The long and meandering regulatory pathway for MannKind's (NASDAQ:56400P706) inhaled insulin product Afrezza may be close to its journey's end after two overwhelmingly positive votes by the U.S. Food and Drug Administration's, or FDA's, Endocrinologic and Metabolic Drugs Advisory Committee yesterday. To recap, the committee voted 13 to 1 in favor of Afrezza for type I diabetes, and voted 14 to 0 for type 2 diabetes. The panel's decidedly favorable view of Afrezza is somewhat surprising because an FDA reviewer raised several concerns over missing data, modest efficacy, and an imbalance of lung cancers in the briefing documents. Indeed, the market certainly feared the worst after the documents were released last week, as MannKind shares dropped over 35% in short order. Although the FDA doesn't have to follow the recommendation of the panel, it usually does. So, MannKind investors may be in for more good news on or before April 15, which is Afrezza's target PDUFA action date.
What's particularly interesting is that this the second time already this year that the FDA has released briefing documents that appeared to contain major hurdles to a drug's approval, only for the advisory committee to vote strongly in favor of approval. As a refresher, Chelsea Therapeutic's anti-fainting drug Northera looked dead in the water after the briefing documents openly recommended the drug be rejected because of deficiencies in the clinical trial design and execution. Yet, the advisory committee ended up voting 16-1 in favor of Northera, with it receiving final approval from the FDA soon thereafter. If past is prologue, Afrezza may thus get the green light from the FDA for both type 1 and type 2 diabetes within the next two weeks.
In after-hours trading following the positive vote, MannKind's shares rose approximately 110%, giving the company a market cap exceeding $3 billion. Previously, I discussed how post-approval trading patterns for biotechs like MannKind are notoriously hard to predict, and this case looks to be no different. The foremost issue is the large number of unknowns facing MannKind and its inhaled insulin product going forward. While final approval appears to be likely after such a strong recommendation by the panel, my view is that the market is going to want clarity on the commercialization front soon. Specifically, MannKind's management has made it clear that they intend on partnering for Afrezza. As MannKind currently lacks the resources to take a go-it-alone approach toward marketing Afrezza, the near-term prospects for MannKind's shares may depend on how a partnership is structured.
Possible issues holding up a partnership
First and foremost, I believe the peak sales estimates of Afrezza could be a sticking point in the negotiations. Almost immediately after the news broke yesterday, Bloomberg reported that three analysts they had polled estimated 2018 sales of $534 million. If this estimate turns out to be a starting point in negotiations, you can see how a big pharma may not be particularly inclined to ink a deal that is front-loaded with large milestone payments. And MannKind could counter that such estimates are too conservative given that Novo Nordisk (NYSE:NVS) and Eli Lilly's (NYSE:LLY) injected insulins garnered a combined $5.6 billion in sales last year, according to Bloomberg. Put another way, the Street is saying that Afrezza will be a specialty niche drug compared to Novolog and Humalog, whereas MannKind's management may hold an entirely different opinion altogether. Time will tell how this issue plays out. However, if you believe the market is a predictor of future performance, it's worth noting that this news didn't move the needle on shares of either Novo Nordisk or Eli Lilly, suggesting that the market may not believe that Afrezza will be a major competitor in the insulin space.
With the regulatory smoke starting to clear, the fog of commercialization is surely to set in on MannKind's near-term outlook. Looking ahead, you can rest assured that the bulls and bears will debate this issue until they're both blue in the face. In short, I think the only certainty following this positive advisory committee vote is that MannKind shares will continue to be volatile moving forward. As such, I believe risk-averse investors may want to remain cautious given that the market assigned the company a $3 billion plus market cap in after hours trading, and Afrezza's commercial prospects may not be able to support this lofty valuation, at least in the near term. Given the twists and turns of MannKind's tale, however, I wouldn't be surprised if Afrezza once again proved its detractors wrong.