Can David succeed where Goliath failed?

A little-known Southern California biotech company developing an inhalable version of insulin for diabetics received ominous news recently: The world's biggest drug company by sales said its inhaler device bombed at the drugstore.

The high-profile failure of Pfizer Inc.'s Exubera is considered one of the biggest flops in modern pharmaceutical history. The company hoped to collect as much as $2 billion a year in revenue but reported that the product took in just $12 million over the past nine months.

Despite that, MannKind Corp. said it remained optimistic that its version would be a hit.

“We obviously wish Pfizer had more success with its product,” said Dick Anderson, MannKind's chief financial officer. “But we believe ours is in a different class and are going forward with our plans.”

The Valencia, Calif.-based biotech company, whose chief executive is billionaire entrepreneur Alfred E. Mann, has spent an estimated $700 million on its insulin product, Technosphere. The product, which combines a concentrated insulin powder with a inhalation device the size of a deck of playing cards, is expected to enter the market in 2010.

Insulin is a hormone that traditionally has been taken as a shot to help diabetics control their blood sugar. Before Exubera arrived on the market this year and sold poorly, many experts believed inhalable insulin could be one of the biggest drug blockbusters of the decade.

There was hope the advance would have a clinical benefit as well. About 5 million Americans take the hormone but a significant number inject themselves too infrequently, partially because the needle sticks are bothersome, research shows.

Analysts blame two major factors for Exubera's poor sales. Some doctors worry its long-term effects on the lungs have not been studied sufficiently, and consumers appeared to shy away from the oversize inhaler, perhaps because it appeared awkward in public.

Much is at stake. The number of people in the U.S. with Type 2 diabetes, which can result from obesity and a lack of exercise - it's sometimes referred to as "diabesity” - could reach 40 million within a decade. The annual market for diabetes drugs is expected to increase from $15 billion today to $25 billion over the same period.

Still, MannKind has been beset by obstacles at every turn.

Mann started MannKind in 1991. The 81-year-old former aerospace entrepreneur made a fortune setting up medical companies and selling them. He founded Advanced Bionics Corp., which sold for an estimated $4 billion in 2004, and MiniMed Inc., a maker of insulin pumps, which sold for $3 billion in 2001.

In August, the company - whose shares have dropped over the past year - settled a lawsuit by Wendell Cheatham, its former chief medical officer. Cheatham accused MannKind of making false statements to the Food and Drug Administration and improperly changing the drug's formulation in a rush to get its Phase III clinical trials underway. MannKind denies the charges and filed suit against Cheatham for libel. The case was settled, but the details weren't disclosed.

Although MannKind has several drugs in development, including a cancer drug and another diabetes medicine, it has no revenue. Its inhaled insulin is in Phase III testing, the final stage needed to support an application for federal approval.

Executives maintain that the Technosphere system has a better chance for success than Exubera because it is faster-acting and must be taken just 10 minutes before a meal. Exubera is estimated to take as long as 15 minutes to be effective.

More important , early tests have not shown any decrease in pulmonary activity from the drug, Anderson said.

The company says it is seeking a major drug company as a marketing partner when and if the drug receives federal approval -- a common strategy for small companies. But some analysts believe that will be more difficult with Pfizer's exit.

"Fundamentally, they are two separate companies and two separate issues," said Oppenheimer & Co. pharmaceutical analyst Scott Henry. But now that Pfizer has pulled its drug, "I would gather it is going to make it harder to convince people about how big this market really is."

Denmark-based Novo Nordisk and Indianapolis-based Eli Lilly & Co. have inhalable insulin candidates in late-stage development that are expected to start selling in the next few years.

MannKind announced $600 million in new financing in October, including $350 million in additional credit and $250 million from the sale of 27 million shares.

But the cash wasn't raised on Wall Street. Mann, the company's principal stockholder, provided the credit and, along with two other investors, is buying the shares.

"We believe this will be an important product for patients," Anderson said.