Brenton Flynn: We're going to move on to MannKind. Max, what's the big overhang with this story?
Max Macaluso: It's a story I like. I think there are some positives of the company, but there are several overhangs that are really weighing on the stock, and they have for quite a while.
The first, of course, is FDA approval for its inhalable insulin, Afrezza. It's already faced two complete response letters from the FDA, which is never good news. The positive there is that it wasn't due to safety or poor efficacy. It was just that they wanted to change the type of inhaler used in the clinical trial. It went from the MedTone, which was a first-generation inhaler, to a much improved inhaler called the Dreamboat.
Now, after these two rejections they're in phase 3 trials for this new inhaler. That's the first overhang. Before you get your compound product on the market, it has to be approved. Along the way, they've had struggles with cash.
Fortunately, their CEO has been shoveling money into this very generously -- over a billion dollars at this point. Even last quarter, the company was down to a couple million in cash. The CEO swooped in and replenished the credit line there. I think Alfred Mann is really keeping the company afloat. I think he believes in his vision. We have to see if it translates to a reality.
That's the first overhang. The second, of course ...
David Williamson: You see, too, often when a company gets that CRL [complete response letter] and it has to run another clinical trial, it's sort of lost in the woods. Investors in our space love binary events. They love something with momentum. When a company is just running a long, large trial, people just abandon it, basically. They don't want to just park their cash.
Brenton: Yeah, it's dead money because there's not a catalyst coming.
David: I think that's sort of what MannKind is seeing.
Max: But of course there could be more momentum as the next decision nears.
David: Yeah, absolutely.
Max: But long-term, there's another overhang. We all know Exubera; Pfizer tried to commercialize it. It failed after just about a year, due to a few different reasons. Poor marketing was one that was cited as a reason. Pfizer ended up losing $2.8 billion.
MannKind really would benefit hugely by having a Big Pharma partner, but of course no one wants to have egg on their face. At the end of the day, pharma executives are people, and they don't want to lose their jobs. You don't want to make the same mistake that Pfizer made with Exubera, going after MannKind.
David: A $2 billion mistake would definitely cost you your job.
Max: Almost three.
Brenton: I was going to save this for Christmas, Max, but I actually got you an original Exubera inhaler to keep on your desk.
Max: Thank you very much.
Brenton: Yeah, that certainly can haunt investors, when you think about this. This is one of those concepts that's really new.
Max: It's fantastic. It's a very innovative product that could revolutionize the way mealtime insulin is given to patients. Right now, it's injected. An inhalable system would be a lot more convenient. Afrezza is a very small product.
I think it's a cool device. As a scientist, I think it's awesome, but as a shareholder, this is one of the riskiest stocks in the biotech space. If someone does want to invest in it, you could invest with a controlled risk, because you can only lose 100% of your investment.
The gains are questionable. It could be more than 100%, but ... the stock could go to zero, it could go to ...
David: The FDA has been tough on inhalable drugs in the past.
Max: Very tough, yeah.
David: That's another issue.
Brenton: Certainly. To your point, hedging risk, I haven't looked into the options market for MannKind and just how liquid it is, but there's obviously other ways to hedge your risk with biotech stocks. Owning the stock, maybe hedging your downside with some options, too.
Efficacy isn't necessarily the problem with Afrezza, right?
Max: No. As far as I've seen, no. We have to see the results of this latest trial with the new inhalable device, but so far it seems to be a safe device. They just have to make sure they got the trial right this time.
Brenton: Yeah. Looking at the end market here, correct me if I'm wrong, but Type 1 diabetes, required to have insulin, is a much smaller market, although as you progress through Type 2, many times patients are also prescribed.
Max: Right, but actually Afrezza is only a mealtime insulin. Patients who have Type 1 diabetes will need long-acting insulin and may need some mealtime insulin when they eat because they have a big influx of sugar during that time.
Brenton: I guess the question would be, is this the most attractive place to go? Obviously, it's a very speculative bet.
Brenton: There's likely to be huge upside potential, but the Type 2 diabetes space is full of new drugs coming up, largely supported by Big Pharma, so you don't necessarily have that binary event element.
Max: Yeah, there are a lot of different ways to play the diabetes space. You have new oral drugs that are coming out, different classes. I think it's DLP-1, a new class of drugs?
Max: Is it GLP-1?
Brenton: I don't know; I might be wrong. I don't know the acronym.
Anyway, you've got anything from a Novo Nordisk, which dominates and has been one of the best performing Big Pharma stocks...
David: It's pretty focused on diabetes, too, as a company.
Brenton: Yeah, a huge percentage of its revenues.
David: It's basically a pure play.
Brenton: It's essentially a pure play, absolutely, and it's got an element of insulin, it's got some of the Type 2 diabetes products as well. You can go that route if you want the safer ... you're obviously not going to see the multibagger potential there, but the bottom line is diabetes is a growing trend that's not going away. I've seen some incredible statistics on the number of people with Type 2 diabetes in countries like China, so there's huge emerging markets potential, in addition to just potential at home, here in the U.S. and in Europe.
Max: But, just to drive home the point, very risky.
Max: Very risky stock.
Brenton: Absolutely. Cool, guys. We're definitely going to do this again. More roundtables on this topic in particular, overhanging risks. Next up we're going to talk about Big Pharma, and then we're going to do a Wild Card round.
Definitely check back with the Fool as we do more of these "guys talking about stocks" type of discussions. Thanks for watching, and Fool on!
David: Fool on!
Brenton Flynn, Max Macaluso, Ph.D., and The Motley Fool have no positions in the stocks mentioned above. David Williamson owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.