MannKind Corp. (MNKD): Strong Upside Potential, Finite (But Small) Downside Risk for Approval-Pending Inhalable Insulin Therapy, Good Options Play on Volatility

MannKind Corp. (MNKD) is a California-based biopharmaceutical company that develops drugs for diabetes and cancer. The company’s leading drug candidate, Afrezza, is an ultra-rapid-acting insulin powder for Type 1 and Type 2 diabetes that is currently awaiting final FDA approval (due July 15, 2014).

Large and Growing Addressable Insulin Market

Afrezza’s addressable market is large – $35 billion in 2013 – and rapidly expanding, and is expected to increase 66% to $58 billion by 2018 – with obesity becoming more of a problem globally as second- and third-world countries move their populations up the food chain with celebrated indulgences such as McDonald’s and Pizza Hut that herald middle-class status. Roughly 8% of the U.S. population is diabetic but juvenile obesity is on the rise and diabetes is a very real threat to America’s health. China and India have about 100 million diabetics each, with numbers rising as populations shift from farmlands to cities. Global insulin sales have increased by about $4 billion each year in 2011 and 2012

April 1, 2014: Afrezza Received Overwhelming AdCom Approval… But the Devil May Lie in the Details

On April 1, 2014, MannKind announced that an advisory committee (AdCom) at the U.S. FDA had voted 13-to-1 to support the marketing of Afrezza Inhalation Powder to Type 1 diabetics and 14-to-0 to support its use by Type 2 diabetics. What was not reported was that some of the AdCom members who voted for the drug expressed little confidence that it was indeed better than prevailing therapies – and critics have grabbed on to such data points to trump-up FDA rejection.

While the FDA is not bound by the AdCom’s recommendations, it is widely expected to follow them, with a final decision from the FDA deferred to July 15, 2014. Proponents believe the FDA likely deferred its decision to July 15 so it can compile labeling guidelines given the vast and heterogeneous population of diabetics that could adopt Afrezza shortly after it hits the market.

Afrezza has a high probability of winning final FDA approval because the clinical trials were designed with significant input from the FDA, with success benchmarks defined by the regulators. Secondly, the AdCom – members of which were all picked by the FDA – voted overwhelmingly to approve Afrezza, so it is unlikely that the FDA will do a u-turn at this stage. Moreover, a study by consulting firm McKinsey & Co. shows that the FDA follows AdCom recommendations 90% of the time. So, overall, there is a fairly high probability of Afrezza approval come July 15.

That said, there is a finite but low probability of a negative decision.

At this critical juncture, as the company awaits a final FDA decision, Afrezza has access to funds to sustain ongoing operations through mid-July including a credit-line from company founder Alfred Mann and two at-the-market issuance agreements that could bring in $50 million.

Significant Share Price Volatility

MannKind went public in July 2004 at $14 per share and raised about $80 million in net proceeds. Shares have fluctuated significantly since the company’s IPO and, at $6.55 as of 4/30/2014, are well off their post-IPO peak of $23.25 and 54% below their IPO price. MannKind has a market capitalization of $2.3 billion which totally rests on the probability of FDA approval and bullish uptake on sales. Should FDA approval be contingent or restricted, or should the product fail to take-off (like its predecessor, Exubera from Pfizer), shares and valuation could come crashing down.

More recently, on April 1, shares jumped 74% from $4 to about $7 on overwhelming AdCom approval and will likely be range-bound at current levels through final word from the FDA which could also come before the July 15 deadline and surprise investors, likely on the upside.

Shares are now trading at levels they had earlier touched 10 months ago, well before Afrezza received AdCom approval, so bulls believe this is a no-brainer at current levels.

Shares Now Trading on Upside Potential – with analysts split on wide range of revenue outcomes

With FDA approval virtually a foregone conclusion in many circles, debate has now shifted to the pace at which Afrezza might steal market share and revenue from existing therapies, especially in the $7 billion injected insulin market. Wall Street analysts differ sharply on revenue estimates, with a wide range from $30 million to $360 million in projected revenue for FY 2015.

Proponents believe Afrezza’s ease of use and safety will drive strong uptake, to $3 billion in peak annual sales on maturity. Proponents also cite a prior FDA approval of inhalable insulin (Exubera from Pfizer) which was withdrawn in 2007 due to poor sales related to a cumbersome delivery apparatus that was much bigger than Technosphere’s small portable form factor.

The cautious outlook calls for peak sales of well below $1 billion with analysts questioning pulmonary safety and citing low confidence on AdCom members’ yes votes on concerns that Afrezza is less effective than injectable insulin in controlling blood sugar levels.

Many prominent hedge fund managers, such as Blackrock, Vanguard and others, are also bullish on MannKind and have been accumulating shares even after they rose significantly from their 2012 lows.

Afrezza… Explained

Afrezza is an ultra-rapid mealtime insulin treatment that consists of the Afrezza inhalable powder capsule which is delivered through a small, easy-to-use inhaler at the start of a meal – a proprietary drug-device combination labeled Technosphere by the company. The powder is immediately delivered to the deep lung and gets absorbed into the blood stream within 12-15 minutes, way quicker than the 45-90 minutes for injected rapid-acting insulin doses. Potentially, Technosphere could be used for the needle-free delivery of a wide range of drugs.



In clinical trials with 50 different studies on over 5,000 adult patients, Afrezza showed significant reduction in post-meal glucose fluctuations (thereby reducing a major risk factor in diabetics), comparable levels of overall glucose control as current state-of-the-art treatments, a lower risk of hypoglycemia (again, another major problem for patients) and less weight gain than from other insulin treatments. Afrezza was also tested for pulmonary safety over a two-year period and changes in pulmonary function were comparable to other insulin or oral therapies, with adverse effects that included hypoglycemia and mild cough.

Afrezza is expected to trump other treatments currently in the market because is it highly synchronized with normal digestion of a typical meal and has less weight gain and lower associated risk of hypoglycemia.

Rich Pipeline beyond Afrezza… Technosphere Delivery System Could Become Runaway Success

Additionally, MannKind’s product pipeline includes the following four drugs:

MKC253 is a formulation of glucagon-like peptide or GLP-1, currently in phase 1 trials, which may simulate the incretin effect that is lost in patients with Type 2 diabetes.

MKC180 is a Technosphere formulation of a natural hormone – oxyntomodulin – to control satiety for up to six hours after inhalation, and address obesity; MKC180 beat a placebo and an IV infusion of oxyntomodulin in early trials.

MKC1106 is an active immunotherapy platform with three separate programs. MKC1106-PP targets solid tumors associated with prostate cancer and renal cell carcinoma, which completed an open label phase 1 clinical trial with objective responses. MKC1106-MT showed objective response in a phase 1 trial for melanoma (skin cancer). MKC1106-NS is positioned for clinical evaluation for the treatment of a range of solid and blood cancers.

MKC204 is an inhibitor that targets the IRE-1 alpha protein that could have potential applications for the treatment of multiple myeloma, and autoimmune, cardiovascular and neurodegenerative disorders.

The company’s proprietary Technosphere platform uses a class of organic molecules onto which a broad range of drug molecules – proteins, peptides and small molecule drugs – can be loaded and rapidly delivered through oral inhalation to the deep lung using proprietary inhalers. In addition to the pipeline drugs listed above, MannKind is exploring Technosphere formulations for the treatment of osteoporosis, hypoglycemia, migraine and the pain-related symptoms of irritable bowel syndrome.

Veteran Founder, Experienced Management

MannKind was founded in 2001 by Chairman
Alfred Mann after he bought a company called Pharmaceutical Discovery which had developed Afrezza, an inhalable insulin product. MannKind was founded for the testing and commercialization of Afrezza.

Alfred Mann holds degrees in Physics from UCLA and is an entrepreneur, scientist and philanthropist with deep roots in medical innovation. Mann founded Pacesetter Systems in 1972, which developed cardiac pacemakers. Mann developed the company for 20 years, and then sold it to Siemens; the unit is now part of the Cardiac Rhythm Management Division of St. Jude Medical Corp. In addition, Mann founded Advanced Bionics (for cochlear implants), Infusions Systems (for infusion pumps), Quallion (which produces batteries for medical products) and Stellar Microelectronics (which makes electronic assemblies for medical, military and aerospace applications).

Hakan Edstrom has held the President and COO post since April 2001 and was earlier Senior Corporate Vice President at Bausch & Lomb, Americas Region, and President and CEO of Pharmacia Opthalmics.

Matthew Pfeffer serves as Corporate Vice President and CFO, and has been with MannKind since April 2008. Pfeffer brings extensive senior finance experience with private and public pharma and biotech companies.

Juergen Martens serves as Corporate Vice President of Operations and Chief Technology Officer, and brings extensive experience in pharmaceutical technology and process development that is core to the company’s Technosphere platform.

Q4 and FY 2013 Financials

MannKind recently reported Q4 and FY 2014 results for the period ended December 31, 2013. As the company has no approved drugs, it has no revenue and is currently spending funds on R&D, G&A and licensing fees in anticipation of FDA approval for Afrezza.

In Q4, MannKind had total operating expenses of $46.6 million due to higher non-cash stock compensation expenses and higher professional and financing fees. For the full year, MannKind spent $169.4 million on operations, again due to higher non-cash stock compensation expenses and higher professional and financing fees.

In 2013, the company reported an annual net loss of $191.5 million or $(0.64) per share on 299.6 million weighted average shares outstanding. At year end, the company had $70.8 million in cash and $30.1 million in available borrowings from The Mann Group. At quarter end, the company had a stockholders’ deficit of $30.7 million, down from $110.7 million a year ago.


There is a high probability that the FDA will approve Afrezza for commercial sales on or before July 15, 2014. Shares will likely remain fairly volatile until then, as bulls and bears slug it out. While shares could pop significantly higher on approval, they likely will correct shortly thereafter as the company commercializes the product and investors take a wait and see approach on uptake and quarterly revenue. Profitability could still be several quarters away and hiccups are inevitable through the commercialization process. Afrezza could well be a blockbuster and investors should carefully analyze quarterly results to gauge true market uptake and buy shares on downturns if the story appears to be playing out nicely. At this point, the odds seem biased towards near-term upside but a negative ruling from the FDA could send shares tumbling.

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