Pfizer, Nektar break up but stay friends

Pfizer's CEO Jeff Kindler has parted ways with Nektar Therapeutics over the botched insulin inhaler Exubera.

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(Fortune) -- "It's not you. It's me."

You could almost hear that common cop-out of cads in Pfizer's attempt today to smooth over the heartbreak it dealt Nektar Therapeutics. Last month, without warning its biotech partner, the drug giant announced that it would end sales of inhaled insulin product, Exubera. This morning, Pfizer (Charts, Fortune 500) unveiled a deal to return all marketing rights and intellectual property for Exubera to Nektar, the small San Carlos, Calif.-based biotech that originally discovered the drug. Pfizer will also give Nektar $135 million.

Pfizer's move ends a decade-long partnership to co-develop and market a product that was billed as a diabetic's alternative to needles. "This agreement," said Pfizer CEO Jeff Kindler and Nektar chief executive Howard Robin in a joint statement, "demonstrates the industry leadership of Pfizer and the company's desire to work with world-class biotechnology partners like Nektar. The agreement strengthens our relationship and demonstrates our ability to work together to craft a solution that allows Nektar the ability to pursue additional commercial opportunities for the Exubera." The news sent Nektar's (Charts) shares up 7% on Tuesday, a broadly upward day for stocks.

Pfizer's message, of course, is that there's nothing wrong with Exubera. The drug simply required more marketing than initially thought, and wasn't on track to meet the lofty sales projections analysts predicted. The drug would therefore never garner enough to move the growth needle for a company that does $52 billion in sales. But it would be a fine addition to Nektar's portfolio. Right?

The problem is: Pfizer's pullout is likely to cause great sorrow for Nektar and the several other companies - such as Eli Lilly (Charts, Fortune 500), Alkermes (Charts), Novo Nordisk (Charts) and Mannkind (Charts) - who plan to sell inhaled insulin in the near future. Many observers acknowledge that Pfizer made some marketing missteps with Exubera. Pfizer's Exubera dispenser was widely ridiculed for being too large. Nektar has designed a smaller, more elegant dispenser.

Even so, selling inhaled insulin won't be easy. Doctors resisted Exubera for a number of reasons: in clinical tests, inhaled insulin causes some diabetics to have lung function problems. Also, there was little clinical data to show the advantage of inhaled insulin over the injectable therapies patients have used for decades. Finally, Pfizer set Exubera's price at $5 per day, compared to around $3 daily for injectable insulin. Pfizer's failed entry means "there are clear negative implications for all remaining inhaled insulin players," notes Robert Hazlett, an analyst with BMO Capital Markets.

Making it even more of an uphill battle, there are many more treatments available to the 20 million U.S. patients with type 2 diabetes than there were a decade ago when Nektar first shopped its discovery to Pfizer. In the last three years at least three new diabetes treatments have been introduced to the market: Januvia from Merck, Byetta, marketed by Eli Lilly and Amylin, and Symlin from Amylin.

Still, Nektar executives say they are "in conversations with multiple potential partners" to help market Exubera. "Exubera is a spectacular product. It's the only FDA-approved inhaled insulin on the market, and has the potential to be a good business for us," says Nektar spokesman Tim Warner.

Nektar's competitors are remaining hopeful about the market, too. Alkermes, a Cambridge, Mass.-based biotech, entered into a license agreement in 2001 that allows Eli Lilly to develop and market its inhaled insulin product. Alkermes has already designed a small inhaler and is awaiting the end of Lilly's phase three testing. Lilly has said it plans to apply to the FDA in 2009. Alkermes chairman Richard Pops believes his company's smaller, sleeker inhaler - and the idea of an inhaled powder - will specifically appeal to patients who fail to get to their desired blood sugar levels using pills, and dismisses Exubera's failure as a determining precedent. "Just because the first MP3 players were bulky, had poor battery life, and didn't have enough storage space, doesn't mean there's no room an iPod to come along," says Pops.

As for any future relationship between Pfizer and Nektar? Today's release made a point of mentioning that the two companies will continue work on another project, to develop a human growth hormone. So they're trying to stay friends.