How the Exubera debacle hurts Pfizer

(Fortune) -- When Pfizer announced yesterday that it would stop selling its new inhaled insulin product, Exubera, the news came as quite a surprise to executives at Nektar Therapeutics - the company that first discovered the medicine.

The San Carlos, California-based biotech company had little time to absorb the bombshell as it endured an almost immediate 20% drop in its share price yesterday, falling from Wednesday's close of $8.08 to $6.67 by the end of the trading day (it had dropped a bit further by midday Friday). Yesterday afternoon, Nektar's CEO Howard Robin issued an angry press release saying that the company was "very disappointed with Pfizer's performance in marketing Exubera."

Pfizer's marketing clout was not enough to save Exubera.

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With Pfizer's announcement, Nektar (Charts) is literally left holding the bag - that is, several million doses of Exubera, and no real sales or marketing capability. But given some time, Nektar may actually benefit from severing ties with Pfizer. The company could find a new marketing partner, maybe even one willing to share a higher percentage of revenues.

In the end, it may be Pfizer that will suffer most from the Exubera debacle. Certainly, Pfizer (Charts, Fortune 500) can withstand the reported $2.8 billion write-off on the product. That's not the problem. What Pfizer can't afford is the knock on its reputation as a licensing partner.

It's not as if Pfizer is suddenly a pariah; the company still has the power and prestige to woo partners. But in the very competitive dealmaking atmosphere, small companies and biotechs may think twice about signing with Pfizer, particularly in deals involving lucrative specialty treatments. "They may have made it hard for themselves in the area of diabetes," says Jim Reddoch, a biotech analyst with Friedman, Billings, Ramsey Inc.

It's no secret that Pfizer is lumbering toward a steep cliff. As early as 2010, the company's top-selling cholesterol medicine, Lipitor, will lose patent protection and face competition from cheaper generics. Lipitor, the biggest blockbuster in history, generated sales of $12.8 billion in 2006, roughly a quarter of Pfizer's $48.3 billion revenue.

Pfizer's own laboratories have had a difficult time discovering new compounds that can match the enormously successful cholesterol drug's sales. The only hope for the company, then, is to license the rights to innovative medicines from smaller, more agile companies like Nektar.

Pfizer, with more than $20 billion in cash at hand, is flush with money. But the marketplace for molecules discovered in Small Pharma and biotech labs is competitive. In the past, Pfizer could always flex its marketing muscle to impress perspective licensees. But, in the aftermath of Exubera, Pfizer's ability to convince outside scientists that it can be a trusted partner is in peril. Pfizer, long known as the industry's best marketer, has admitted that it botched the initial launch of Exubera.

"Exubera was not our finest day," Pfizer vice chairman, David Shedlarz acknowledged in a conference call with analysts last summer. "We made a lot of mistakes with what is a profoundly important therapeutic."

Exubera has a somewhat checkered history. In the mid-'90s, Nektar, had initially partnered with Sanofi-Aventis, seeking help with Exubera's development. In 2005, Sanofi decided to sell its stake in the medicine to Pfizer, which paid $1.3 billion for the rights to sell the drug. In exchange for the larger company's services, Nektar would give up about 90% of the drug's sales to Pfizer.

It seemed like a ideal situation: in the midst of worldwide diabetes epidemic, a small company with a bright idea to help diabetics avoid needles teams up with the biggest and best marketer in the business. Granted, the FDA had concerns that long-term use of Exubera might cause lung complications, but Pfizer promised to monitor Exubera patients with a host of so-called post-marketing studies. By the time Pfizer's scientists and regulatory liaisons shepherded Exubera through the FDA approval process in January 2006, analysts were projecting Exubera to be a $2 billion a year blockbuster by 2009.

Once Exubera hit the market in the summer of 2006, a few things became clear, according to Pfizer: Doctors were uncertain about how the Pfizer-designed inhaler device worked and were reluctant to learn about it in order to train their patients. Physicians were also not happy about the lung-function tests they needed to perform on patients to make certain Exubera was an appropriate therapy. There was also some speculation that the inhaler device itself - about the size of a can of hairspray - was too big and unwieldy for patients to carry around.

Executives at Nektar say they watched in amazement as Pfizer failed to roll out an aggressive physician education program, or even a direct-to-consumer advertising effort. Robin had been telling investors all along that its surveys showed patients and doctors liked Exubera as an alternative to insulin injections with needles - but only after they were sufficiently educated about the product. And Nektar could not afford to lose: a true biotech with its own pipeline of future medicines and no profits, Nektar was burning through cash at a rate of $100 million per year.

Earlier this year, Nektar CEO Robin instituted a plan to cut spending and announced layoffs of 350 employees, or a third of its workforce. It was counting on Pfizer's marketing might to drive sales of Exubera. By May 2007, Exubera had been on the market for almost a year with little traction. Nektar's Robin had grown exasperated with questions about Exubera's poor performance.

In the company's first quarter conference call with analysts, Robin blew up: "We've all talked to physicians that when asked what do you think of Exubera, they say, 'Well, it's too large or it's uncomfortable. I don't know how to use it'. And then you say to them, 'Well, have you actually seen one? Have you actually held one in your hands?' 'No, I actually haven't. But I've heard things about it'," Robin said. He went on to say: "The fact is that it hasn't done well, and we know it has done miserable. It's one of the worst performing products for new launch that I could ever recall. That doesn't mean the product is flawed. The product is excellent. The launch has been flawed and Pfizer has been very open about admitting that they have really done a very poor job of launching this drug."

Disgusted with Pfizer's efforts, Nektar's top management began a regular series of weekly meetings with Pfizer's marketing team last spring. Pfizer had previously had little contact with Nektar executives regarding the sales plan. According to people familiar with the meetings, Nektar executives pushed hard for a relaunch of the product and a new advertising campaign, featuring television ads with the tagline "Now I Get It."

The commercials aired in July of 2007. But it was too late. Pfizer said Thursday that Exubera generated a paltry $12 million in sales this year. Pfizer had little choice but to stop spending billions on drug that isn't likely to put up the big numbers it needs to show growth.

A Pfizer spokesperson says the company takes issue "with any comments that suggest we didn't put our full support" behind the product. "We put maximum effort behind Exubera," says Pfizer spokesman Andy McCormick. "It just wasn't well received by physicians."

Oddly enough, Nektar could breath new life into Exubera and be better off than it was under its deal with Pfizer. After all, thousands of patients are currently using the insulin therapy. The biotech, which already has license deals for other medicines with Novartis and Bayer, could easily find a new partner to market Exubera, says WR Hambrecht analyst Andrew Forman. "There's an opportunity here for a company that is more patient," says Forman. "Exubera is a valuable asset and Big Pharma has very few novel products. If you have a medicine that's safe and people are using it, that's a big deal."

Meanwhile, Pfizer is left with egg on its face after failing to pull off its usual marketing magic. "While we are not surprised by Pfizer's decision (we have lowered our Exubera end-market sales estimates numerous times this year and have consistently cited the risk that Pfizer may pull out of Exubera), we were taken aback by the manner in which Pfizer management handled the situation," notes Morgan Stanley pharma analyst Jami Rubin.

Now the challenge for Pfizer will be to demonstrate to future partners that it won't fail to deliver on another big bet.