MannKind Is A Better R&D Company Than A Full Service Pharma Company

For almost as long as I have covered MannKind (MNKD) I have always stated that I would rather see this company as a research and development entity than one that is attempting to get into the business of sales and distribution. My opinion on that front became more solidified when it was blatantly apparent that MannKind was really struggling to deliver Afrezza sales numbers that were able to impress the Street or help the bottom line.

The pipeline deal with United Therapeutics (UTHR) gave some new life to the idea that MannKind might be able to shift its business model to something more in line with what I have always seen as the best opportunity for this stock. To that end, MannKind seems to be focusing its more recent presentations to the possibilities of the pipeline, a move which I applaud.

In my opinion, the perfect situation would be one that saw the company essentially sell off Afrezza and make a pronounced shift to the pipeline. To see some flavor on the possibilities with such a move, investors can look to Arena Pharmaceuticals (ARNA). Arena was in a very similar situation to the one MannKind finds itself in. The company developed a drug, got a big partnership deal, saw that partner essentially pull out, and was wallowing along without enough capital and with prospects that were not very compelling. The main difference is that Arena had a more mature pipeline that was closer to seeing new drugs come to fruition than what MannKind has. To make a long story short, Arena essentially sold off the first drug for some upfront cash and a royalty and shifted its entire business to its pipeline. Today, Arena has three very mature drugs in its pipeline and is on the cusp of either partnerships or FDA approval.

The issue here is simple, and it is something that less experienced investors often seem to miss. The Street will place more value on potential than it will on a drug that has a history of poor sales, or even one that is growing, but growing very slowly.

If MannKind were to announce that it had a buyer for the Afrezza franchise, the company could trim back its expenses greatly. If it were able to garner $50 million for the Afrezza move and add another $100 to $150 million with an offering, we would have a company that has a better appearance to Wall Street.

MannKind, as it currently exists, is paying out almost $1 million per week for selling and marketing, and another $200,000 plus in rebates, discounts, returns, etc., whilst paying out just $200,000 per week in research and development. Imagine what could transpire if monies were dedicated to the pipeline rather than attempting to sell a drug that is simply not selling well.

In its most recent presentation at Cantor Fitzgerald, management had to spend time discussing Afrezza, which, in my opinion, is a detraction from the current pipeline possibilities. If one were to look at the presentation in a vacuum, it was quite good. That being said, if one does a little digging (which the big players will do), you start to see the weak spots. Some examples below relative to a milestone checklist of management:

Chart Source – MannKind Corp.

Looking at the chart, it would appear that every goal management has outlined is tracking well. Looking deeper though, we see where there is some weakness. Let’s assess one at a time.

Growth Trajectory Continues With Afrezza

On its face, it is a truthful statement. The problem is that the growth trajectory is not even meeting management’s own stated goals, and is not a trajectory that impresses the Street. In fact, it can be argued that the growth trajectory delivered is getting more costly to support. Management might put a check mark next to the bullet point, but I would characterize this point as incomplete.

FDA Label Change 2017

Indeed, a label change happened. The issue here is that the company did not get everything it wanted, and compounding the problem is that the label change has not really shifted the trajectory on sales.

Completion of STAT

This sounds great, and did happen, but what has the impact been? It was a small study that provides some anecdotal data, but lacks the scope, size, and design to really move the needle in a way that will help the bottom line. It is a study that provides enough positive data to warrant additional studies, but funding those may not deliver the needed value in a reasonable time frame.

IND Filed For TreT and Partnered With United Therapeutics

This is the best accomplishment. I applauded the phase 1 trial of TreT as a smart choice. It was a great candidate with great odds for success. Attracting a partner was a big boost. In my opinion, MannKind did not get all that it could have in the deal because of a lack of leverage, but it does point to the possibilities of Technosphere as having real potential. The check mark in this bullet point is warranted.

Increase Payor Coverage

This is another statement that on its face is true. That being said, the level of coverage is still disappointing. MannKind made a big move in May of this year, but since then the coverage has not had much traction, and despite this better move in May, the sales trajectory has not shifted by very much. Many formularies will be re-established here in October, so this bears watching.

Chart Source – Spencer Osborne (based on data from FingertipFormulary)

In simple terms, Afrezza is on lower level tiers and still carries many restrictions. It will be costly to get onto higher tiers.

Recapitalization (Complete upon UTHR closing)

This bullet point is off of the mark, in my opinion. This company is not near being fully funded. The United Therapeutics deal does provide a couple of quarters worth of cash in the near term and possibly another couple of quarters during the next 2 years. But beyond that, the company still needs cash. Currently the company has some breathing room in until 2021, but it will need to address some substantial debt payments that year.

International Expansion

Management checks this box, but the deals it has established thus far have lacked attractiveness. There was no upfront money for Brazil, and minimal upfront money for India. The company has stated it intends to file for approval in Mexico and Canada. In my opinion, the Brazil and India deal will help the company use up contracted insulin, but will not be a driver of substantial cash making it to the bottom line. The insulin contract with Amphastar is a big burden to MannKind. The company still has to pay Amphastar almost $100 million over the next 5 years. As yet, the company is not able to use all of the insulin it must buy. International deals help use up what would otherwise expire, but until Afrezza can actually help the bottom line, it remains a burden that investors consider.

Of the seven bullet points that the company outlined as complete, five of them relate to Afrezza. Of the three remaining bullet points two relate to Afrezza. Perhaps the most important point that remains is a Co-Promote deal for the inhaled insulin. As yet, the company has not really defined what it means by co-promote, and due to a lack of analyst coverage, has been able to keep that point as undefined. If a co-promote partner were to take over the drug, pay the ongoing trials, absorb the insulin purchase requirements and simply pay MannKind a manufacturing contract and royalty, I think that the Street would celebrate the deal. Even if it was for a relatively small upfront payment.

Simply stated, I like MannKind as an R&D company much more than I like it as a company trying to mount its own sales force, and spending money on marketing, patient management, etc.

The deal with Receptor Life Science could be compelling if something were to actually happen. The cannabinoid sector is hot at the moment. Some of my regular readers have likely already seen some healthy returns of Youngevity (YGYI), a company I cover that is entering the CBD space and working toward a field-to-finish hemp and CBD oil capability. The current problem is that Receptor Life Science is on radio silence and has been for years. If RLS were to break radio silence while that sector is hot, it could provide a compelling move in MannKind stock. That, however, is a big if, but let’s take a moment to assess.

If MannKind were to be able to extract itself from Afrezza costs at the same time that it is able to announce something in the cannabinoid space, it could provide the very best opportunity for the stock to rise, the warrants to get taken out, and even provide for an offering that could raise enough capital to fund bringing some pipeline candidates forward, which could in turn bring in added partners.

Let me make this clear. I am not anti Afrezza. I feel that the product has some compelling attributes that can serve needs within the diabetes space. My issue with Afrezza is that MannKind cannot afford to market the drug the way that it needs to be marketed, and it has some legacy deals (Amphastar – and Deerfield milestones) that will make it difficult for any company to see a quick return on the drug without making a substantial investment into marketing it. That means that such a company would need to minimize its acquisition costs on the rights. If MannKind had hundreds of millions in the bank, and a pipeline that was a bit more mature, it could be worth continuing the efforts with Afrezza. Unfortunately, MannKind does not have that level of cash, and does not have a more mature pipeline.

With all of that being said, MannKind could be a great speculative play on the possibility of RLS alone if RLS gets moving. I am oft asked what would make me bullish on MannKind. The answer is rather simple.

  • Getting fully funded
  • Getting a more mature pipeline
  • Getting out of the sales and marketing business
  • Getting leaner on overhead and more swift on R&D
  • Recapitalizing existing debt and getting a cash stockpile to develop new drug candidates

I know that there are some readers that are full-fledged members of the “Afrezza Army.” Much of what I am saying in this article may be upsetting to those readers. My answer to you is simple. The investment is in MannKind, and not Afrezza. Public companies need to re-invent themselves, grow, and be nimble enough to shift the path when the situation dictates. Some might even say that the best chances to see Afrezza succeed may be in the hands of another company. Do not fear it. Celebrate it.

It is clear that the Street is looking to put money into inhaled solutions. Look no further than Liquidia (LQDA). That company was $11 per share just 2 months ago. Today it trades at nearly 3 times that level. Liquidia is focused on research and development. Liquidia has a story that the Street likes. Liquidia is not (at least not yet) attempting to be a pharma company that takes a drug to approval and then tries to market it alone.

There are many times that I would have been a player in trading MannKind stock. I committed to not buy the stock as long as I was actively writing about it, thus have no shares. In fact, I have never had a position in MannKind. That being said, I have made clear when the opportunities exist to trade this effectively, or even build a longer term position as a speculative play in one’s portfolio. MannKind has had a tendency to be late to the game in many respects, and to box itself into corners on the financial front. These are things that can be repaired, but it takes a bold move on the part of MannKind and a bold move on the part of potential investors and partners.

There is opportunity here for traders as there has always been. There is also more upside speculative potential than has existed in the past. Is MannKind going to rocket to the moon so fast that investors miss out? Not in my opinion. Can it make a substantial pop on the right news? Yes. Investors should not get themselves so hung up on the potential without balancing it with the cash situation, cash commitments, and cash flow. There will be bears that will argue that Technosphere cannot make it and that it is expensive. I do not subscribe to that thesis. What Technosphere needs is funding. In my opinion, the Street could be eager to fund Technosphere programs. What I do think the Street is not eager to fund is Afrezza sales and marketing efforts. That is simply my opinion based on the lack of appetite of the Street to play MannKind stock in a bigger way. If MannKind can re-invent itself, there could be a much more compelling story in the making. Stay tuned!

Disclosure: I am/we are long YGYI, ARNA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.