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MannKind Co (MNKD), the Valencia CA based development-stage biopharmaceutical company, stock had been on a tear this year, up almost 195% YTD. The rise was due to expected positive news on Afrezza, the company's inhalable insulin powder for controlling diabetes that is in two late-stage clinical trials. And the good news did come on Wednesday August 14th when the results from both Phase III studies were announced. Then the old adage "buy on the rumor sell on the news" appears to have kicked in, and the stock has since given back over 22% of its value. However, the dip could be short lived as the potential sales for this inhalable diabetes drug could be in the billions.

Diabetes Rates Continue to Rise Globally

Type 1 diabetes, or juvenile diabetes, is a chronic condition in which the pancreas produces little or no insulin, and is generally caused by genetics or exposure to certain viruses, and there is little one can do to prevent the disease. However, if there's one disease that doctors say can for the most people be prevented or delayed its type 2 diabetes, once known as "adult onset diabetes, a chronic disease that occurs when the pancreas does not produce enough insulin or when the body cannot effectively use the insulin it produces. Today 90 to 95% of the reported cases of diabetes are type 2. And diabetes can lead to a myriad of other ills such as heart disease, kidney disease, stroke, blindness, limb amputation, and the list goes on. 370 million people worldwide suffer from diabetes, and the World Health Organization (WHO) projects that by 2030 diabetes will be the 7th leading cause of death.

Globally, diabetes accounted for an estimated 12% of health expenditures in 2010, which roughly in dollars was $376 billion, and that number is expected to rise to $490 billion in 2030. Asia now accounts for 60% of the world's diabetic population, due to the rapid economic development, urbanization, and transitions in dietary changes. In 1980, less than 1% of Chinese adults had the disease, twenty years later the number reached nearly 10%, and now it is estimated that 92 million Chinese adults have diabetes, and another 148 million are prediabetic. China has now overtaken India as the global epicenter of the diabetes epidemic.

Though age, family history, and even ethnicity plays a role in type 2 diabetes, If one maintains a normal weight, eats healthy, and exercises regularly the odds of developing type 2 diabetes diminish significantly, or at lease delayed. Unfortunately, for the masses, human nature does not seem to take the healthier approach in preventing, delaying or reversing type 2 diabetes, therefore until that time comes people with type 2 diabetes will be treated with medication. Until now, during late stages of type 2 diabetes, when the pancreas can no longer produce insulin, the diabetic would have to take insulin injections. That all may be changing as a number of companies have been developing other methods of delivering late stage diabetes medicines, including MannKind.

MANNKIND'S NEW INSULIN INHALER SHOWS POSITIVE RESULTS

On August 14th MannKind announced, as expected, positive results from the Phase III studies, for both type 1 and type 2 diabetes using Afrezza, the company's flagship drug, an inhalable insulin powder for controlling diabetes. The results found patients taking Afrezza in combination with metformin, with or without another oral medication, experienced significant reductions in A1C levels compared to patients taking only oral therapy. Over a 24-week period, the A1C level for patients saw mean A1C level reduction of 0.82%, while the mean A1C level for patients taking only oral medication dropped 0.42%. Which means that Afrezza, delivered via an inhaler, was more effective in controlling diabetics' blood sugar levels when combined with oral diabetes medicines compared to oral drugs alone.

CEO Alfred Mann, whose company has spent over six years working on getting its inhaled form of insulin on the market, commented on the results. "Based on the results of this study, we believe that Afrezza can be used to improve glycemic control in insulin-naive Type 2 diabetes patients that are not adequately controlled on conventional oral medications - a potentially large and underserved patient population."

MANNKIND MUST MEET THE CHALLENGES THAT STILL LAY AHEAD FOR AFREZZA

While the next step is to gain regulatory approval for Afrezza, the challenges for the drug are far from over, with the main challenge being to successfully commercialize Afrezza. And that might not be such an easy task, as Pfizer (PFE) found out in 2005 when the company lost somewhere around $3 billion on its then insulin inhaled drug Exubera as sales never materialized. Pfizer bet on the idea that diabetics would rather inhale their medicine than inject it, and they are probably correct. However, the bulky size of the device became a hindrance, and worse the Insurance companies refused to pay for Exubera, citing it didn't work for many patients, thus the cost became too high for most patients to cover on their own. Afrezza has addressed the size issue by making the device small enough to fit in the palm of one's hand. Secondly it is expected that Afrezza will be priced competitively to other insulin products.

MANNKIND NEEDS A PARTNER

The other challenge is that MannKind does not have the sales and marketing infrastructure or financial arsenal to commercialize the drug on its own, therefore MannKind will need a partner. Graig Suvannavejh, analyst at MLV & Co, who estimates U.S. and European sales of Afrezza could reach roughly $3 billion by 2025, sees potential partners as Novo Nordisk (NOV), Sanofi (SNY), Bristol-Myers Squibb (BMS), Merck & Co (MRK), Eli Lilly, and Johnson & Johnson (JNJ), all major players in the diabetes drug market. Mr. Suvannavejh also commented that the success of the drug could depend on the commitment that a partner is willing to undertake. "I think it really will depend on who the exact partner is, as this product is going to require a lot of education, a lot of heavy lifting."

While Mr. Mann, has mentioned that the company has been in discussions with potential partners, I think that Novo Nordisk would be a good fit for the product given that Nordisk does have a strong presence in the diabetes drug market, though I would also think that an Asian company, like the giant Japanese Pharmaceutical company Eisai (OTCPK:ESALY) would also be a good fit given that Asia has the largest number of diabetics in the world. Therefore, perhaps to be a successful product MannKind will court a number of larger pharmaceutical companies to license the drug in various countries. And given the potential of the product, these license fees could amount it upfront fees of $2 to $2.5 billion.

The company has stated earlier that it plans to resubmit the New Drug Application for Afrezza in October, and expects approval sometime in 2014. And though the stock will rise or fall on Afrezza the company is developing three other drugs, two for cancer and one for diabetes. And while two of the drugs appear to be in the development stage the third, an immunotherapy platform MKC-1106 is currently being evaluated in a phase 2 clinical trial for patients with advanced melanoma.

LOSSES HIGHER THAN EXPECTED AT MANNKIND

MannKind, has a market capitalization of $2.05 billion. The company posted a second quarter net loss of $0.16 per share shaving $.07 off the $0.23 loss from the second quarter 2012, however above Zacks estimate of a loss of $0.15 per share. On August 14th Zacks reaffirmed its "neutral" rating and placed a target price of $7.25 on the stock. On August 14th Piper Jaffray Cos reiterated an "overweight" on the stock. Earlier, on June 27th analysts at MLV Capital raised their price target from $6.00 to $8.00 placing a "buy" rating on the stock. MannKind stock closed down over 12% Thursday August 15th to $6.64, as heavy trading volume continued. On Wednesday and Thursday over 60 million shares changed hands and the stock has shed 20% of its value.

CONCLUSION

The number of diabetics worldwide is projected to cross half a billion by 2030, and the global insulin market is expected to reach $32 billion in 2018. That is tremendous market potential for a new diabetes drug. But, as has happened in the past, a new product needs to be marketed and priced properly, as the competition is stiff. If MannKind tries to market Afrezza alone I would be rather skeptical on the stock. However, if MannKind does indeed find a partner, or partners in one or a number of the global pharmaceutical companies who can spend the time and money market the drug I can see the chances of success skyrocketing, and the stock would be cheap at these levels. I do like the stock and I like that the stock has dipped over 20%, giving it a better entry point for investors.

Source: MannKind's Phase III Diabetes Drug Results Should Continue Its Upward Trend