StockTalk:
TMF Interview With Inhale Therapeutic Systems CEO Robert Chess
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

July 1, 1998

Today our guest is Robert Chess, president and CEO of Inhale Therapeutic Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INHL)") else Response.Write("(Nasdaq: INHL)") end if %>. The San Carlos, California-based drug delivery company caught our eye on June 16 when it announced favorable Phase IIb trial results for its inhaled powder-form of insulin for diabetics. The product, which is being developed in collaboration with drug maker Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>, may offer a new alternative to the estimated 3.5 million diabetics in the U.S. who need to take daily shots of insulin to control the level of glucose in their bloodstreams.

TMF: Thank you for taking the time to talk with us, Mr. Chess.

Chess: Glad to be here.

TMF: If you could, please tell us briefly about the inhalable insulin product and its potential for treating the nation's estimated 16 million diabetics.

Chess: Actually, we are working on 13 different programs, all of which have the common theme of drugs that are currently given by injection, but ones that you'd much rather breathe in instead. The lead program we're working on, as you mentioned, is insulin. Our system to concept is very simple. Rather than having to take mealtime injections which, typically, diabetics should take three to six times per day -- though most of them don't -- they would just merely need to breathe in a system like ours. Our system would, hopefully, encourage diabetics to take insulin more often.

Current diabetics should take insulin, as I mentioned, three to six times a day, and average diabetics are only taking it 1.9 times a day, so they are not being treated nearly as well as they should be. But secondly, many diabetics are supposed to be taking insulin, but are refusing to do so due to the dislike of shots, so this would allow them and hopefully encourage them to be on insulin therapy, which would be much better for [treating] their disease.

TMF: If all goes well with the next stage of trials on this insulin product, what would be the earliest date that your inhaler could go on the market and generate profits for the company?

Chess: We'll still have a few more years of clinical trial. In essence, we're just completing the Phase IIb testing, as you mentioned earlier. That data was presented at the American Diabetes Association. We would then, through our partner Pfizer, go into large-scale Phase III testing, which Pfizer has said they're projecting to start before the end of the year. That, in combination with the time it takes to enroll patients and complete the trial, would mean that the product would still be a few years from market.

TMF: What is the estimated potential market for the product? Does it cover all diabetics or just certain types?

"Many diabetics are supposed to be taking insulin, but are refusing to do so due to dislike of shots, so this would allow them and hopefully encourage them to be on insulin therapy, which would be much better for [treating] their disease."

Chess: Essentially, there are two types of diabetics: Type I diabetics, which are called Juvenile Onset Diabetics, and Type II diabetics, which are Adult Onset Diabetics. Our product would be targeted at all Type I diabetics, and that's about a million people in the United States, and then it would be targeted at a large percentage of the Type II diabetics, and Type II are, in turn, 90% of diabetics.

Right now, there's about 16 million diabetics in the U.S. -- about 8 million that are diagnosed. Of the Type IIs, about 35% to 40% are on insulin therapy right now, and they would all be targets for our product. An additional approximately 20% to 25% should be on insulin, but are not right now, so they would be targets for our product. The current insulin market worldwide -- if you take the insulin plus the needles and syringes -- is over $3 billion. So we would be targeting that market plus expanding it, we hope, through encouraging more people to take insulin.

TMF: Other drug makers, such as Astra <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: A)") else Response.Write("(NYSE: A)") end if %> and Novo-Nordisk, are also working on inhalable insulin products. How much of a competitive threat do they represent for your business, and what will set Inhale's product apart from the others?

Chess: Well, we think a few things are important in looking at the situation. One of them is, by any measure, we're certainly several years ahead of anyone else working in the insulin business. We're now in Phase IIb clinical testing and expecting to start large-scale Phase III trials later this year. The other developments are certainly in an earlier stage.

In addition, we are working with a system that we think will be extremely easy for people to use and will also allow them to use their insulin in a variety of different environmental conditions, which is a very important advantage. Right now, even with injectable insulin, you either need to refrigerate it, or you can't take it out on a warm day. You can't take it out warmer than 86 degrees, and you can't freeze it, so that puts a constraint on the lifestyle of the diabetic. So, we think that our product not only will allow people to take it much more easily than injections, but, compared to other products potentially being developed, will allow a much broader range of use because of the broad range of stability our product will have -- in addition to just being out on the market sooner than other programs.

TMF: You've mentioned that many diabetics need to take more insulin than they are currently taking now. We understand that Pfizer will determine the eventual price of the insulin inhaler. Could you comment on if you feel the product will be economically competitive with the other forms of insulin -- the injectable forms?

Chess: Well, certainly if you look at both the insulin and more broadly at the diabetes market right now, I think there's a few important things to consider there. I mean, one of them is that diabetics right now spend money on insulin but also on the needles and syringes.

Also, our product may very well either supplement or replace many oral hypoglycemic therapies and the oral hypoglycemic therapies are typically several times what insulin pricing is right there. So, that would provide a very nice pricing window for the product.

"The current insulin market worldwide -- if you take the insulin plus the needles and syringes -- is over $3 billion. So we would be targeting that market plus expanding it, we hope, through encouraging more people to take insulin."

I think another important thing is that if people took insulin more often than they're taking it right now -- and hopefully our product would encourage them to do that -- you could significantly decrease the side effects of diabetes, which in turn would decrease the total cost of treating diabetes care. In the U.S., $92 billion is spent per year on treating diabetics both in the treatment and lost work days and other complications of the disease. So, if you could decrease that through having a system that people would use, it would be a huge savings for the healthcare industry and also obviously for insurance companies and others that cover diabetes care right now.

TMF: Do you think that even if this inhaler costs more than injectable forms of insulin that diabetics would be willing to pay more for the product because of what it is?

Chess: Well, I think certainly the market research would indicate that in looking at both diabetics and also at healthcare organizations. Because, once again, if you can show that you're decreasing overall healthcare costs by better compliance leading to lowered disease management costs, even if the product may be more than current injectable insulin, that would be a huge savings in the healthcare costs. And once again, as I point out, you won't have the costs of the needles and syringes.

TMF: Is diabetes your most promising product area? Or do you see Inhale developing treatments for other diseases with potentially larger markets in the future?

Chess: I think diabetes is certainly a very significant opportunity for Inhale, but I think that the work we've shown in the diabetes area really validates a lot of the other work we're doing. As I mentioned, we are working on 13 projects with nine different partners, and the sales of all those products, including the insulin one, as injectables right now is over $6 billion. We are working on treatments in the area of osteoporosis, for multiple sclerosis, for Hepatitis B & C, and genetic emphysema -- all very large market products where this could replace or supplement the injection therapies.

TMF: What can you tell us about your partnership with Baxter Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAX)") else Response.Write("(NYSE: BAX)") end if %>? Why are the compounds being kept confidential when they aren't in your other projects?

Chess: Well, actually, that's not uncommon because our partner, Baxter -- and I think also in the case with a few other partnerships -- realizes the system we're developing is such a competitive advantage that they don't want their competitors to know that they're working on developing a program with Inhale because that may spur them to try to develop some kind of response product.

They [our partners] know that if they are out there in the market first with a product like ours, that's going to give them a huge advantage, and the longer they can keep their competition in the dark, the bigger the advantage they are going to end up getting. So, while it may not be as good for investors not to know what the products are, from the point of view of our partners -- and then ultimately from investors -- it'll be a real advantage because it'll give us a better competitive edge and our partners a better edge.

"As I mentioned, we are working on 13 projects with nine different partners, and the sales of all those products, including the insulin one, as injectables right now is over $6 billion."

TMF: What are the benefits Inhale derives from its partnerships, especially with Baxter or Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %>? What kinds of opportunities does that bring to a small, new company such as Inhale?

Chess: I think a few things, I mean, one of them is that it provides funding. It allows us to develop these products without having to take the risk of putting the capital in place. For example, in our partnerships with Pfizer, with Lilly, with Baxter, and with others, our partners typically pay for all the costs of developing the product. Plus, they provide us milestones for several million along the way, so we actually can fund the work and not have to take the money risk while the product is being developed. But then we share on the upside with royalties and through manufacturing.

So it allows companies like Inhale to develop a very broad portfolio of products but not have to risk their own capital to do it. And plus, these large pharmaceutical companies have a great deal of expertise on how to bring products to market and how to get them approved and so, really, we can rely on the expertise of a Pfizer or a Lilly, who've brought hundreds of products to market, to help get our products out there also.

TMF: Given that all of your products are still under development, what do you think are the most important elements potential investors should consider when trying to value your company?

Chess: I think severalfold. One of them is the large opportunity for replacing needles. There's currently $10 billion worth of products in the biotech and biopharmaceutical industry that are given by injection on a chronic or sub-chronic basis that need a technology like ours.

Second is the fact that we have really validated that this technology works. We've had, in the case of insulin, people taking it home, using it for several months. We've now had patients [for] up to 18 months using the technology at home, using it two to three times a day. We've given over 100,000 doses of the product. So, it's gone from just being an interesting concept to something that really works to treat people's diseases, and we think that's a real validation for what we are doing.

And I think third is the partnerships that we've signed up with Pfizer, Baxter, Lilly, Immunet, Genzyme <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>, Centeon. Many large biotech and pharmaceutical companies have looked at what Inhale is doing and have signed up to work with us and made major commitments because they think that we have a system that really can be very important commercially.

TMF: We'd like to thank you again for speaking with us, Mr. Chess.

Chess: I appreciate you having me on today.

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