A little biotech's big, risky bet on weight loss

symlinAmylin has soared on sales of one diabetes drug. Now it's looking to extend its franchise into weight loss. Will it pay?

NEW YORK (CNNMoney.com) -- The biotech Amylin is testing what could be the next blockbuster in the $40 billion market for weight loss products, or the treatment could just be a big fat flop.

The only thing for sure is that it's too early to say, meaning the biotech's bet on the weight loss drug makes the San Diego-based company a risky, long-range investment.

Amylin is experimenting with its injectable drug Symlin, which is already on the market to control blood sugar levels for diabetics, for an additional use as a weight loss drug. The biotech recently reported that Symlin reduced weight by 7 percent to 8 percent over 52 weeks in diabetics, compared to a 1 percent weight loss with a placebo. 

"Amylin's obesity program is looking like another potential billion-dollar-plus franchise," wrote Jim Reddoch, analyst for Friedman, Billings, Ramsey, in a recent report. Reddoch rates Amylin a "buy," and expects the stock price to jump by a third over the next year.

The stock has already tripled since June 2005, when Amylin released data on its only two drugs - Symlin and Byetta - both treatments for diabetes. Amylin is also testing an extended-release version of Byetta meant to further strengthen sales.

But some analysts say Amylin stock has gotten way ahead of itself for a money-losing company. Amylin reported a net loss of $46 million in the third quarter, with about 85 percent of its $147 million in quarterly sales coming from Byetta.

Amylin is best known for the drug, which is derived from venom from the lizards known as Gila monsters and is produced in partnership with Eli Lilly & Co .

Meanwhile, any potential sales from Symlin as a weight loss drug are years away. Its sales as a diabetes treatment were just $12.4 million in the latest quarter.

The latest Symlin study was phase 2, which means it won't enter late-stage testing until next year. Assuming tests are successful, Symlin might not enter the market as a weight loss drug until 2012. Because of this, some analysts are reluctant to offer projections on Symlin.

"The real question is: How much of a premium do you want to pay for something that's five or six years away?" said Andrew Forman, analyst for WR Hambrecht & Co.

But Amylin is launching five more studies that will combine Symlin with other compounds, including leptin, a protein hormone that processes energy in the body, which Amylin licenses from Amgen (down $0.42 to $74.87, Charts), the world's biggest biotech. (Symlin, also known by its scientific name pramlintide, is based on a human hormone called amylin, which is where the company gets its name.)

Adding leptin to Symlin could be the winning combination for Amylin, if tests in humans are as successful as earlier experiments with rats. In a study completed earlier this year, fat rats on the Symlin-leptin combination lost 12 percent of their body weight. A similar result in a 300-pound man would cause him to shed to 36 pounds, just by taking drugs. But Amylin isn't expected to release the results of its Symlin-leptin study in humans until the second half of 2007.

"The greatest potential with pramlintide lies with leptin," said Matthew Osborne, analyst for Lazard Capital Markets. But Osborne rates Amylin a "sell" and expects the stock to lose a fourth of its value over the next 12 months, because Byetta will face competition from Merck's  newly approved diabetes drug Januvia and an experimental diabetes drug known as Galvus from Novartis .

If the Symlin-leptin combo does eventually go on the market, it could be a crowded place indeed.

Osborne said the Amylin combination could find itself competing with other weight loss drugs such as Meridia from Abbott Laboratories' and Xenical from Roche Holdings, as well as the experimental weight loss drugs Qnexa from Vivus and Sanofi-Aventis' Acomplia, which is being tested mainly as a diabetes drug.

Analysts quoted in this story do not own shares of company stocks mentioned here, but FBR and Lazard make a market in Amylin.