A Good Drug That's Too Risky to Buy

In a companion article a few days ago, I predicted that MannKind's (MNKD 0.72%) extended phase 3 program for its inhaled insulin, Afrezza, is likely to produce positive results when it reads out later this month.

Despite the high likelihood of clinical success, MannKind won't be out of the woods after the results are presented. There's still quite a bit of risk involved in buying the biotech.

Getting approved
Assuming a clinical trial success, I think the chance that the Food and Drug Administration approves Afrezza is extremely high, but you can't discount the possibility the FDA might not see it the same way.

MannKind worked closely with the FDA to design the new studies, so efficacy and clinical endpoints shouldn't be a problem. The biggest risk is probably that regulators find some side effect they're worried about. The agency tends to heavily scrutinize drugs delivered via the lungs if they don't treat diseases that affect the lung.

And let's not forget, the regulatory agency has already rejected Afrezza twice. At least for the second rejection, there seems to have been a miscommunication between MannKind and the agency over what would be required for approval (or the FDA changed its view after MannKind resubmitted its application). Either way, it could technically happen again although hopefully going through the process for three years has helped work out any kinks.

Finding a partner
I think finding a partner is going to be harder than most investors think. After Pfizer (PFE -0.19%) pulled Exubera from the market, Novo Nordisk (NVO -1.93%) and Eli Lilly (LLY -1.81%) both stopped development of their inhaled insulin products. And none of the other big pharmas decided to step up and fill the void. The interest seems pretty low.

Afrezza is arguably a much better product than Exubera. It seems to work better than injected insulins sold by Novo Nordisk and Eli Lilly, and the delivery device, dubbed Dreamboat, is much smaller than Exubera, which quite frankly looked a bong used to smoke marijuana.

Source: MannKind.

I doubt Pfizer would be interested in jumping back into the market, especially since it doesn't sell any major branded diabetes products. Although I guess it could use Afrezza as a stepping stone, Pfizer does have quite a few diabetes drugs in its pipeline including ertugliflozin, which it partnered up with Merck (MRK 0.10%).

If MannKind is able to find a partner, it might come in the form of a joint venture between two companies that can share the risk of going into an uncharted area. I guess Pfizer and Merck could be a possibility, but their partnership isn't as formal as AstraZeneca and Bristol-Myers Squibb, which have an established joint venture with at least four different diabetes drugs. The Eli Lilly-Boehringer Ingelheim partnership also has multiple diabetes drugs, but I see that as less of a possibility given Eli Lilly's previous experience.

Assuming MannKind can get a decent deal, a partnership should drive the stock higher. Of course, that's what we said of Amarin, and more than a year after its approval, we're still waiting for a partnership. In general, biotech management doesn't like to give away the farm in a partnership and that likely goes double for MannKind's CEO, namesake, and largest shareholder -- Al Mann. Given the large market size, MannKind would have a hard time launching on its own.

The market
This is the area with the highest risk-reward proposition. Afrezza's potential is huge; fast-acting insulin is a multi-billion market.

But it's unlikely that doctors will immediately switch their patients from injected insulin sold by Eli Lilly and Novo Nordisk to Afrezza. Some patients that hate their needles might get switched, but convincing doctors to change the way they think about delivering insulin will be an uphill battle.

The easiest group to capture might be new-to-insulin type 2 diabetics. They typically start with oral medications, such as metformin and Merck's Januvia, but the medications eventually can't control the blood sugar levels. Starting on inhaled insulin would be an easier transition than going directly to an injected medication.

Stay on the sidelines
The time to buy MannKind was earlier this year before it tripled in value. At this point, unless you have very high confidence that MannKind can find a partner with good deal terms, staying on the sidelines is your best move.

MannKind has a good product, but there's just too much risk to justify buying at this inflated price. Wait until the risk is gone or the price falls enough to justify taking on the risk.