It's usually a good sign when a competitor of a company you're invested in struggles. Less competition for customers should result in higher sales.
But when the competitor is struggling for funding, investors should take notice: the lack of investor support could be a bad sign for the industry itself.
Source: Dance Biopharm
Such is the case for MannKind (MNKD +0.35%) after Dance Biopharm told the Securities and Exchange Commission last week that it would not pursue an initial public offering. In April, Dance filed a registration statement that said it hoped to sell shares worth $75 million to help develop its Dance-501 inhaled insulin device.
Why the reversal? Per Dance's registration withdrawal letter filed with the SEC, "The Company is requesting withdrawal of the Registration Statement because it does not plan to file an updating amendment and pursue a public offering at this time."
Well, that isn't particularly helpful.
There are many possibilities as to why Dance might not want to "pursue a public offering at this time," but the most obvious is that it couldn't find investors willing to back the company at the valuation management thought reasonable. Dance Chairman and CEO John Patton owns 43% of the company, so it's in his best interest to secure the least costly capital possible; the higher the valuation of the company at the time funds are raised, the less his stake will be diluted.
At the end of March, Dance had $7.8 million in the bank, so it will likely need to raise cash before completing phase 3 trials for Dance-501. The first trial is scheduled to begin in the middle of next year, so the company has time to find additional cash.
Dance or industry specific?
If investors aren't willing to pony up $75 million because they don't like Dance's technology, that's obviously good news for MannKind's investors. Reading through the IPO prospectus, though, I didn't see anything that looks like a big red flag.
Dance-501 uses liquid insulin instead of powder like MannKind's Afrezza, which should make it cheaper to operate and could reduce lung irritation. In the phase 2 trial, there were only three minor coughs among 535 separate inhalations.
Like Afrezza, Dance-501 reaches peak insulin levels before injected insulins such as Eli Lilly's (LLY +3.30%) Humalog and Novo Nordisk's (NVO +3.84%) Novolog, which helps rapidly bring down blood glucose levels at mealtime and more closely matches the insulin profile in nondiabetics.
Source: Dance Biopharm.
The one downside: the insulin seems to stick around longer than Humalog, which can lead to dangerously low blood sugar levels. While the potential side effect could be controlled by adjusting other medications that lower blood sugar levels, limited data -- the phase 2 trial only enrolled 23 patients -- could be why Dance can't get investors to buy in at acceptable terms. Long-term data on blood glucose levels won't be known until the company conducts a larger phase 3 trial.
More importantly, investors are probably worried about the lack of data on whether doctors will prescribe inhaled insulin. Pfizer's (PFE 1.39%) Exubera was a commercial flop, although the device itself was unwieldy compared to Afrezza's and Dance-501's. Ironically, if Afrezza was already on the market and doing well, doctors' acceptance of inhaled insulin wouldn't be a problem and Dance might have been able to progress to its IPO.
Prove it
You see the lack of investor confidence in Dance's inability to seek an IPO, but also in MannKind's share price, which has dropped dramatically from its post-approval high.
Fortunately, the lack of confidence isn't particularly worrisome for MannKind. As part of its recently signed deal with Sanofi (SNY 1.07%) to market Afrezza, MannKind received $150 million up front, and Sanofi is loaning MannKind up to another $175 million to cover the losses from their partnership until Afrezza is profitable.
MannKind shouldn't need to raise capital in the near future, so the share price in the short term isn't a concern. (And even if it did need to raise capital, billionaire namesake and CEO Alfred Mann can continue to help foot the bill.) If Sanofi and MannKind can prove that doctors are willing to adopt inhaled insulin, investors will come back and MannKind's share price will go up substantially.
And that would make everyone dance.
