Does Mannkind Offer a Good Risk to Reward Ratio?

It seems there is never a dull moment in the health care sector. On nearly a daily basis, some company is soaring to new heights or sinking like a stone. And most of the really big moves in the sector, up or down, are tied to a pivotal regulatory event. With MannKind's (NASDAQ: MNKD  ) briefing documents set to be revealed next Friday, March 28, followed by the all-important Advisory Committee meeting on April Fool's day, you may want to carefully consider the stock's risk to reward profile around this binary event. With this goal in mind, let's consider the prior outcomes for three biotechs, Arena Pharmaceuticals (NASDAQ: ARNA  ) , Chelsea Therapeutics (NASDAQ: CHTP  ) , and Vanda Pharmaceuticals (NASDAQ: VNDA  ) , that were facing comparable situations in the not-so-distant past. 

Why Arena, Chelsea, and Vanda may shed light on MannKind's future
I didn't choose these three companies randomly for comparative purposes. Instead, I think they offer some unique lessons for MannKind investors for a couple of reasons. First, all three companies were in positions heading into a key regulatory event for their flagship clinical candidate similar to what MannKind is looking at today. For example, these three companies saw their share prices rise in dramatic fashion ahead of their regulatory events, and each was highly dependent on a positive outcome to keep from dropping equally quickly. Given their notable similarities, I wanted to retrace the performance of each companies' stock immediately before and after their respective regulatory decisions and see what lessons can be learned ahead of MannKind's pending review. And finally, I wanted to explore how each company's stock has performed since its regulatory decision was handed down. 

Stock performance surrounding and after a binary event
Arena shares jumped another 28% the day Belviq was approved, despite rising several fold leading into the drug's approval. Yet this gain was short-lived. Arena shares have now dropped 45% from their post-approval highs. Turning to last month's approval of Northera and Chelsea Therapeutics, the company's shares popped 26% upon approval. Since then, Chelsea's shares have been particularly volatile, but are only down slightly from their post-approval highs. Vanda Pharmaceuticals is the oddball of the group. Upon news that its drug Hetlioz for non-24hr disorder was approved, shares actually sank by 16%. However, Vanda's shares are now up 38% since the drug's approval in January. Overall, these empirical examples paint a mixed picture for the prospects of biotechs like MannKind heading into a major regulatory decision. 

One thing is certain -- risk
Although the historical cases mentioned above show the difficulty of assessing potential upside around a binary event, the downside risk should be evident. As a reminder, Dynavax Technologies Corp. (NASDAQ: DVAX  )  dropped by nearly 60% in a single day when its lead vaccine candidate Heplisav was rejected by the U.S. Food and Drug Administration. Shares ultimately fell around 68% from their former highs. What's important to understand is that this is a common type of market reaction when a developmental biotech fails to gain approval for a top clinical prospect. Arena Pharmaceuticals, for example, saw a similar type of drop after Belviq was rejected in its first regulatory review. And Chelsea fared only slightly better when Northera was rejected in 2012. 

Foolish final thoughts
MannKind has been a tremendously volatile stock over the last two years, illustrated by the chart below. My view is that this roller coaster type action reflects the regulatory and commercial uncertainty surrounding Afrezza. 
 

MNKD 1 Year Total Returns Chart

MNKD 1 Year Total Returns data by YCharts

Looking at Afrezza from a commercial perspective, experts have suggested that the drug could see peak sales of anywhere from $1.5 to $2.5 billion if approved. Even so, MannKind does have problems with its fundamentals. Specifically, the company has been burning, on average, $11.5 million per month lately, giving them only about five months of runway remaining. If Afrezza is approved, MannKind will therefore need to either partner immediately or raise a large sum of money. Overall, I think the commercial overhangs surrounding Afrezza will limit any post-approval 'pop.' A rejection, on the other hand, will undoubtedly see MannKind shares fall in dramatic fashion. As a risk-adverse investor, my view is that it's probably best to remain on the sidelines until the regulatory and commercialization risks have been taken off the table.    

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 21, 2014, at 10:09 PM, mbracket123 wrote:

    What was your point? Your comparisons have negative correlations and so have no meaning with respect to what MNKD will do. Of course, any company with a binary event is high risk/reward. How you figured that on approval MNKD will only have a minimal potential upside is completely unsubstantiated. Enjoy your $300 writing fee - you were overpaid.

  • Report this Comment On March 22, 2014, at 5:38 AM, noelnavarro wrote:

    This is a classic example of "fallacy of correlation". You listed examples of bio-tech companies that did not perform very well after a binary event, and you are concluding that since MNKD is also facing a binary event they will therefore have the same outcome. I could just as easily come up with a list of bio-tech companies that performed well after a binary event and come up with an opposite conclusion from you. This is of course dumb because one does not cause the other, a binary events does not cause stock price decline.

  • Report this Comment On March 22, 2014, at 9:57 AM, theeseer wrote:

    If you are going to comment on the Pharma sector you should have at least some acquaintance with the science involved because the "binary event" is tied to that. Your analysis is therefore largely worthless from an investing perspective as your point about waiting for the event to be over could be said about any earnings or personnel event for any company. By the time you wait for a safe entry on this stock the train will have left the station and you will be left wishing you did real due diligence which clearly shows that the science is strong and the medical community that has published opinions is overwhelmingly positive.

    Next your point about limits on the upside is absurd. The diabetes market is one of the largest and fastest growing segments of the healthcare market. MNKD is ready with a factory and inventory their debt load will be mitigated by a partnership with a distribution company that undoubtedly will be announced after approval. Are you even aware of the fact that Exubera an inhaled insulin was and is approved and Afrezza is a far better version with a far better and small delivery sytem that was the focus of the FDA 3 trials? Are you aware that all "end points" were met? Do you know what an "end point is"? Stick to companies that make something that you can understand before you advise people to miss the best opportunity since Netflix.

  • Report this Comment On March 22, 2014, at 12:23 PM, marp11 wrote:

    fools perfect name

    ps

    please stay short ARNA just till DTC TV starts in 2-4 weeks

    Thanks

  • Report this Comment On March 23, 2014, at 1:38 AM, b4unewme2 wrote:

    Can anyone please tell me how I can become a contributor for Motley Fool? I thought you had to have some specialized or expert knowledge. This article proves that assumption is wrong.

  • Report this Comment On March 23, 2014, at 9:11 AM, larryw101 wrote:

    Another worthless article from a real FOOL at Motley.

    Thanks for wasting my time. Where is this author

    s credentials? Oh wait, he has none.

    Motley has become garbage journalism and this is a perfect example as to why.

    With articles like this Motley is going on my IGNORE list. Motley Fool has no credibility left in the area of financial journalism. It's pure garbage written by know-nothing authors for their penny a click commissions.

  • Report this Comment On March 23, 2014, at 10:59 AM, jonny80s wrote:

    Affrezza is a a money maker for Mannkind, but that is not the whole story. The real money maker is technosphere. If Affrezza get's approved technosphere gets approved..... and all big pharma pay Mannkind to reformulate their drugs for technosphere delivery in effect re-upping their control of their respective drugs. The sky is the limit on this one.

  • Report this Comment On March 24, 2014, at 12:45 AM, peterh60 wrote:

    What a dumb article. Any investor in this area knows the key is diversification across binary events. Also one must evaluate each company individually, not against a list of essentially unrelated enterprises in different markets. One thing we know about Motley Fool staff writers is that the key for them is not intelligent or even honest evaluation, but keeping their tenuous jobs by never really saying anything.

  • Report this Comment On March 24, 2014, at 2:20 PM, WCoastGuynCA wrote:

    Buy a few shares of Amarantus Bioscience ,$AMBS, under a dime and hold them for six months. The company is developing a test to detect early stage Alzheimer's with Becton Dickinson.

    The company's patented drug, MANF, alrady has three orphan indications that could make it worth billions. Due diligence.

    Twitter: @AmarantusBio .... 9,612 followers

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