Biodel Back At Square One, Not Zero

Apr.12.12 | About: Biodel Inc. (BIOD)

Like many other biopharmas taking on the diabetes market, Biodel (BIOD) has had pretty serious setbacks. The decision to abandon the original Linjeta absolutely hammered the stock, and it is true that the company is a very speculative stock at this point. That said, with a near-term glucagon program that has relatively lower clinical risk and multiple attempts at the insulin market still in hand, it may be premature to completely close the book on this stock.

Can Glucagon Fill A Gap?

Biodel's nearest-term opportunity is with its glucagon rescue program. Glucagon is a naturally-occurring hormone produced by the pancreas to raise blood glucose levels. In healthy individuals, this is part of the normal blood glucose regulation process.

For diabetics, though, it's a different story. Diabetics do produce glucagon, but their bodies do not necessarily process it properly. What's more, supplemental insulin can act much faster than the body's glucagon-producing system, and sudden hypoglycemia is a major risk factor for diabetics.

While hypoglycemia is normally "treated" by avoiding it all costs, supplementary glucagon is an option. Unfortunately, the current product is an enormous pain to use (it takes multiple reconstitution steps - not desirable in the midst of severe hypoglycemia) and the market is only around $100 million.

Biodel thinks it has a better mousetrap - a stable liquid formulation that can be survive at refrigerator temperatures for more than a year, and possibly also remain stable on a long-term basis at room temperature. Packaged in a convenient auto-injector, this would be a much more convenient rescue product.

Biodel specializes in creating new, enhanced formulations of existing compounds and that works in its favor in this case. Specifically, it looks like the company can pursue a 505(b)(2) approval pathway which allows it to reference existing safety and efficacy data. What the company has to do, then, is conduct a bioequivalence study to prove it's functionally the same as glucagon, a CMC (chemistry, manufacturing, and control) study to prove the long-term stability, and a toxicology study.

If all of this comes together, the company could file with the FDA by mid-2014. At this point, shooting for 18-month refrigerator life would seem to be the limiting step (assuming successful bioequivalence and toxicology).

Is Glucagon A Real Market?

Perhaps the biggest problem with a new glucagon product is that most diabetics simply aren't accustomed to using glucagon and there will be a patient education/conversion aspect to the program. In other words, this is a program that could require some significant detailing with docs to get it into broad use.

So while Biodel's glucagon product could be worth over $300 million in revenue, it will be a tough sell and Biodel won't have the resources to invest heavily in marketing. While partnering could make sense, the small sales potential will likely limit large-company interest.

Interesting Insulin Options

Biodel has gone back to the drawing board with its insulin program, but these programs are still worth watching.

The company has two recombinant human insulin programs in development (BIOD-123 and BIOD-125). While '123 features a modified EDTA component with calcium ions, the '125 is based on the old Linjeta formulation plus an excipient designed to improve injection site tolerability.

The hope here is that the company can prove that these insulin formulations are reliable, predictable rapid-acting insulins with better tolerability and improved pharmokinetics. If these work, they could be interesting alternatives in the multi-billion dollar insulin market, and the company should be reporting Phase 1 data in the second quarter of 2012.

Behind these is another interesting program based around other companies' analogs. Biodel has reached agreements with two existing companies (presumably two of Novo Nordisk (NVO), Lilly (LLY), and Sanofi (SNY)) to be supplied with analog insulin (the active part of Novolog, Humalog, or Apidra). The company will then apply its technology with an eye towards improving the performance characteristics of those insulins.

At Least One Big Hurdle

One immediate problem jumps out to me about this approach from Biodel. It's not the issue of financing (which will likely become an issue in 2013), nor even clinical success (which is a huge issue, admittedly). Instead, it's the issue of the market potential.

Two of these insulin analogs are likely to be off-patent by the time Biodel's modified versions reach the market (Humalog and NovoLog). That could put it into a similar situation as XenoPort (OTCPK:XPRT) - trying to sell a (presumably) premium-priced reformulation against existing cheaper generics. Now there's a chance that Biodel could partner with the patent-holders and figure out a way to turn this into a product with extended patent coverage, but that strikes me as a tricky task and a longshot.

So my fear, then, is that these insulins work as expected and offer real clinical benefits, but insurance companies basically refuse to pay up for those improvements. It's happened before.

Of course, Biodel isn't the only company working on a better diabetes mousetrap. All of the existing insulin analog manufacturers are looking to extend their franchises with new products, and other biopharmas like Halozyme (HALO) and MannKind (MNKD) are working on their own insulins (including MannKind's inhaled form). If nothing else, MannKind is an abject lesson in the ups and downs of trying to bring a new mousetrap to the diabetes/insulin market.

The Bottom Line

Let me be clear that this is nothing like a "widows and orphans" stock. Not only is Biodel targeting the tough diabetes market, but it's also taking the approach of trying to improve pre-existing compounds - an approach with a pretty dicey record in the market.

If Biodel could sell $100 million of its glucagon product in 2017, that alone should be worth $1 per share on the basis of a low revenue multiple (4x) and extensive share dilution between then and now. If one of these experimental insulin compounds shows encouraging early results, Biodel could perhaps find a partner, secure some financing, and offer a good return from these very depressed levels.

Trading below $1 (and below cash), then, I find it hard to ignore these shares. That said, the record of salvaging winners out of the broken, sub-$1 biotech bin is so poor that nobody should consider these shares without being able to accept the possibility of a total loss.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.