Tuesday, May 27, 2014

Mannkind – The good, the bad, and the ugly

Mannkind (MNKD) and its investors received very good news last month when its inhaled insulin drug for diabetes, Afrezza, received an overwhelmingly positive FDA advisory panel vote.  The panel voted 13-1 in favor to approving the product in type 1 diabetes and 14-0 in type 2 diabetes.  The drug had been rejected by the FDA and received complete response letters twice before so it looks like the third time may be a charm for Mannkind.  The positive panel vote was a surprise to the market after the FDA released briefing documents that included concerns over efficacy versus currently approved products and safety issues.  The FDA was also likely surprised by the positive vote as it subsequently pushed back the PDUFA date three months to July 15 in order to provide the agency time to for a full review of the application.  The approval of Mannkind is likely due to the overwhelmingly positive ADCOM vote as the FDA rarely goes against the panel recommendations.  Approval is good news for diabetes patients as it offers another treatment option for their disease. 

The bad news for Mannkind and its investors is just how many diabetes patients will use Afrezza as their treatment option.  This won’t be the first inhaled insulin product that’s hit the market and the last drug was a commercial disaster.  Pfizer won approval and introduced its inhaled insulin product Exubera in 2006 but only achieved $12 million in sales (no, I’m not missing a 0, that’s twelve million) in its first year despite a strong investment in launch including a television ad campaign.  After only a year on the market, Pfizer dumped Exubera and took a $2.6 billion write-off.  Will Afrezza meet the same fate and what went bad on commercialization? 

Yes, the Afrezza device is much smaller and more convenient to carry and use than what was referred to as the “bong” but was this sole reason for Exubera’s demise?  There’s the argument that inhaled insulin will be a blockbuster because diabetics hate using needles but if this were true, wouldn’t these needle fearing aichmophobiacs have used the “bong” regardless of it’s bulky size?  The FDA approved it for both type 1 and type 2 diabetes so the drug did work.

The really bad news and reality is that Afrezza will face many of the same commercial challenges as Exubera.  These include a restrictive label, premium pricing and coverage challenges, marketing to a broad range of physicians, and lack of superiority to existing products. 

After reading through the FDA briefing documents, my guess is that the Afrezza label will look much like Exubera’s.  This could include a pulmonary test prior to initiating therapy and possibly every six months thereafter, restrictions for patients with lung diseases such as COPD and asthma, and warnings for patient groups such as pregnant or nursing mothers and children.  These restrictions will significantly impact the size of the potential patient market. 

Exubera carried a 30% premium without a superiority profile over injected insulin that led to insurance coverage challenges.  Managed-care companies scrutinize new drugs now more than ever for their cost vs. benefit and Afrezza wasn’t statistically superior to current injectable treatments, which will likely put the drug in a higher co-pay tier than it’s injectable rivals.  The higher co-pay will be another negative for commercialization. 

Lastly, it’s going to be very expensive to market a drug for an indication that’s currently prescribed by just about every family doctor in America.  Not only do you have to sell the benefits of inhaled insulin to an extremely fragmented network of doctors, you have to educate them on how to use the device so that they can teach their patients.  Also, how keen will already overworked family doctors be to actively subscribe an alternative product that requires a preliminary lung test and follow-up tests every six months?  The marketing challenges will make it all but impossible for Mannkind to go it alone, which leads me to the ugly…

How can things get more ugly than the commercial challenges?  It can!  It’s a combination of an astronomical market cap, horrible balance sheet, and lack of a commercial partner. 

I have reviewed hundreds, if not thousands, of company financials over my professional and investment career and I can’t think of another company with such an over-inflated market value than Mannkind.  Its market cap currently exceeds $2.5 billion dollars while having over $200 million in liabilities (including a $100 million note maturing mid-2015), only $35 million in cash, and a measly $17 million in owner’s equity.  The company has over 388 million shares outstanding with plans in place to increase this count in the coming months via a $50 million ATM agreement.  Mannkind lost over $50 million last quarter, which is shocking since the two pivotal trials for Afrezza ended last year.  They are in a very weak financial position to negotiate a deal with commercial partners and potential suitors will take advantage of this, if a commercial partner can be secured at all due to the many challenges listed under the bad section of this article. 

Mannkind - The good, the bad, and the ugly.  There’s plenty of each with the Mannkind saga and only time will tell how this movie ends.  My recommendation is to steer of the stock until the story unfolds in the coming year. 

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