Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Does Mannkind Offer a Good Risk to Reward Ratio?

By George Budwell - Mar 21, 2014 at 6:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

MannKind Corp.'s regulatory review for Afrezza is close at hand. Does the stock offer a favorable risk to reward profile?

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 ( 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 ( ARNA -1.54% ), Chelsea Therapeutics (NASDAQ: CHTP), and Vanda Pharmaceuticals ( VNDA -1.26% ), 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. ( DVAX -3.90% ) 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.    

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MannKind Corporation Stock Quote
MannKind Corporation
MNKD
Arena Pharmaceuticals, Inc. Stock Quote
Arena Pharmaceuticals, Inc.
ARNA
$53.65 (-1.54%) $0.84
Dynavax Technologies Corporation Stock Quote
Dynavax Technologies Corporation
DVAX
$15.52 (-3.90%) $0.63
Vanda Pharmaceuticals Inc. Stock Quote
Vanda Pharmaceuticals Inc.
VNDA
$15.99 (-1.26%) $0.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.