MannKind (NASDAQ:MNKD) has placed all its bets on a single diabetes treatment that can be viewed as a game changer. Its success in the future depends entirely on its inhaled insulin Afrezza, which is an insulin powder that can be loaded into an inhaler to treat adults with type 1 and type 2 diabetes. If it is approved, it will be the first such treatment and has the potential to completely replace insulin injections. The treatment costs only around 10% to 15% more than insulin injections and could significantly improve the lives of diabetes patients. Earlier, the FDA rejected the product twice asking the company to perform two more clinical trials to establish the efficacy.
The company has just completed two Phase 3 trials, and the better than anticipated results showed that Afrezza came out favorably in comparison to both injected insulin and oral treatments. The first trial showed that the efficiency of Afrezza was comparable to the injected insulin NovoLog from Novo Nordisk's (NYSE:NVO). The second trial showed that Afrezza was more effective at reducing the levels of blood sugar than the existing oral therapies. MannKind is the only remaining pharmaceutical company to work on inhaled diabetes treatment after other major companies such as Novo Nordisk/Aradigm and Alkermes/Eli Lilly gave up years ago. The complete data from the clinical trials will be submitted to the FDA in the fourth quarter.
The potential of Afrezza
Though the price of the stock has been up almost 200% because of the expected positive result of the trials, the stock had to give up some of its gains. However, this could be a short term phenomenon because of the sales potential of the product. There are questions about the data from the trials about areas such as design and insufficient disclosure of data, which have raised questions about the eventual success. Type 1 diabetes, also known as juvenile diabetes, is a condition in which the pancreas produces little or no insulin, and is generally caused by genetics or exposure to certain viruses and little can be done to prevent it. However, if one condition can be prevented or delayed, it is type 2 diabetes, which is a prolonged disease where the affected person's pancreas doesn't produce enough insulin or when the body can't process the natural insulin it produces, thereby affecting blood glucose levels. Today 90 to 95% of the reported cases of diabetes are of this type, and diabetes can lead to a myriad of other conditions such as heart and kidney diseases. 370 million people suffer from the condition globally, and Asia now accounts for something like 60% of them.
Though the next step in the process is to secure FDA approval, the main challenge lies in successful commercialization. Think back to Pfizer (NYSE:PFE) earlier this decade and its insulin inhaled drug Exubera, on which the company lost in the region of $3 billion because sales did not take off. The device was simply too large, and insurance companies refused to pay for it so that it became too expensive for patients to pay for it on their own. Mannkind has addressed these problems for Afrezza by making the device small enough to fit into the palm of your hand and pricing it to be affordable in comparison to insulin. The number of diabetics worldwide is expected to cross 500 million by 2030, and the global diabetes treatment market is expected to touch $32 billion by 2018.
The company reported a loss of $0.16 per share for the second quarter which was lower than the $0.23 per share for the same quarter of the previous year. In July, the company made an agreement with Deerfield Management Company, which is a leading investment management firm that has a reputation for healthcare investment. MannKind will receive four tranches of $40 million each totaling $160 million. The agreement will add $99 million to the company's resources this quarter. $40 million can be converted into stock, but this will not amount to a significant dilution. The company has also disclosed that it has retained Greenhill & Co to assist in the review of, and negotiations with, future marketing partners. Greenhill & Co is a leading and well known investment bank which has been involved in many business relationships regarding healthcare.
What the analysts say
Zacks has reaffirmed its "neutral" rating and placed a target price of $7.25 on the stock, and Piper Jaffray Cos has reiterated it as an "overweight". Earlier analysts at MLV Capital increased their price target from $6.00 to $8.00 and placed a "buy" rating on the stock. Analysts have a mean price target of $8.16 and a median price target of $8.50 with a high of $11.00 against the current price of $5.78.
It goes without saying that early stage drug development companies are high risk investments because there is no certainty of FDA approval, and the prices could be long and convoluted. Moreover, the risk factor in the case of MannKind is heightened by its dependence on a single product, Afrezza. There is no doubt that the diabetes treatment market offers enormous potential but you should buy this stock only if you have the appetite for the risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.