MannKind takes its shots in insulin race.

By some accounts, MannKind Corp. has the best inhaled insulin drug in development, a delivery system that is expected to revolutionize diabetic care and earn billions of dollars in revenue.

Yet over the past year the Valencia-based biotech company, whose chief executive is billionaire entrepreneur Alfred Mann, has seen its stock drop from nearly $25 a share to less than $10.

MannKind is beset by obstacles at every turn.

Its competitors are years ahead and have partners with deep pockets. It's quickly burning through cash reserves, and it's been hit by a lawsuit from its former chief medical officer who claims that the company has cut corners in the race to get to market.

Analysts have not been kind. "Inhaled insulin is the Mt. Everest of drug delivery and MannKind just left base camp and it does not have much oxygen," wrote Andrew Forman at WR Hambrecht & Co. in a recent note to investors that placed a 12-month target for shares of MannKind at just $8.

Jefferies & Co.'s Adam Walsh downgraded MannKind's stock to "underperform" from "hold" and set the target price at $6 per share.

Much is at stake. There are more than 13 million diabetics in the U.S. alone, each with about $13,000 in annual medical expenses. With diabetes a common malady as people get older, that number is expected to get larger. Mann estimates the potential value of the market including undiagnosed cases--at a total of $300 billion. Capturing just a fraction of the market can mean annual sales into the billions.

MannKind went public last year and has a cancer vaccine and other products in development, but its Technosphere inhaled insulin delivery system is by far the furthest along. Even Mann acknowledges its success or failure could make or break the company.

"In my view, it's potentially the most valuable medical product of all time," said Mann, who holds a 48.6 percent share of MannKind stock and effectively controls the company. "It's critical to us, it's our lead product."

Stiff competition

MannKind's problems start with the high cost of drug development and testing--along with its decision to go it alone after raising $87.5 million in a September initial public offering. While that strategy has long-run financial benefit since the company would not have to split profits with a development partner, it also has meant a short-term crunch.

The company spent in excess of $600 million developing Technosphere (much out of it from private investors and Mann's own money before the company went public) and continues to spend $8 million a month. It now has only $67 million in cash, according to Thomas Shrader, a biotechnology analyst at Harris Nesbitt Corp. in New York.

Moreover, the company will need at least another $200 million just to get past the expensive Phase III U.S. clinical trials, which it just initiated and will track nearly 2,000 patients over two years.

Those numbers have prompted Mann to pledge that he will fund the company out of his own pocket if necessary "to the end."

MannKind is up against Exubera, which is being developed by San Carlos, Calif.-based Nektar Therapeutics, with backing from Pfizer Inc. and SanofiAventis Group, two of the largest pharmaceutical companies in the world. Exubera is already under Food and Drug Administration review and could hit the market by early 2007.

Other competitors include a system being developed by Cambridge, Mass.-based Alkermes Inc., with backing from Eli Lilly & Co., that has begun the larger scale Phase III human trials. Mannkind trails Exubera by up to 30 months.

There also is AERx, developed by Hayward, Calif.-based Aradigm Corp. and backed by Danish firm Novo Nordisk MS, the world's biggest insulin company. It's currently in Phase III trials.

MannKind does have some advantages. Its delivery system is smaller than the rest, making it more convenient to carry. Analysts say it's also easier to use. More importantly, tests have shown that its formulation results in a higher, faster blood uptake of insulin, an important medical advantage.

"It mimics the body's natural first spike of insulin release when eating a meal. So you can truly stop the disease progression," Shrader said.

Still, MannKind is roughly three years behind Exubera. Complicating matters is a lawsuit filed in May against MannKind by Wendell Cheatham, the company's former chief medical officer. Cheatham accused MannKind of making false statements to the FDA and improperly changing its Technosphere formulation in a rush to get its Phase III medical trials under way. He also alleged that he was fired in retaliation and in order to silence his charges. MannKind denies all charges, and it has since filed suit against him for libel.

The allegations themselves haven't spooked analysts as much as the Cheatham's departure, because he had been a liaison with investors and the larger scientific community. The concern is that the MannKind insulin system may have more problems than the company has acknowledged.

"We suspect that his scientific discussions with investors regarding Technosphere Insulin might have revealed more challenges for the product than management had wanted to disclose," Forman wrote in a research note.

Mann denies any undisclosed problems, saying that the company is on schedule with its trials. He also said that Cheatham wasn't in a position to substantiate his claims because he had been moved aside as chief medical officer.

While Mann acknowledges that getting Technosphere to market will be costly, he said the company is prepared to handle it alone through the clinical trial phase, though it is in talks with several other companies to form a marketing partnership after approval. "You don't need much penetration in a $300 billion market to get $5 billion in revenues," he said. "There' s plenty of room."