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Is This MannKind's Biggest Risk?

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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Read/Post Comments (13) | Recommend This Article (9)

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 June 19, 2014, at 9:01 AM, fuzzface52 wrote:

    Another BS article from the Motley Fool. The actually lied in this article by saying that Mankind management has said they only have enough cash through the July 15th FDA approval date. That is an outright lie. In the Wells Fargo conference just 2 days ago Mankind management said they have plenty of funding to cover them and that cash is not a worry for them. So why does this author lie? He said he has no position in the stock and that MAY be true but that does not mean this author is not a Paid Mouthpiece for the Shorting cause on this stock. As the shorts are so worried at this point in time (less than one month away until approval) that they are pulling out all the stops to keep this stock from running away with all of their money! I will laugh my butt off what that happens and I will be sure to write back to this author to let him know what I think of his biased reporting. You should do the same.

  • Report this Comment On June 19, 2014, at 9:07 AM, theeseer wrote:

    What a suprise another "hit piece" on MNKD only this one takes the prize for being inaccurate!! MNKD is actually sitting with ample cash to complete the partnership negotiations and has a ready market waiting for the product. Anyone who takes the time to listen to the ADCOM live testimony will hear prominent diabetes specialist Doctors and patients from the trial pleading for the drug. One female Doctor with a very large female patient list pleading for her pregnant patients. Since Afrezza is the fastest acting insulin all emergency rooms in the world will stock it for those brought in who need insulin NOW! In short this is a blockbuster and the Motley Fool has put its reputation on the line with numerous negative articles and now even though they concede approval the short squeeze on approval of 65 million shares short will be a disaster for traders that pay attention to such an irresponsible article and likely the success of MNKD will be en event that will leave the Motley Fool's reputation in tatters.

  • Report this Comment On June 19, 2014, at 9:19 AM, jenksbob wrote:

    really? What utter horse manure. Motley Fool is getting as bad as Seeking Alpha for allowing its writers to publish poorly informed speculation and presenting it as fact.

  • Report this Comment On June 19, 2014, at 10:16 AM, forfund wrote:

    You have mentioned in this article that you don't have enough money to pay for rent this month

  • Report this Comment On June 19, 2014, at 10:32 AM, missjessiecat wrote:

    I believe that MNKD will sign an attractive partnership agreement b/c the big boys will be competing to partner up with MNKD. They all need future sources of revenue and profits and this is one big opportunity for the winner.....Yes, I'm heavily invested in MNKD for all the same reasons that all the big boys will need to be!

  • Report this Comment On June 19, 2014, at 11:48 AM, fortunateone wrote:

    This is getting ridiculous, I agree w fuzzface52, it's amazing the number of misleading articles from truth-bending shock-jock "writers" that Motley Fool allows to be published. Yes, the only place you can find more negative, completely BS articles on MNKD is prob Seeking Alpha, followed closely by the Street (run by a bunch of guys who speculated wrong on MNKD and would rather die with foolish pride than admit error, join in long and take some profits).

    Mannkind will make a very healthy profit for anyone wishing to invest and wait out the next few weeks, ignoring the bogus articles trying to scare you off your shares. If you choose to listen to these "short Mannkind"-authors, you are indeed the fool.

  • Report this Comment On June 19, 2014, at 2:05 PM, ASAL223 wrote:

    Have you ever read what an injection does, and multiple injections do to your skin? T2 's have to inject themselves from 1 to 4 times a day multiply that by 365 days a year. Once afreeza hits the market, and diabetics that are injecting themselves find out that they can reduce the amount of injections by more than 50% don't you think they will ask their doctors for afreeza ? Even If i wasn't long on this stock I would hope and pray that the FDA, MANKIND and the investment community get this to market. Go and read some of the diabetic blogs and websites, see what diabetics have been suffering through, costs of insulin skyrocketing, unable to use the vial before it expires because the company's wont package it in smaller amounts, the need to refrigerate insulin, the problems with the slow acting insulin ( which is what is more widely prescribed afreeza is an ultra rapid acting insulin) the weight gain with insulin the hardware such as needles alcahol pads and all the associated costs for testing and injecting

    3 - 4 times a day. People who are on limited funds or poor insurance skip meals so they wont have to inject themselves so as to save on hardware and insulin costs.

    I know people that are on insulin and the pump and when I started doing some research on this to think that this may be able to bring a better life to millions of people, feels good to invest in this not only for possible gains.

  • Report this Comment On June 19, 2014, at 2:37 PM, kthor wrote:

    the more the lies, the more the un-educated would sell depressing the stock, the more you should buy now than later! lol

  • Report this Comment On June 19, 2014, at 2:38 PM, b4unewme2 wrote:

    The author has provided an editorial, completely void of actionable information. Whenever an article is filled with words/phrases like: "I think", " it might", "I suspect", "may not", "may be", and "perhaps", then just move on. From an investment perspective, whether the article is bullish or bearish, the author has pretty much wasted your time.

  • Report this Comment On June 19, 2014, at 4:37 PM, electraveler wrote:

    All the diabetics I have talked with (many since I supply components to glucose meter makers) really want to try Afrezza so I'm sure even with some warnings on the label diabetics at risk will ask their doctors to advise on the real risks to themselves.

    Regarding a marketing partner, I'm confident the major hold up now is any major pharma is trying to lock in a "first right to purchase" of Mannkind along withas favorable of conditions they can get - the hold up is likely Alfred Mann holding out for extremely favorable terms..................I truely believe that MNKD will be bought with 24 months for $30-$40 per share

  • Report this Comment On June 20, 2014, at 10:43 AM, downwithpumpers wrote:

    George, reading the response to your article I believe your question has been answered. 100% emotional speculators.

  • Report this Comment On June 23, 2014, at 3:11 PM, Kimamarie wrote:

    Mnkd could sell the European rights to afrezza and use this money to start U.S. MFN and Mrk

  • Report this Comment On June 27, 2014, at 7:04 PM, larryw101 wrote:

    Another worthless Motley Fool article.

    Motley Fool = Garbage Journalism

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George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

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