Is This MannKind's Biggest Risk?

Shares of MannKind have soared ever since the company received a positive Advisory Committee vote for its inhaled insulin product. Are investors overlooking this critical risk factor?

Jun 19, 2014 at 7:59AM

Shares of clinical-stage biotech MannKind Corp. (NASDAQ:MNKD) have skyrocketed by 51% over the past month, catalyzed by a positive Advisory Committee vote for the company's inhaled insulin product, Afrezza. Since then, a contentious debate has broken out between bulls and bears on whether this rally is driven by fundamentals or emotional speculators. 

MNKD Chart

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The bull thesis centers on a large and growing diabetes market that already sports two megablockbuster insulin products by Eli Lilly and Novo Nordisk.

By contrast, the short thesis primarily revolves around Afrezza's potential market share and its use in the real world. Namely, shorts are suggesting that Afrezza will be relegated to a specialty niche within the diabetes market, falling well short of blockbuster status as a result. 

Whether you are a bull or a bear, I think there is an even more critical risk factor for MannKind's growth prospects that is only now starting to be fully appreciated. 

MannKind's partnership could be a defining moment for the company
MannKind's management has repeatedly stated that it plans on partnering for Afrezza because the drug will require a substantial sales force to market properly and an educational effort to communicate the benefits of the product to medical professionals.

And by its own admission, MannKind presently does not have the cash to launch this product on their own at this time. In fact, MannKind's management has stated that they only have enough cash on hand to get through Afrezza's target Prescription Drug Fee User Act date of July 15. 

Although we've heard that MannKind is in ongoing discussions with potential partners, I think there are some key issues investors should consider going forward. First and foremost is the issue of how a partnership would be structured.

The problem is that MannKind's dwindling cash position puts it in a position of weakness at the negotiating table. Simply put, large pharmas know that MannKind would have to resort to major dilutive financing in order to market the product alone at this point, and this issue will likely be used as leverage when putting together a deal. Indeed, this is why many developmental biotechs try to get a deal done during the research phase if they are bent on partnering.

What might a deal look like?
I don't think it's a secret that MannKind needs and wants the deal to be front loaded with milestone payments -- and a double-digit royalty base would be nice as well. If they are unable to get a hefty milestone payment upfront, for example, they will have to raise additional funds to continue their operations without an interruption.

Large pharmas with extensive experience in the diabetes market, however, may not be willing to give MannKind what it desires. Besides the fact that MannKind is in a position of weakness from a financial standpoint, I don't believe the industry is sold on the commercial potential of an inhaled insulin for a few reasons.

First off, I suspect this is the case because large pharmas haven't pursued their own inhaled products since the Exubera calamity that cost Pfizer $2.8 billion. Second, we haven't seen any interest from the industry in terms of either a possible takeover or a even a partnership with MannKind. 

The bottom line is that a deal at this point would probably focus more on sales targets for Afrezza and may not include milestone payments for development. Deals that include milestone payments for regulatory and clinical achievements are usually signed prior to approval, not after. And this issue may be the reason why MannKind hasn't accepted an offer from one of its negotiating partners as of yet.   

Foolish wrap-up
MannKind shareholders have been handsomely rewarded by their faith in the company so far. The key issue going forward, however, is likely to be the details of a partnership. Perhaps we'll see another twist to this tale with a lucrative partnership or maybe we'll see the company decide a go-it-alone approach is best. Nonetheless, until the details of Afrezza's commercialization are known, I think it's difficult to properly assess the company's value moving forward.   

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