By Randall Osborne

Fortified by a development deal worth up to $40 million, Aradigm Corp. plans to start pivotal clinical trials next year of its electronic inhaler to deliver morphine sulfate for pain.

Under the deal, Aradigm, of Hayward, Calif., will get $9 million up front from London-based SmithKline Beecham P.L.C., which also will buy $5 million in equity at a 25 percent premium to Aradigm's recent market price. SmithKline will pay milestones if it decides to develop other opiates and opiods for pulmonary delivery with Aradigm's AERx pain management system. The agreement "goes well into the next decade," said Richard Thompson, president and CEO of Aradigm.

The AERx system is a hand-held device that electronically measures the flow rate of morphine from liquid drug packets. A red light on the system's display tells the user to breathe slower; a green light means to breathe faster. If the flow rate is not appropriate, the device shuts off.

"It also keeps track of dosing," Thompson said. If a dose is sought too soon after the previous dose, the programmable device will not provide it. The patient wears an electronic bracelet, and swipes it across the device before each session. "That will tell the inhaler that the right person is asking for the drug," Thompson said. "Also, you get a complete electronic record of everything that goes on, which can be downloaded to [the physician's] personal computer."

Thompson said the AERx system works for delivering insulin to diabetics, too. Three human trials have shown the non-invasive system is faster-acting than injected insulin. It's also more convenient. Whereas diabetics who inject must time their dose according to meals, the inhaled insulin may be taken immediately beforehand. "That's going to be a major compliance factor," Thompson said. Phase I trials for the insulin inhaler will begin in the first half of next year, he added.

Aradigm is looking into the feasibility of using AERx with a marketed protein, Thompson said. One of three potential collaborators has dropped out. "We can't disclose what the molecule was, or who the partner was," Thompson said. "The other two [partner candidates] have not concluded their evaluations."

At the end of the second quarter, Aradigm had $20 million in cash with a burn rate of $1.5 million per month. The company's stock (NASDAQ:ARDM) closed Wednesday at $14.25, up $0.25. *