We at Maredin Capital Advisors realize that investing in a Biotech is unusual for a self-described "value investing" shop. However, in this particular case, we believe MannKind is an exception.
We have owned shares in MannKind for the better part of 6 years and have endured quite a bit of volatility in the process. Nevertheless, while the price movements have been dramatic, the central thesis has not changed. In short, we believe our patience will ultimately be rewarded.
THESE MATERIALS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN MAREDIN CAPITAL ADVISORS OR ANY OF ITS AFFILIATES. AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO A DEFINITIVE SUBSCRIPTION AGREEMENT BETWEEN MAREDIN CAPITAL ADVISORS AND AN INVESTOR.
The information contained herein reflects the view of Maredin Capital Advisors as of the date of publication and serves as an opinion. These views are subject to change without notice at any time subsequent to the date of issue. Maredin Capital Advisors has an economic interest in the price movement of the securities discussed in this thesis, but Maredin Capital Advisors' economic interest is subject to change without notice. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trademarks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from Maredin Capital Advisors.
MannKind Corporation: One Large Step for Shareholders, One Gigantic Step for Diabetics
MannKind is a $1.4B biotech company focused on two key areas of treatment: Cancer and Diabetes. MannKind consists of a delivery technology (Technosphere), a drug pipeline consisting of two promising early stage cancer therapies, and a soon-to-be-approved drug called AFREZZA. Since MannKind's near-term future is largely tied to their ground-breaking inhalable combination drug/delivery device (AFREZZA), this is what we will focus on.
AFREZZA has the potential to become a major blockbuster, potentially surpassing the likes of Lipitor (>$13B/year) and Plavix (>$7B/year). Our average estimate puts MannKind's value at ~$70/share or approximately 14x the current price. While this may seem exorbitant, or doubtful, our research supports the above estimate due to a combination of the current and growing size of the global diabetes market, and resulting market share capture based on the two pillars of our AFREZZA thesis: superior pharmacokinetics/efficacy and convenience.
Over the past several years investors have been distracted by a lot of "noise" surrounding AFREZZA. Though some of the concerns were real, it's no longer so, and yet it continues to haunt the company. Some of the concerns raised cross the spectrum from investor fatigue from FDA uncertainty, overblown fears of dilution/capital raises, complexity of the business which easily confuses both longs and shorts, and the lack of a partner. This is why the shares are trading at such depressed levels today. The key to resolving this is simple: focus on the facts. We will attempt to address the facts in this report and show why MannKind is so undervalued.
There are over 370 Million diabetics in the world today. This figure is rapidly growing and diabetes is already an epidemic. AFREZZA's pharmacokinetics/efficacy has demonstrated over numerous trials (involving 5,000+ patients) that it offers clear benefits over current best-in-class treatments. This alone will give AFREZZA considerable market-share.
While the pharmacokinetics/efficacy is a key pillar of the thesis, our largest conviction is how significantly the market is underappreciating the magnitude of disruption that AFREZZA's convenience will have with diabetics in the real world (no needles or titration needed). Combined, AFREZZA has the potential to be the best selling drug in history.
To exemplify our view, we will invoke Einstein's wise dictum "invert, always invert" - to pose a question: If inhalable insulin was invented first and another pharmaceutical company developed an insulin treatment whose key differentiation was that it was injectable, how many people would switch?
Our research could not be any clearer: virtually none.
Thankfully the story of AFREZZA is not limited to simple convenience over current best-in-class insulins but also consists of significant improvements in Pharmacokinetics and Efficacy. This will lead to better overall health for diabetics, lower costs to the entire healthcare system, and make AFREZZA a blockbuster. We will cover this in-depth in the report.
MannKind was founded by Dr. Alfred Mann in 1991 but only took its current form after Dr. Mann merged three companies he owned. In 2001, MannKind purchased the Technosphere technology from Solomon Steiner and went public in 2004 with a small $70M offering. Since that time MannKind has focused its efforts on bringing AFREZZA to market.
Dr. Mann has a long and reputable career as a serial entrepreneur. This is especially true in the medical device arena where he made the majority of his fortune. As the son of a grocery store owner, Dr. Mann is known for both his work ethic and intellect. He never worked less than 80hrs a week until well after his 80' (he's 87 now), graduated from High School at 15, and holds a BA and MS in Physics from UCLA.
After graduating college, Dr. Mann founded several companies which were ultimately acquired by high profile companies. Some examples are: Spectro-Lab and Heliotek which were sold to Textron (NYSE:TXT), Pacesetter sold to Boeing and Advanced Bionics Corp. which was acquired by Boston Scientific Corp. (NYSE:BSX)., for $740 million. The biggest and most important company as it relates to Dr. Mann and MannKind (more on this below), was the founding and ultimate sale of MiniMed Inc. (maker of the first insulin pump), which was acquired by Minnesota-based Medtronic Inc. for more than $3 billion. In all, Dr. Mann founded and ran over a dozen successful companies, the vast majority of which he eventually sold off to large companies.
Dr. Mann has put ~$1B of his personal capital into MannKind and remains its largest shareholder (~46%). As far as we know, no one in the "biotech" space has ever committed as much personal capital into a single company. The reason Dr. Mann has done this is due to his belief and understanding of AFREZZA's disruptive technology and believes it will ultimately be the best selling drug in history and a major boon for suffering diabetics Worldwide. Based on Dr. Mann's history and unparalleled insight in both the device and diabetes space, combined with stellar clinical trial results, we agree with his conviction in AFREZZA's future.
A Mini Primer on Diabetes
Diabetes is a complex group of diseases with a variety of causes. Diabetes is a disorder of metabolism - the way the body uses digested food for energy. The digestive tract breaks down carbohydrates - sugars and starches found in many foods - into glucose, a form of sugar that enters the bloodstream. With the help of the hormone insulin, cells throughout the body absorb glucose and use it for energy. Insulin is made in the pancreas, an organ located behind the stomach. As the blood glucose level rises after a meal, the pancreas is triggered to release insulin. Within the pancreas, clusters of cells called islets contain beta cells, which make the insulin and release it into the blood.
Diabetes develops when the body doesn't make enough insulin or is not able to use insulin effectively, or both. As a result, glucose builds up in the blood instead of being absorbed by cells in the body. The body's cells are then starved of energy despite high blood glucose levels.
-from NDIC website (National Diabetes Information Clearinghouse)
There are approximately 370M diabetics, with another 300M near/pre-diabetics in the world today. Diabetes is a worldwide epidemic and one of the biggest healthcare related costs. In 2012 alone, diabetes accounted for $245B (up 41% from 2007) or more than 1 in 5 US health care dollars. Diabetics spend on average $7,900 or 2.3x more than a non-diabetic on healthcare related expenses per year. Diabetes was the leading cause of blindness, kidney failure, and non-traumatic lower-limb amputations in the United States in 2011. Sadly, diabetics, on average, live 15 years less than non-diabetics. This is largely due to the long-term effects of volatile swings of glucose and insulin in diabetics' circulatory systems.
Diabetes was first described in an Egyptian manuscript from ~1500 BCE. Around the same time Indian physicians described it as "honey urine" (a symptom of diabetes is sweet smelling urine as the body expunges excess sugar). Since the usage of insulin to combat diabetes began in 1921, it has been an incredible success. It has improved and elongated the lives of hundreds of millions of people. While insulin has greatly improved the lives of diabetics, their current form and delivery methods are not a panacea.
Diabetes largely comes in 2 forms; Type I and II. Type I, also referred to as "juvenile" diabetes affects approximately 5-10% of diabetics (8.3% in US). Type II, or "adult onset" diabetes affects approximately 90%. The remainder shows up in other forms such as gestational (pregnancy can sometimes cause diabetes, though this tends to be temporary).
Diabetes can be diagnosed several ways as detailed in the picture above though the preferred method is testing for Fasting Plasma Glucose or "FPG." For our analysis however, we will focus on "A1C" as it's commonly used for clinical trials and comparisons. A1C also known as "HbA1C" is an indicator of average blood glucose concentration, generally over a 3 month period. According to the American Diabetes Association (ADA,) having an HbA1c > 6.5% means you are diabetic. Between 5.7% - 6.4% you are considered pre or near-diabetic; meaning you are at risk of becoming diabetic (>50% of pre-diabetics become diabetics within ~10-15 years). Below 5.6% you have normal glucose control (healthy).
With near/pre-diabetes, doctors generally prescribe changes in diet and exercise. Occasionally they also prescribe medication. For full onset Type II diabetics, doctors continue to push for improved diet and exercise but now require medication (patients generally begin with Metformin) to help manage the disease. For some Type II's both basal (baseline) and/or bolus (meal-time) insulin is required. For Type I's, basal and bolus insulin is immediately required upon diagnosis.
There are numerous basal and bolus insulins which are administered in various forms. The most common are pills and needles, although there are pumps and even jet injectors. Because people have differing treatment needs and preferences, there is no single solution for all diabetics. However, there are certain drug/drug combinations that are predominately used based on affordability, access and suitability.
What is Afrezza?
AFREZZA is the first "ultra-rapid" acting insulin therapy for the treatment of patients with Type I & Type II diabetes. It also has the potential to help treat near/pre-diabetics as well (more on that below). AFREZZA is a combination drug/device that happens to deliver insulin by inhalation. As proven over numerous trials, it offers a unique clinical utility for diabetics from a convenience and efficacy stand-point. As such, it will have a considerable place in Physician's armamentarium for the battle against diabetes.
The major factors to focus on is that AFREZZA offers better efficacy, more convenience, lowers the chance of severe hypo-glycaemia, less weight gain, and is not injectable. Compared to current "best-in-class" treatments, AFREZZA offers a superior option in numerous aspects.
Most people fail to understand is what AFREZZA actually is. In short, AFREZZA uses the same "feed stock" as virtually all current diabetes treatments: insulin. The main difference amongst the numerous therapy options is the way in which the insulin is "manipulated." Rapid Acting Analogs ("RAAs") such as Novolog and Humalog were an advancement over previous insulins (and became very successful) because they were manipulated to have a faster onset of action. Likewise, AFREZZA is an advancement over current RAAs for the same reason: it's faster and thus superior.
AFREZZA is a faster better treatment because of a technological breakthrough called Technosphere. Technosphere converts insulin into powder form which is then loaded into a cartridge and delivered via inhalation (with the Dreamboat device) into the deep lung (much more on this below). Technosphere is a delivery technology which makes insulin have superior pharmacokinetics and makes AFREZZA a better drug over current therapies. AFREZZA is really a story about a unique delivery technology (Technosphere), not radically new insulin.
Technosphere is where the magic lies but luckily for MannKind shareholders, the delivery system is not limited to AFREZZA. Some testing has shown the technology could have a vast array of uses. How much would sales of drugs like Viagra, Acetaminophen, Ambien, Advil Cold and Sinus, etc… be if they activated in 10 minutes instead of 30? Imagine the royalties to MannKind for Technosphere if some of the most successful drugs with patent expiration could be reformulated and regain exclusivity. This is just the tip of the iceberg in terms of market opportunity with Technosphere, in our opinion. MannKind will surely place considerable emphasis on Technosphere, once AFREZZA is approved and being marketed.
Though it has yet to receive FDA approval (it's a low hurdle at this juncture in our opinion), many use it today through a special FDA waiver. This includes individuals and groups like the Junior Diabetes Research Foundation (or JDRF) which uses AFREZZA (bolus) in combination with insulin pumps (basal) to achieve results which virtually mimic the human body. This is an astonishing feat and these results are independent from the studies MannKind has successfully completed. Many AFREZZA users are also active on message boards and other venues discussing their pleasing experience and desire to continue using AFREZZA.
Why AFREZZA is Superior: Pharmacokinetics and Efficacy
The first pillar of our MannKind thesis is based on AFREZZA's superior Pharmacokinetics and Efficacy. Simply defined, Pharmacokinetics may be simply defined as what the body does to a drug, while Efficacy is the ability of a drug to produce a desired effect. This inference results from Technosphere's delivery of powdered insulin into the deep lung in monomeric form. Since it's delivered in monomeric form, peak insulin levels are achieved within 12 to 14 minutes of administration with all insulin out of the system within 3hrs. This action virtually mimics healthy individuals.
Current "best-in-class" insulin treatments such as Humalog or Novolog (RAAs), peak between 45-90min and remain in the body for over 5hrs. This is because current RAAs, which are injected subcutaneously (in muscle and fat), are assembled and delivered into the body in the form of hexamers. After injection, these hexamers must be "broken down" by the body into its useable form: as a monomer. The human body's physiological process of "breaking down" insulin is largely responsible for RAA's 2-3x delay in peak activation versus AFREZZA. The difference is comparable to driving 30miles in a buggy or Ferrari. AFREZZA is a Ferrari and that speed differential will benefit diabetics immensely.
Due to the delayed "peaking" and additional time insulin remains in the body when using RAAs, diabetics have difficulty achieving proper insulin/glucose balance. In a continual attempt to maintain proper glucose levels, diabetics usually resort to snacking, additional insulin and/or glycogen. This occurs because hypo/hyper-glycaemia is the dominant concern for diabetics both short and long-term.
AFREZZA on-the-other-hand better mimics a healthy person's pancreas. The rapid action peaking and exit of insulin results is less severe hypoglycemia (>60% less), no increased cardiovascular or pulmonary risks, and weight neutrality compared to current insulins. The positive results of the 2-year pulmonary and carcinogenicity studies (along with 7 years of usage data) are also vital for diabetics who will consider using AFREZZA in the future.
While AFREZZA has proven in numerous trials that it does an excellent job of efficacy, the current evaluation methods for efficacy clearly underestimate AFREZZA's paradigm shifting pharmacokinetics.
Currently efficacy is measured as the mean reduction in HbA1c by patients over a given period (generally 3 months). Though this has served as a good system in the past, for AFREZZA - the first "Ultra-Rapid" acting insulin - it does an inadequate job of demonstrating its true benefits.
To understand our point, one only needs to look at the second graph above titled "Different Post-Prandial Excursions results in Modestly lower 24 hour average (and HbA1c) for RAAs." In that graph, AFREZZA peaks much faster than the RAA comparator, but doesn't accompany the RAAs below the baseline. This results in a misinterpretation of the true data story.
If one solely looks at average HbA1c levels, RAAs - with considerable swings both up and down - they lead to a similar average. However, AFREZZA's quicker "peak," without crossing the lower bound, actually benefits diabetics much more so than the HbA1c results would lead one to believe. Thus, the HbA1c is similar for AFREZZA but the number of Hypos - the biggest concern - is >60% less. Additionally, the speed of onset, rapid peak, and quicker departure from the body, all favor AFREZZA. And since Hypos are far less likely to occur with AFREZZA, diabetics can better control their disease.
As an example: say you have a batter that hits .300 and another that hits .325, which is better? Superficially, the .325 batter is the obvious answer. Pre-2000s that was the key indicator GMs and Front Office Execs focused on when acquiring a hitter in baseball.
Then, one day, Billy Beane, GM of the Oakland Athletics, began focusing instead on a different metric: On Base Percentage ("OBP"). OBP takes into account the number of walks, which for all intents and purposes, is the same as a hit. Interestingly, the .300 hitter may have an OBP of .410 whereas the .325 hitter may have an OBP of .365.
As Oakland started drafting and contracting players based on OBP, they started beating "more talented" clubs (Red Sox, Yankees, etc...) who were spending far more money on "better players" and became a sensation (they even made a movie about it called Moneyball). Today, it's a key metric used by all GMs when assessing the true value of a hitter.
So just like OBP replaced Batting Average as the key metric, HbA1c clearly undervalues AFREZZA's true "Clinical Utility" in effectively helping diabetics long-term. Once AFREZZA starts "beating" the "Major Pharmaceutical Players" (Novo Nordisk (NYSE:NVO), Eli Lilly (NYSE:LLY), Sanofi Aventis (NYSE:SNY)) on the field (i.e. in everyday life), everyone will focus on the more important metrics.
There is little doubt that the current offerings of RAA insulins were a major improvement over previous therapies. However, just as the "rapid acting" ("RAAs") insulins supplanted previous formulations, AFREZZA's first to market "ultra-rapid" acting insulin, will supplant the current therapies.
Why AFREZZA is Superior: Convenience
Physicians have long conveyed a desire for faster acting mealtime (bolus) insulin. MannKind recently commissioned a study with an outside marketing firm to gauge the potential interest of general Physicians and Endocrinologists in prescribing AFREZZA after the results of their most recent trials. The result: a whopping 86% said they were very likely to use AFREZZA in their practice. For anyone with or without any experience in marketing surveys, that is equivalent to a player hitting two grand slams in the World Series. The size and positive reaction (over 300 physicians interviewed) to the trial results cannot be understated.
That study is on the heels of numerous other studies done in the past which show similar results to questions regarding demand for faster/better insulins. While it's intuitively obvious, it's valuable to review a well-crafted study which reinforces the second key pillar in our thesis: convenience.
From the study titled: Preferences of Patients with Diabetes Mellitus for Inhaled versus Injectable Insulin Regimens in the March 2008 edition of PharmacoEconomics.
The result of the study: A majority, ranging from 63% to 81% (emphasis mine) across the scenarios, preferred inhalation (they used Exubera!). This study highlights the utility differences that people with diabetes perceive between the prospect of inhaled and injected routes of insulin administration, even under the assumption of no difference in efficacy. These differences are magnified when the comparison in utility scores is between the majority who prefer the inhaled route and the minority who prefer the injectable route.
So in summary, people rather deal with a clunky inhaler the size of a tennis ball can, rather than inject themselves with a needle! Imagine what these same people will do once they get their hands on AFREZZA!
Current RAAs are predominately injected subcutaneously using needles. Most insulin dependent diabetics inject themselves 3-5x per day solely for their bolus needs. Another 1-2 injections are needed for basal insulin.
This can be painful (mostly psychological, except for those not using the ultra-thin needles) and cause infections (such as staphylococci as seen in this study) due to repeated and improper use. AFREZZA supplants bolus needles with a novel superior inhalable insulin, which is both painless (a little cough that goes away after a couple weeks) and has zero long-term effects on lung function (over 7 years of data from MannKind to support).
Most people do not realize the psychological barriers that are present for individuals that should be utilizing insulin but refuse to comply with their doctors' wishes. It may seem absurd to not use insulin injections which will improve one's health when needed, but that is just what occurs some of the time (the actual % varies). Again psychology and the aversion to needles play are large part in this. Removing that barrier with a small inhaler will not only improve convenience, but also compliance, which will create a long-term positive feed-back loop for diabetics. We cover this is greater detail in the section below titled: Convenience = Better Compliance = Increased Insulin Sales + Healthier Lives.
Another considerable benefit/convenience with AFREZZA is that it almost completely eliminates the need to properly titrate for Type II diabetics and minimizes titration for Type I's. This is a major improvement as current drugs require constant monitoring of sugar and insulin levels while counting the amount of carbs and sugars in ones' meal to ensure a balance is attained. This can be annoying as especially so for kids and people that are newly diabetic. Being able to largely avoid this considerable nuisance, while ensuring proper insulin/glucose balance, would be a welcomed experience for all diabetics.
AFREZZA's Market Potential and Impact
As discussed above there are two main pillars for AFEZZA are superior Pharmacokinetics/Efficacy and Convenience. While we discussed the reasons AFREZZA is superior above, we will tackle the effect this will have on its potential market and impact below.
Improved Drug = Significantly Larger Market
The size of the diabetic population is growing rapidly. It's a worldwide epidemic that's aggressively progressing due to increasingly poor eating habits combined with our sedentary lifestyles. Currently there are ~370M diabetics Worldwide and another 340M near/pre-diabetics. Of those approximately 50M use insulin. In the US alone, there are 26M diabetics and an additional 80M pre-diabetics. Expectations are that there will be ~552M diabetics and another 470M pre-diabetics Worldwide by 2030.
The vast majority of diabetics as well as pre/near-diabetics do not currently take insulin regularly. Most diabetics do not know they have the disease while pre/near diabetics likely have little idea as well. Others, such as actor Tom Hanks, have lived with pre-diabetes for ~20 years and just now started taking insulin. Worldwide pre/near and actual diabetics constitute an astounding 10% of the population. (It's actually a more horrifying figure than that since 90% of diabetics are Type II, which is largely due to lifestyle.)
According to MannKind, AFREZZA may become a first line of defense (shortly after or in conjunction with metformin) to help slow or possibly reverse early stage diabetes, along with the usual recommendation of diet and exercise. This belief is based on the "natural" progression a person goes through when transitioning from "normal" (or non-diabetic) to pre-diabetic, and then fully diabetic.
The physiological diabetes (Type II) process in humans begins when the pancreas begins having difficulty producing enough insulin to cope with the "spikes" associated with eating. During this same initial stage, when not consuming food, the pancreas generally continues to manage baseline (or basal) insulin levels well.
However, people need to eat and when they do, the pancreas needs to ramp-up insulin production in order to deal with these glucose "spikes." These "spikes" are a serious disruption to the endocrine system and must be dealt with properly if insulin/glucose balance is to be maintained. That balance is vital to healthy living.
Since the pancreas can no longer handle the "spikes", a bolus (or mealtime insulin) is most sensible since it is designed to handle the "spikes" with its rapid onset. Current RAAs have done a good job (especially considering their predecessors) but are not a panacea since their "peaks" are still significantly slow compared to endogenous insulin (45-90m vs. 14min).
AFREZZA has an extraordinary pharmacokinetic benefit over current bolus insulins in that its ("peaks") virtually mimics a healthy pancreas. This is why Dr. Al Mann has repeatedly stated that AFREZZA could be a first line of defense therapy option. There is no guarantee that this will bear fruition, but as with most progressive diseases, attacking it early is usually the smartest and best option both short and long term.
The pre-diabetic space is a largely untapped market and could immediately add ~300M potential AFREZZA user's Worldwide (~80M in the US alone). The 80M in the US + 50M pre/near-diabetics in Europe is 5x the current number of diagnosed diabetics in the US alone. Since the US and EU are two very developed markets, if deemed a "proactive" or superior offering, AFREZZA could increase the size of the overall insulin market by magnitudes.
Convenience = Better Compliance = Increased Insulin Sales + Healthier Lives
If one was to argue that AFREZZA is solely a more convenient option over current RAAs, we believe this fact alone would garner considerable market share. The reasons include needle-phobia and improved compliance as diabetics could both reduce the number of injections they take and not needed to titrate. Diabetics would do a better job of managing their disease and live healthier and happier lives. This in and of itself should fulfill the FDA's criteria for where AFREZZA fits in the armamentarium of diabetes treatment.
Sadly, many diabetics who have access to care are not currently using insulin. While there are various reasons (like the price of insulin), in this groundbreaking new study in India, they estimate there are 60M diabetics in India and yet only 1.4M use insulin. When patients were asked why they refused to take insulin, an unbelievable 67% (40M) said it was due to needles. That 40M is ~50% larger than the current entire US diabetic population (26M). India is not alone. In another study nearly 10% of respondents answered that they in fact have needle-phobia. Though not the only reason (there are numerous economic and psychological issues), needles certainly serve as a great excuse to avoid insulin.
Using needles is not an enjoyable experience for anyone. Whether one injects oneself or must inject someone else, it's a very unpleasant experience.
Check out the blog "diabetes stinks." In summary, it's about a little 8-year-old girl named Bailey with Type I diabetes, who had to prick herself 7x/day, 210x/month, or 2,500x/year.
After the trauma, hassle and pain of being a human piñata - pricking herself 2,500/year for years, her parents were able to afford an insulin pump. While this helped with the pain of "pricking," the new pump (it's a MiniMed from Medtronic) still doesn't achieve the same parity that a basal + AFREZZA would. Furthermore, while some can afford the pumps and it can be especially useful for Type I's, many more see the pumps as an additional inconvenience.
You think Bailey might have interest in switching to an inhalable form of insulin that doesn't just maintain the reduced number of "pricks," but also improves her overall long-term health?
Another blog which does an excellent job of covering the travails of being a Type 1 diabetic is called "A Shot in the Dark." This blog is run by the boy's mother - Sandra Miller, who details her son Joseph's journey. It's exceptionally well written and does a great job of highlighting just how difficult life can be for a young Type I diabetic.
Without people like Sandra properly shedding a light on the reality of living with diabetes one would likely not understand the true nature of the disease. What one quickly understands is that living with diabetes is not like most diseases. One major slip and game over. Pretty tough to have to understand that at such a young age and properly control the disease.
As an aside, one of the biggest issues relates to parents of diabetic children. Many parents have immense trouble sleeping as they are constantly worried about their kids having a hypo event in their sleep (not uncommon). So not only does the child have to deal with the health issues relating to having diabetes long-term, but the parents also suffer mightily. One only has to do a quick Google search on long-term "sleep deprivation" to see how bad it is to one's health.
In a similar vein, another complication diabetics must deal with is correct dosing. Diabetics must be pretty precise in their dosing or run the risk of enduring a hypo/hyper glycemic event (hence the constant need for titration, testing of sugar levels, snacking, and sometimes using additional insulin.) This concern isn't limited to adults. Young adults and parents of diabetic children also have difficulty dealing with this issue. Parents must have an especially terrible time when their kids go to school and have to either self-administer, or have to have a school nurse administer the insulin.
What if one could completely avoid meal-time injections and dramatically lower the chance of having a severe hypoglycemic event by using a little inhalable insulin device? Given the above information, anyone want to guess how many kids/parents/adults/young adults might be interested in that option?
If AFREZZA was only a convenience over current therapies it should still grab significant market share. But convenience is only part of the AFREZZA story. As has already been clinically proven through numerous trials, AFREZZA was non-inferior to current best-in-class treatments and in many ways superior for both Type I and II diabetics. Though FDA approval and ultimate consumer adoption is not guaranteed (though all primary endpoints were met and surveys show significant consumer and endocrinologist interest), it is clear that investors are underestimating the potential of AFREZZA.
Why Insurers Will Love AFREZZA
One of the major factors determining interest in, and acceptability of AFREZZA, from both the patient and insurer perspective, is the reduced level of Severe Hypoglycemic Events ("SHEs"). One of the most considerable costs to the healthcare system is the high expense due to hospitalizations from SHEs.
The insulin-only cost to treat an insulin dependent diabetic usually runs about $1,200-$2,000 per year. A single hospitalization due to a SHE costs approximately $1,200 (very conservative) or nearly the same amount spent on insulin a year. The typical diabetic has ~1.2 SHEs. While some of the SHEs end up being minor, at the extreme it can result in death.
Now imagine an insulin therapy that reduces SHEs by 64% (see above slide). The expense reduction to insurers and individuals is nothing to scoff at. If multiplied over the entire diabetic population, one would quickly conclude that insurers will likely push their diabetic patients to utilize AFREZZA when suitable.
Equally important, the insulin/glucose swings and SHEs increase short and long term cardiovascular and other risks, which are already high for diabetics. This dynamic could be considerably improved with AFREZZA.
The need for a therapy that improves diabetes control is pressing. The convenience and superior glucose control associated with AFREZZA will cause a complete paradigm shift in the treatment of diabetes. This will lead to lower costs and better lives.
In all, MannKind has the ability from both a convenience and pharmacokinetic standpoint to help improve the lives of millions of diabetics. Because of its convenience, actual patient compliance will likely provide AFREZZA superior real-world results over other therapy options. Convenience is a driver for innovation and demand. Improved efficacy also drives demand. Combine the two and you effectively have a superior product with blockbuster potential.
Now we get to the all-important question: what is MannKind actually worth? What are reasonable expectations for sales and profits once AFREZZA receives FDA approval, partners with a Major Pharmaceutical company (I believe both will happen within 6-8 months) and launches? We believe the best way to answer this vital question is to look at MannKind and AFREZZA through several lenses.
While some of the assumptions such as profit margins and royalties seem high historically, we used comparable companies as benchmarks. For example, Novo Nordisk, the leader in diabetes generates an NPM of nearly 30%. MannKind's would be higher since they would essentially be outsourcing a lot of the expenses through the partnership. Though it would cause a 30-50% top-line haircut, NPM will be very high as MannKind will become a royalty machine. Additionally, the reason MannKind will be able to command such a high royalty figure is due to the fact that MannKind already paid for all the clinical trials for AFREZZA. A partner would solely be responsible for advertising, marketing, sales and distribution.
My base assumptions consist of the following:
- Worldwide insulin sales are estimated to be $44B for 2014
- The total number of diagnosed diabetics Worldwide will grow at a CAGR of 3%;
- The total number of insulin users will increase at a rate of 10%/annum;
- MannKind will "only" get an up-front payment of $400M (explanation below);
- We will not assign any value to Technosphere or their cancer pipeline;
- 40% Net Profit Margin (Seems high but they will basically become a royalty machine);
- 10% Discount rate - we prefer to be conservative;
- Average payment by insurers will be $1,500/year per patient (very conservative);
- MannKind has ~$2B in NOLs (Net Operating Losses) that can be used to offset profits.
It's important to note at this juncture that we strived to be both balanced and conservative in our assumptions of MannKind's value through a rigorous focus on research and data.
Ultra-conservative #1: US Type 1's Only Valuation
If we solely consider the US Type 1 market in 2019 we end up with nearly 2.5M patients (8.3% of 30.1M). Since AFREZZA is demonstrably better for Type 1's than their current bolus insulin, adoption will be early and rapid. At a conservative $1,500/year for AFREZZA, you get $3.75B in sales. With a 50% royalty rate, 40% Net Profit Margin and 20 earnings multiple, you get a $15B market capitalization.
Discounted back at 10% and divided by 450M shares you get $21. While this completely ignores the entire Type II (90%) market, that is still 4x the current price.
This is truly a conservative estimate that we believe drives home just how undervalued the MannKind is in even the most pessimistic scenario. Since this is so conservative and will easily be surpassed, we give this a 5% weighting.
Ultra-conservative #2: 30% Royalty fee, 15% Market Share.
With a 30% royalty rate, 40% Net Profit Margin and 20 earnings multiple, with 15% market share for AFREZZA in 2019, you get a $20B market capitalization. Discounted back at 10% and divided by 450M shares you get a current intrinsic value of $28 per share.
This scenario is also very conservative as it only assumes a sliver of the Type II market and the majority of the Type I market. A 30% royalty rate also likely under-represents what will be agreed upon. However, even with such conservative assumptions we will get a value that is nearly 6x the current price.
Since we view this as an absurdly low probability in our analysis, we give this a 5% weighting.
With our "convenience only" model we estimate worldwide insulin sales of $56B in 2019. With "only" 10% of the market using AFREZZA we would get $5.6B in sales. With a 50% royalty rate and 40% profit margin we get $1.12B in profits. Using a growth multiple of 20x we get a market capitalization of $22.4B. Discounted at 10% and divided by 450M shares we get an intrinsic value of $34 per share.
Based on various reports and surveys we believe the "convenience only" model alone could justify a market share well above 50%. This would provide significant upside to the "convenience only" per share value. However, we believe conservative assumptions provide another lens in which to view the "true" opportunity of AFREZZA. We believe 10% market share undervalues AFREZZA and as such give it a weighting of 20%.
Our Baseline Discounted Cash Flow ("DCF") Model estimates AFREZZA sales of $14B in 2019 (25% Market Share), 15% growth for 7 years, and 7% terminal growth for 7 years. We then discount the result back at 10%/annum to 2014.
We understand that at first blush, most would deem 25% market share for an "unproven" drug within 5 years aggressive. However, we believe the convenience and efficacy benefits highlighted in detail above will drive demand from physicians and improve both the marketing and acceptance, allowing for major penetration. AFREZZA will thus become the de facto preferred choice for diabetics.
With the above scenario, we come to a value of approximately $85/share today. We consider this our Baseline case and place a 50% weighting.
Dominance Valuation #1
Using a Bullish scenario where AFREZZA gains 40% market share by 2021, we would arrive at sales of $23.8B. Using the same 50% royalty rate, 40% profit margin, 20x earnings multiple, 10% discount rate and dividing by 450M shares, we attain a current intrinsic value of $109 per share.
Due to the dominance and time necessary to attain the above results, we give this a 15% weighting.
Dominance #2: Including Pre/Near Diabetics Valuation
Using a very Bullish scenario where AFREZZA would be prescribed for some pre-diabetics along with regular diabetics, we believe worldwide sales would be an astounding $80.6B in 2021. Taking 40% market share, we would get an astounding $32.25B in sales of AFREZZA. With the same 50% royalty rate, 40% profit margin, 20x multiple, 10% discount rate, divided by 450M shares, we get a current intrinsic value $147 per share.
Because this scenario takes into account some very bullish assumptions, including the adoption by physicians of AFREZZA as a first line of defense along with considerable overall market share we give this a 5% weighting.
The Baseline scenario works out to $85, Convenience Only is $34, and the Dominance case 1 came to $109. Dominance 2 - with pre/near diabetics - came to $147. The Ultra Conservative came to $21, while conservative 2 came to $28. The figures above are the intrinsic values for today. The simple average works out to $70 with the weighted average being $75 per share.
Considering that the stock is currently trading at ~$5/share, it is our belief that the company is severely mispriced. This is especially true as we are ignoring the up-front payment ($300-$500M), drug pipeline, insulin inventory ($100-200M), and considerable licensing opportunity of Technosphere.
A Margin of Safety in Biotech?
We know that most investors - especially those who are in the value camp as we are - would probably not consider investing in any biotech as they are very complex and can often be binary events with little downside protection or a margin of safety. However MannKind is not your typical biotech. Superficially MannKind fits the mold of a typical biotech: either you get 8-20x your money or $0. Dig below the surface however, and one is likely to discover another image entirely.
In MannKind's particular case there are several other key factors to consider. They are: MannKind's up-front partnership payment, value of the Technosphere delivery system, two cancer drugs in MannKind's pipeline showing considerable early clinical potential, and over $2B in NOLs.
Firstly, should AFREZZA meet our lowest expectations the company would be worth 4 -5x its current price. Because the value is so considerably above the current price and the probability of success is very high (in our opinion), you get a considerable margin of safety.
Second, the potential value of the upfront payment is considerable and will provide further downside protection. For example, when Pfizer (NYSE:PFE) acquired the rights to Exubera from Sanofi Aventis/Nektar Pharmaceuticals, it gave them an up-front fee of $1.3B, plus royalties. This is a sizeable sum for a partnership, but given the size of the diabetes market and estimated market share (10%) Exubera would attain, it seemed reasonable. Though Exubera was a total debacle, and a poor comparable in virtually every way, it does underscore the value a major pharmaceutical company ascribes to partnering with a potential blockbuster drug assumed to garner ~10% of the diabetes market.
Another example is the deal that was struck between Eli Lilly and Icos Corp for developing a competitor to Viagra. In that deal Eli Lilly agreed to pay an upfront payment of $75M + split the profits 50/50%. It also agreed to pay another $52M towards finalizing the clinical trials. The big difference with this deal and that of Exubera's is that the Eli Lilly deal was struck before the drug entered the final phase (III) of the clinical trial process. MannKind will fall somewhere in-between these two deals as it has finalized all its trials successfully and has a market potential that's more on par with Exubera.
In MannKind's case, we believe the up-front partnership payment will be considerably smaller for reasons Dr. Al Mann desires. Though we cover this below in greater detail, we believe an up-front payment of $400M is a more reasonable amount MannKind will receive from its partner(s) in the coming months. This excludes any additional milestone payments or royalties.
Third, as a proven technology, Technosphere alone should command a public market valuation of between $500M to $1B. MannKind has yet to partner Technosphere with anyone (it isn't a focal point, AFREZZA is their sole concern) other delivery companies like BIND Therapeutics, have a current valuation of $225M. BIND has an unproven delivery technology but has partnered with 3 companies looking to develop a drug with the technology. If successful, payments could total over $1B plus royalties.
Technosphere has already proven itself to be highly effective and completely safe. Partnering Technosphere alone would provide MannKind with a considerable valuation (Pfizer is said to be currently testing the technology on some of its compounds). Imagine the benefit to patients of a system that could deliver medicine which would activate in ½ to ¼ the time. Furthermore, given the possible delivery speed improvement, what would Technosphere be worth if it could deliver acetaminophen (Tylenol) or allow Pfizer to regain exclusivity on Viagra (a $1.5B/year drug before losing patent protection), amongst a whole host of other drug applications as well? This is part of the equation that is currently being ignored.
From The Burrill Report:
In the six years since Pfizer tried but failed to profit from its inhaled insulin Exubera, the non-invasive, quick, and inexpensive delivery of drugs via the lungs has advanced enough to forecast a promising future for inhaled therapy, says John Patton, one of the original inventors of Pfizer's inhaled insulin technology system. "When you're first, you take a lot of bullets. With the developments in the industry, it's just a matter of time before we will be inhaling lots of medicine."
Additionally, MannKind has two cancer therapies in clinical trials. So far, the results of those two drugs have been very promising; with MannKind already partnering one of them (they have the ability to buy-out the partner as part of the deal). Though early in the process, if MannKind desired to raise capital through monetization of assets it could sell its cancer therapies.
A good representation of the potential value is publicly traded biotech Geron Corp. In short it has a couple of drugs undergoing clinical trials for the treatment of cancer. Because the trials are going well, the market has afforded them a capitalization of $500M. This is not an unusual valuation and there are plenty more examples as cancer has huge market potential and no cure is in sight.
Lastly, MannKind has between $100-200M of human insulin in inventory that could be sold as well as ~$ 2B in NOL's that will provide a nice buffer against future profits in the order of $4.4/share (450M shares). These tax savings would apply to the profits of AFREZZA, Technosphere, or the Cancer pipeline.
Excluding AFREZZA's considerable potential, MannKind should currently justify a valuation between $700M - $1.5B for its cancer pipeline and Technosphere technology. Throw in the $300-$500M in up-front partnership payments expected within the next 6 months, $2B in NOLs, and this provides us a considerable margin of safety at current prices.
However, if there is a negative event regarding AFREZZA, MannKind's share price will undoubtedly reflect this is short order. It would likely take a couple of years for people to refocus on Technosphere and the other two cancer drugs. We are very conscious of this fact but believe non-approval/market failure to be a low probability event.
MannKind's history has been nothing short of a rollercoaster ride. This ride has consisted of 2 Control Response Letters or "CRLs", 3 capital raises and a stock price that has oscillated between $23.25 - $1.60 since its IPO in 2004.
After MNKD had its IPO in 2004, its stock bounced around with the overall market until late in 2009, when it received its first CRL. The first CRL - which was not a total surprise - was due to MannKind seeking a dual approval for both AFREZZA and its inhaler. Dual approvals are exceptionally rare.
In the CRL the FDA made no mention as to the efficacy or safety of AFREZZA but it did raise concerns regarding its delivery device called the "Medtone inhaler". However, MannKind was never planning to launch with the Medtone device as they had already developed a superior device affectionately called "Dreamboat."
Because MannKind was short on cash at the time of their first CRL, they needed to do a capital raise, which combined with the negative headlines of the CRL, caused the stock to tank. Dr. Al Mann, then the largest shareholder participated in the capital raise to maintain his considerable position (~46%) in the company.
MannKind then quickly completed the necessary documentation and resubmitted to the FDA. They then waited the usual 6 months for a class II FDA review. Approval seemed likely as MannKind resubmitted with the FDA's requested bio-equivalence study allowing for AFREZZA's data to be bridged between Medtone and the new Dreamboat inhaler.
On Dec 29th, MannKind was to receive its FDA response on approval. One day before the FDA response, MannKind received a call from the FDA that they would need three additional weeks to finish reviewing the data.
In a complete surprise (at the time), the FDA sent MannKind another CRL. Management seemed completely dumbfounded on their conference call shortly after receiving their second CRL. The overwhelming message was that the CRL was in stark contrast to management's interpretation of their numerous interactions with the FDA between resubmission and their approval/non-approval (PDUFA) date.
This again punished shareholders as MannKind needed another capital raise to complete a pair of new trials to unequivocally bridge the gap between the two inhalers instead of a simple bio-equivalence study which would take 2 years to resubmit. Again, most importantly, the FDA made no mention of efficacy or safety concerns. Actually, the FDA seemed so at ease with AFREZZA's safety and efficacy profiles that they requested that MannKind include kids as young as 4.
There are many investors that believe the second CRL was a result of some malfeasance on the part of a hedge fund manager named Martin Shkreli of MSMB Capital Management. In 2010-2011, Mr. Shkreli was short MannKind's stock and wanted to do everything he could to derail AFREZZA's approval; since, if successful, he and his clients would stand to gain a lot of money.
In order to help improve his odds of success, somehow, Mr. Shkreli attained the e-mail addresses for all 12 researchers - including Commissioner Margaret Hamburg - responsible for deciding AFREZZA's fate. With e-mails in hand, each researcher received a 30+pg presentation - on Christmas Day - covering Mr. Shkreli's rationale for why MNKD should not be approved. (In Mr. Shkreli's defense, he had been completely upfront about being short the stock and there is nothing inherently wrong with shorting stocks per se.)
Without a hint of sarcasm, and probably totally coincidentally, a few days after receiving the presentation from Mr. Shkreli, and 1 day before the PDUFA date, MannKind got a call from the FDA asking for more time to review the data.
At the center of Mr. Shkreli's assertions was about having insufficient data to properly bridge the new and old inhaler. Remarkably, that is exactly what the FDA requested.
No wonder management at MannKind was completely dumbfounded on the conference call to discuss the CRL. Whether one believes in conspiracy stories or not, this is certainly an interesting set of circumstances (although as fictional FBI Agent Fox Mulder liked to say: "there are no coincidences").
Though this story probably sounds like some glue-sticked, pin and thread conspiracy story from disgruntled shareholders, you only need to check the information from this great blog which contains the numerous links to documents which will back up these assertions. Included in those links is a grievance made to Robert Khuzami, Director of the SEC, from "C.R.E.W"(Citizens for Responsibility and Ethics in Washington) against Mr. Shkreli. I have included an excerpt from the full letter below:
So, to appease the FDA, MannKind crafted two new studies. This time however, MannKind wisely set up AFREZZA's trial design and endpoints (goals) jointly with the FDA so as to remove any possible future concerns which could be raised. Thankfully, last month, MannKind announced it met all primary endpoints in both trials, setting a clear path for approval.
Let's just say it's been a tough ride the past few years for shareholders.
Mr. Market: Behavioral Finance at Work
Many investors are waiting on the sidelines to invest in MannKind until the "skies are clear" or believe this is "dead-money" for months or even years. Many others believe it's worth nothing. Since we answered the valuation question above, we believe those sitting on the sidelines or betting against MannKind may find themselves a bit distraught in short order. This is especially true considering all the potential catalysts in the near future.
The catalysts consist of (not in exact order): one or more Partnership deals, FDA approval, launch of AFREZZA, a marketing/advertising blitz and ultimately, sales. This is all likely to occur within the next 6-9 months. Not exactly "long-term", though that term is very relative in today's nano-second trading world.
Furthermore, rationally looking at this, AFREZZA has already "jumped" the major hurdles: A) all necessary clinical trials have been conducted and met their primary end-points, B) they are adequately funded with over $130M of cash on hand plus a revolver, another 2 tranches ($40M each) from Deerfield, and warrants to be exercised, C) they already have a production facility ready to go, and D) they have received a new PDUFA date of April15th.
While it's true that the company could end up without a partner and get rejected by the FDA, we believe this is a low probability. Most analysts, as well as the independent panel associated with the Deerfield agreement, reviewed the results independently and all came to a positive conclusion. Truthfully, there really is nothing (barring a nefarious event) that should stand in the way of AFREZZA's approval. Upon approval, AFREZZA will be able to help millions of diabetics live better and improve the fortune of shareholders.
With all the positive trial results under their belt, FDA approval is all but a formality at this point. As such major pharmaceutical companies are sure to be jockeying to partner with AFREZZA, the World's first Ultra-Rapid Acting Insulin. Once a partner(s) is announced both companies are likely to start working on EU approvals and approvals in countries Worldwide.
Al Mann mentioned over two years ago that they had a partnership proposal on their desk but didn't like the terms. Doing a deal is not difficult. Coming to an agreement in which both parties are satisfied is another discussion altogether.
Dr. Mann has elected to raise capital (nearly half of which was with his personal funds) rather than settle for a sub-par partnership in the past. If management has high confidence in the ultimate success of AFREZZA, a large up-front payment would likely be a poor decision. The ultimate outcome will be interesting, but I believe both will agree before approval (April 15th).
An interesting argument being debated is in regards to MannKind's expected up-front payment. It seems as though some believe that if they do not receive a large up-front payment this is both a failure on the part of MannKind's management and a sign that the partner is not fully committed to AFREZZA. Let's look at this from a different perspective.
If you are MannKind, and believe you have a mega blockbuster on your hands, what is a better deal structure, $1B up-front and 5-20% royalties (normal partnerships), or $300-$500M up-front and 40-60% Royalties? The answer is directly correlated to ones confidence in the upside of AFREZZA.
Imagine hypothetically for a moment that sales are $5B in 2018. With the $1B up-front payment option you get a 20% royalty rate and maintain a 50% NPM; this nets you $500M in profit a year. Over ten years and adding the $1B upfront puts a total of $6B in the bank.
Using the same sales figure of $5B, with the smaller up-front payment of $500M and 50% royalty, MannKind would receive royalties of $2.5B. At a net profit margin of 50% you MannKind would earn $1.25B. Over ten years (assuming sales held steady) that would be $12.5B. Throw in $400M for the lower up-front payment and you end up with ~$13B.
The difference in up-front fees and royalty rates can lead to a dramatic difference. In this example, the lower up-front payment actually resulted in $7B in additional cash. If AFREZZA is a major success and they do a low royalty deal, it would rob their shareholders of billions. With the level of conviction Al Mann seems to possess in AFREZZA, he is likely bargaining hard for a smaller initial payment and high royalty fees.
Dr. Mann has repeatedly referred to AFREZZA as potentially the most significant drug to ever hit the market. One could call Dr. Mann lots of things but one thing you cannot is unsuccessful. Dr. Mann is a serial entrepreneur who built up a personal fortune of nearly $2B through the founding, development and marketing of over a dozen companies.
The largest part of that fortune came from selling MiniMed - which commercialized the first ever insulin pump - to Medtronic. This is a great point to reflect on because MiniMed and AFREZZA share incredible similarities. As Dr. Mann himself touched on in the MannKind Q4 2011 conference call: "Some of you may recall a somewhat parallel story regarding my experience in MiniMed, which had protocol which had pioneered in insulin pumps and continuous glucose sensors. After some negative publicity by the serious problem with another company's pumps, the 3 major companies competing for that market all dropped out. Our stock was then priced at $1.75 per share. Later, Medtronic acquired MiniMed for a split-adjusted $192 per share. The story for MannKind has been similar with the low stock value. I am not suggesting an ultimate future gain by a factor of over 100 for MannKind, but I do remain very optimistic about the value of AFREZZA as well as several other product opportunities at MannKind".
As Mark Twain famously said "history doesn't repeat itself, but it does rhyme." As MiniMed was working its way through the FDA process everyone got down on its prospects because a "Big Pharma" had issues with their device. All other "Big Pharma's" followed suit. In short order news outlets and the general market considered MiniMed dead and drove its stock down to $1.75.
However, Dr. Mann never wavered on MiniMed because he believed in the research and clinical results of the device. He worked hard to finalize all trials, gain FDA approval, and eventually brought it to market. MiniMed turned out to be a huge success and was eventually bought out by Medtronic for $3.2B or 7x then current sales of ~$450M (another Mann company was bought as part of the same deal for over $400M, which brought the deal to ~$3.7B). MiniMed pumps are still being sold and considered the best pumps in the market.
As one will likely notice from the above example, the parallels are extraordinary. Like his MiniMed experience, Dr. Mann is focused on the results of AFREZZA's clinical trials and ignoring the emotional swings of the market. The only thing that matters is the data and the data is strongly in MannKind's favor. Dr. Mann is putting both his vast expertise in diabetes and devices, along with over $1B (not a typo, he owns ~46% of the company) of his personal fortune (more than half his net worth) to ensure MannKind and AFREZZA will succeed.
With successful results from their Phase III trials in August (along with all the previous trials), the probability of success is now only months away from fruition. As with MiniMed, MannKind will likely move in and quickly establish itself as the dominant force in diabetes in the near future and would only be bought out when its true value is fully displayed (as the majority shareholder Dr. Mann will decide when to sell).
Don't Forget the Bears
The Pfizer Argument
Of all the bearish arguments, this is our favorite. To answer we have 4 pictures and a few thoughts.
EXUBERA: "ready for use", and "travel mode"
Is anyone able to look at the Exubera pictures without laughing? Impossible! And yet people want to compare Exubera to AFREZZA? Let's stop the nonsense and focus on the facts:
- Pfizer's Exubera offered zero medical benefit over current RAAs.
- Pfizer believed that people would be willing to pay much more for inhalable insulin (than for RAAs) based solely on "convenience." Unfortunately, Exubera was inconvenient and had no medical benefits. (Insurers and individuals balked at the cost).
- In Pfizer's studies they asked people if an inhaler appealed to them over injections. The answer was overwhelmingly favorable (+65%) for inhalation (apparently they didn't show the interviewees the device!). Every study we have seen only further drives home the convenience thesis.
Pfizer made it so expensive that insurers declined to pay for it. Therefore, if you wanted inhalable insulin individuals had to pay for it largely out of pocket. Because of this (and the inconvenience/impracticality of it) Exubera was a flop. (As an aside, people using Exubera actually overwhelmingly liked it over injections.)
While inhalable (it was approved by the FDA with several concerns and less benefits than AFREZZA), it's obvious from both the pictures displayed above and from actual data, that Exubera was more inconvenient, less effective, and more expensive than RAAs.
Last item to drive the point home and hopefully close the comparisons with AFREZZA
Would anyone want to be seen using Exubera in public or does one believe that a pen needle would be less conspicuous? Exubera was a ridiculous attempt at "convenience" and yet it was still expected to command over 10% market share. In comparison, AFREZZA is more effective and convenient than current RAAs, will be priced similarly (thus killing any insurer concerns), and results in >60% reduction is severe hypoglycemic events. The fact that AFREZZA is inhalable and diabetics won't have to poke themselves is icing on the cake.
End of story.
Latest Attempts at Bashing AFREZZA
Even the most recent attempts to bash or down play AFREZZA's true potential by numerous market participants now assumes FDA approval. The discussion has taken a radical departure from AFREZZA being "un-approvable" to one in which the focus is about it only having a minor addressable market.
We have addressed this issue in detail above so there is no need to completely revisit it. The only thing of interest is how the arguments against AFREZZA continue to shift as MannKind's trials and management debunk all the issues. There is little standing in the way of MannKind's success at this point but that will likely not prevent partially informed talking heads and "drive-by" writers from debating its merits ad nauseam. That is, until AFREZZA is finally approved and has achieved major success (even then they will probably find something to harp on to draw hits to their sites. It's not silly; they're trying to make a living like everyone else.)
There are several catalysts that will be quick to emerge in the coming months. They are: a Partnership Announcement, Marketing Push, FDA Approval and Sales.
It's our opinion that the market is not taking a partnership or any major market acceptance into the current valuation. It will be interesting to see (from a behavioral finance perspective) exactly how market participants react to the news as it's released. There will be little middle ground in the short-term and any news will have a major impact on the stock. For those in for the long-haul, the short-term can be quite entertaining.
Additionally, management has posted over 11 new jobs on their website in the past month. This is as clear a positive sign as one gets when trying to judge how management feels about the company's prospects as they to prepare for launch. We expect to see further new job postings in the near future as we approach April 15th.
When dealing with a biotech company that has a pipeline of drugs which have yet to hit the market there are numerous risks to discuss.
Foremost, AFREZZA has yet to receive FDA approval. While the clinical trial results are overwhelmingly positive and approval is nearly assured, there remains a sliver of a chance that the FDA sends AFREZZA back to the drawing board. The FDA has somewhat "moved the goal posts" previously and while we would like to believe that there's nothing funny going on at the FDA, it cannot be completely ruled out. Once the "74 day letter" and a partnership with a Major Pharma is announced this will greatly reduce our concerns.
Secondly, MannKind currently has zero sales. This is not atypical of a biotech company, but it is another risk to consider. Biotechs such as MannKind are generally valued at what the market perceives as its potential value which is then discounted. We believe the market is vastly undervaluing MannKind's potential and other assets.
MannKind has considerable IP and other assets that help reduce the risks to MannKind's value should AFREZZA not attain it Intrinsic Value. We believe this is a minor risk, but should AFREZZA not meet its goals, the "other assets" help provide a margin of safety.
Third, MannKind needs to have a Partnership in the near future for 6 reasons:
- They need capital to expand their production facilities;
- They need capital to maintain their operations past 2014;
- MannKind would like to expand into various other markets and the application and approval process requires human and financial capital;
- MannKind needs access to a superior distribution network;
- AFREZZA needs to be marketed Worldwide;
- They need a robust sales force.
Fourth, Al Mann, the heart and soul of MannKind is 87 years old. While he remains as bright and focused as ever, age is unfortunately a concern. However, it's important to remember that all the heavy lifting (with exception of a partnership) has all been accomplished. MannKind is undoubtedly better off with Mann at the helm - so we wish him nothing but to remain in good health - but the wonder drug that is AFREZZA can and will survive long after Dr. Mann; helping millions of diabetics Worldwide have improved lives. Much like what Charlie Munger and Warren Buffett have built, not much else a man could ask for in terms of a lasting legacy.
MannKind is a unique $1.4B biotech company which is targeting a large unmet need in the ever-expanding diabetes space. Though the company has a drug pipeline and IP assets, the main focus is on its wonder-drug: AFREZZA.
Simply stated, AFREZZA will likely become the dominant player in the $44B insulin market due to its unique pharmacokinetics/efficacy and convenience. Pharmacokinetics and efficacy have been proven over numerous trials to essentially mimic the human body's bolus insulin production and this alone should garner considerable market share. However it's the convenience factor that everyone seems to be undervaluing;
Due to the pointed emphasis in driving home over view of AFREZZA, we will repeat a signature point from the Summary:
Using Einstein's inversion maxim: if inhalable insulin was invented first and another pharmaceutical company developed an insulin treatment whose only major difference was that it was injectable, how many people would switch?
We believe the answer could not be any clearer: absolutely none.
And as proven in the numerous studies regarding preference, needles don't stand a chance, all things being equal vs. an inhalable option (anyone want 8 shots a day plus multiple finger pricks to monitor glucose levels?). Thankfully, the AFREZZA story consists of superiority in both convenience and pharmacokinetics/efficacy.
We know there is a lot of misinformation with MannKind and AFREZZA due to the complexities of understanding new drugs, the numerous clinical trials, previous capital concerns, and the fact that it's yet to reach market. However, approval should be a low hurdle as the feed-stock is the same as current diabetes treatments (insulin) and the superior delivery technology (Technosphere) has passed every necessary clinical trial. Furthermore, they have the best jockey one could ask for.
Because MannKind's story is anything but simple and clear, we believe MannKind has been completely overlooked, and as a result, is severely undervalued. According to our estimates, MannKind's intrinsic value is between 4-30x current prices with significant IP assets that serve as downside protection (i.e. margin of safety).
Fortunately, there are multiple catalysts in the coming 6 months which should help shed light on this discrepancy.
Should our analysis prove correct, AFREZZA will become the dominant player in the diabetes space, and investors and diabetics alike will be rewarded considerably.
This is not an endorsement or investment advice. We highly recommend that everyone conducts their own due diligence before making any investment decisions, however, we are long MannKind (TICKER: MNKD).
If one wishes to get more intimate information on diabetes and AFREZZA, I highly recommend reading the four excellent articles I have hyperlinked (here, here, here and here) and an excellent presentation by Novo Nordisk that does a great job of covering Diabetes. One should also subscribe to 3Dimensional Research managed by George Rho. He does excellent research overall and has a great paper on MannKind's AFREZZA. Below are some additional interesting articles and websites for more information on diabetes, insulin and AFREZZA.