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Pfizer already tried to enter this market and failed miserably. Nevertheless, there are three main reasons why it should partner with MannKind, and several reasons why investors should be watching both of these companies.
1. Pfizer should forget about Exubera
Pfizer commercialized Nektar Therapeutics' (Nasdaq: NKTR ) inhalable insulin product, Exubera, in 2006, and the collaboration was a massive failure. Pfizer discontinued the drug after just a year and this project resulted in a loss close to $3 billion.
While Exubera and MannKind's drug, Afrezza, both deliver insulin through an inhalation device, they are far from the same product. MannKind founder and CEO Alfred Mann has been trying to distance his company's drug from Exubera since the latter was pulled from the market. I discussed some of the differences between these drugs in a previous article; in a nutshell, Exubera lacked any clinical advantage over injected insulin and the device was just too big to appeal to patients. Based on its recent trials, however, Afrezza biologically acts faster than the injectable insulin currently available, and the device is small enough to fit in your pocket.
Pfizer should forget about its financial failure with Exubera, remember its missteps while bringing it to market, and apply this experience toward the successful launch of Afrezza. The market size for fast-acting insulin is well worth a second chance. Eli Lilly's (NYSE: LLY ) Humalog insulin sales, for instance, reached almost $2.4 billion in fiscal 2011.
2. MannKind needs a partner yesterday
MannKind is in a tough financial situation. According to its latest financial statements, the company is spending about $8.4 million a month and doesn't have any recurring revenue. CFO Matthew Pfeffer said the company would be spending more money in upcoming quarters as it completes the Afrezza clinical trials and gears up for a possible commercial launch. However, at the current burn rate, MannKind only has enough cash, cash equivalents, and short-term investments to cover about four months of operating expenses. An additional loan from Mann would help pay for costs over the short term, but MannKind will need a larger pharmaceutical company to market and sell Afrezza if it is approved.
Pfizer's free cash flow during the last quarter topped $3.7 billion, while MannKind's current market cap is only around $480 million. Pfizer clearly has the financial muscle to either license MannKind's technology or obtain its intellectual property through an outright acquisition.
3. Pfizer needs a new blockbuster
Based on Pfizer's latest earnings report, the company is facing a new set of challenges and would benefit from MannKind's innovative technology. Pfizer's year-over-year net income increased by 25% in the latest quarter, but this was mostly due to lower R&D and SG&A expenses. Revenue decreased from $16.5 billion to $15.1 billion.
This significant decline was caused by lower sales of Pfizer's cholesterol medicine, Lipitor. The drug went off patent in 2011, and generic versions produced by Ranbaxy Laboratories and Mylan Laboratories caused Pfizer's Lipitor sales to drop from $2.5 billion in Q2 of 2011 to $1.2 billion this quarter. Indian drugmaker Dr. Reddy's recently announced its own version of Lipitor, so expect Pfizer's sales to decrease again next quarter.
Cutting expenses is a good short-term strategy, but Pfizer will have to fill that hole in its revenue with another blockbuster. Pfizer could leverage MannKind's inhalation technology to improve its existing products and create another top-selling drug. For instance, think about the market potential of an inhalable Lipitor or, better yet, an inhalable Viagra. It currently takes Pfizer's little blue pill 30 minutes to a full hour to work its magic, but MannKind has demonstrated that its Dreamboat inhaler and powder technology have remarkably fast drug absorption. While there has been some interest in developing inhalable erectile dysfunction products, none are currently on the market. Viagra delivered through the Dreamboat would undoubtedly buoy Pfizer's sales.
What could this mean for your portfolio?
Pfizer could benefit from MannKind's technology in the long run, but the stock won't crumble if a partnership doesn't materialize soon. Pfizer has suffered in recent years as the patents of its prominent blockbuster drugs started to expire. However, the company is planning to spin off its animal health unit, divested its nutrition group, and is putting its energy toward what it does best: pharmaceuticals. It looks like Pfizer is starting to turn things around, so I'll be closely tracking its R&D pipeline and might jump into this stock later this year.
A partnership for MannKind, on the other hand, would turn the tide for this beleaguered company. MannKind's flagship drug, Afrezza, is completing clinical trials to satisfy FDA approval, and a cash influx from an outside investor would help it finish the trials and prepare a marketing campaign. In MannKind's latest earnings call, Mann said the company is exploring various collaboration and funding opportunities, but nothing has been finalized. News of a partnership, with or without Pfizer, would undoubtedly cause the share price to surge.
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