point is grudgingly well taken by many. Valeritas, spun out a few weeks ago from BioValve Technologies Inc., recently won 510(k) clearance from the FDA for its h-Patch insulin delivery system, which the firm plans to launch in the second half of next year.

By then, Paramount Acquisition Corp. (an affiliate of Paramount Biosciences LLC, a life sciences merchant bank) will be a majority owner, thanks to the transaction under which Paramount gets 58 percent of Valeritas in exchange for $43.5 million of capital right away and another $98 million coming when warrants are redeemed.

"We had these med-tech assets, one of which was approved, and others that were outside of our portfolio that would take years to develop," Gonnelli explained.

"We looked at doing an [initial public offering], and we talked to a number of bankers and investors and ran into" Paramount, a special purpose acquisition company (SPAC). "The deal was there," he said, and Valeritas is the first case of a SPAC deployed in the health care field.

About 20 million people are afflicted with Type II diabetes in the U.S., compared to about 1.5 million with Type I. As baby boomers age and their waistlines thicken, the Type II numbers are certain to rise, but Type II diabetics are peculiarly unwilling to get and maintain therapy.

"They're in denial," Gonnelli said.

In many cases, too, they're misinformed. "A lot of Type IIs actually feel insulin is a bad drug," he said. "That's what you'll hear in focus groups." Often, the reason is that they have heard horror stories that involve patients who went untreated for a long time and their "vascular degeneration is so far along, there is no recovering from the damage."

The inconvenience and social stigma of giving oneself a shot and/or popping pills also contribute, Gonnelli said.

"I've listened to people actually say, 'I'm 65 years old. I've seen my kids grow up, I've played with my grandchildren, and if life deals me a blow and I have to go on insulin, I'd rather just give up,'" he said. Those diabetics might not mean it, and perhaps they don't realize how much they would prefer to live. With insulin.

Despite the reluctance of many with glucose intolerance or outright diabetes to use therapy, inroads have been made. Lantus (insulin glargine), the once-daily treatment from Sanofi-Aventis, racked up more than $1 billion in sales in the first half of this year, a jump of more than 40 percent over the same period in 2005. The drug lets a patient discreetly administer insulin and continue with ordinary life.

As the disease gets worse, though, they may need prandial control, or insulin around mealtimes, Gonnelli pointed out. That means toting the injection system to work and social engagements. Compliance becomes a problem - and shots always have been.

Nektar Therapeutics Inc.'s Exubera became the first inhaled insulin product, approved early this year by the FDA. Nektar developed the drug in collaboration with Pfizer Inc., and analysts have forecast sales beyond $2 billion in five years, with inhaled insulin possibly overtaking injectable insulin in the long run.

Nektar (formerly Inhale Therapeutic Systems Inc.) began working on Exubera shortly after inception in 1990 and performed the first clinical trial about four years later. In early 1995, Nektar partnered the product with Pfizer, which signed a co-development and co-promotion deal with Sanofi-Aventis in 1998. Pfizer and Sanofi share worldwide rights to the product, and Nektar gets an undisclosed royalty.

Inhaled insulin has drawn other players. Among them: Novo Nordisk A/S, which in July took over patent rights related to glucose control from Aradigm Corp. in exchange for $27.5 million. The move opens the door for Novo to bring the AERx Diabetes Management System to market, which could occur upon conclusion of a Phase III program in three years. The company restarted trials in May.

The pact between Novo and Aradigm began in 1998, when the companies first joined to develop the system. But in the spring of 2004, concerns over a secondary endpoint during a Phase III interim analysis halted the program, eventually resulting in Novo's $55 million buyout of the development and manufacturing rights to the system.

Under the restructured deal, Aradigm got $12 million upon transferring the ownership of certain patents related to inhaled insulin, as well as $8 million for reducing its average royalty rate on the AERx product from 6 percent to 5 percent, and $7.5 million in a 5 percent, eight-year note payable in three stages, starting in six years.

The Phase III glitch with AERx insulin involved a delay in post-meal plasma glucose suppression in Type I diabetics, but it's the Type II population that Valeritas' Gonnelli likes to talk about.

The leadership at Nastech Pharmaceutical Co. likes the subject, too. In June, Nastech's nasal delivery technology netted the firm a potential $89 million deal to help formulate a spray version of Byetta (exenatide), the diabetes drug launched last year by Amylin Pharmaceuticals Inc. and Eli Lilly and Co.

Amylin and Nastech will jointly develop the nasal spray, with Amylin reimbursing Nastech for development. Overall responsibility for clinical, nonclinical and regulatory work falls to Amylin, while Nastech's efforts will focus on drug delivery and chemistry, manufacturing and controls.

But, as Gonnelli said, it's not easy to trump a hidden patch for ease of use. Wanting more insulin, the wearer simply reaches into his clothing and presses a button. Could Valeritas become the next ALZA Corp.?

"We hope we're three-quarters there," Gonnelli said.

Widely known for delivery technology that yielded the nicotine patch, ALZA caught the attention of Johnson & Johnson, which took over ALZA in a $10.5 billion stock deal about five years ago. Time will tell whether some buyer is willing to cough up money for Valeritas. The company, meanwhile, has smoked out what Gonnelli believes is a lucrative target.

"[We're focused on] the whole concept of how you get more patients using insulin and how you get them to comply," he said, especially Type II diabetics. "We saw this as the silent market people weren't paying attention to."