MannKind Corporation (MNKD) shares tumbled 16.4% last Friday on trading volume that was almost five times the daily norm, at 23.5 million shares. The sell-off came on the heels of a company press release that announced the Endocrinologic and Metabolic Drugs Advisory Committee of the U.S. Food and Drug Administration (FDA) "is tentatively scheduled on April 1, 2014" to review the developmental-stage biotechnology concern's New Drug Application (NDA) for Afrezza Inhalation Powder. Viewed in isolation, investors' reaction to the release clearly suggests that the announcement represents bad news. As is often the case, however, the picture is far more complicated, and should be seen through a wider lens. Friday's price action, for instance, was preceded the day before by an 18.4% surge, on turnover of 24.9 million shares. The Thursday surge, meantime, punctuated a then year-to-date share-price advance of 36.2%, which, in turn followed a nearly three-month-long period in which the shares were uncharacteristically stable, trading within an extraordinarily narrow price range. The volatility of recent days is likely to persist for the foreseeable future, as MannKind moves into what could be the three most critical months of its existence. In this article, we assess the key variables that undoubtedly influenced last week's developments and will decide the company's long-term future, i.e., the Advisory Committee meeting on or around April 1st, the FDA's decision, now scheduled to be issued by April 15th, and ongoing partnership discussions.
(Note: We assessed Afrezza and the clinical trials that support the NDA in considerable detail in a Seeking Alpha article last August and refer readers new to MannKind to that report.)
Implications of the Advisory Committee Review
The press release announcing the AdCom review was brief, adding only that the date and details of the meeting are "subject to confirmation by the FDA in a Federal Register notice." MNKD shares fell, as investors speculated over the implications. Some noted the presence of a Novo Nordisk employee on the committee, suggesting that he would be biased since his employer would have a lot to lose if Afrezza were to be approved. Others suggested that the committee would give the FDA cover to reject MannKind's application. Unnerving investors, too, was the catchall fear of the unknown. That said, the stock's price movements in the preceding few trading sessions suggest investors/speculators may have been anticipating a press release of a different tenor, perhaps one announcing a partnership or M&A transaction. All in all, we don't think the fundamental picture has changed, Friday's price action notwithstanding.
In our view, the FDA's yes or no decision on Afrezza was essentially made three years ago when it directed MannKind to conduct two additional Phase 3 clinical trials. By asking the company to both include a test arm that administered Afrezza using the Medtone device and to prove bioequivalence between Medtone and the next-generation device Dreamboat, the regulators were all but saying that they were sold on the clinical efficacy and safety of Afrezza. Beyond helping design the so-called Affinity studies, the FDA has asked MannKind to conduct post-marketing studies in children as young as four years old. This clearly suggests the agency has little concern about the drug's safety. And since the latest Phase 3 trials proved bioequivalence between the two delivery devices and confirmed the efficacy results of multiple earlier studies, we believe the AdCom is being convened to provide guidance on labeling issues, which could be complicated considering the heterogeneous population of type 2 diabetics. Indeed, rather than being a negative, we think the AdCom review could be a positive, since it gives the company and its patients, physicians, and other advocates a very public platform to extol the virtues of Afrezza, which many, including this author, believe will be a paradigm shifting way to treat both types of diabetes.
Mum's The Word on the Partnership Front
It has now been almost exactly five months since MannKind first announced that it had retained Greenhill & Co., a leading independent investment bank, to help secure a marketing partner. To repeat an old cliché, the silence since then has been deafening. Remarkably, there has been absolutely no leaks from any of the parties that are (or were) involved in the discussions or negotiations. All management has said thus far is: 1) It wants one global partner; 2) There are several regional players very eager to enter into negotiations but have been put on hold; 3) It's happy with the way Greenhill is doing its job.
As we've told everyone that's emailed us, we have absolutely no special insight as to what's going on behind closed doors. What is obvious, however, is that given Afrezza's sales potential and big pharma's need to replace the massive revenues being lost to generic competition, both parties have substantial common ground. As well, considering the rapidly approaching decision date for the FDA, the desire to file marketing applications for Afrezza in foreign markets, the need to commercialize Afrezza as soon as possible, and the requirement to raise additional funds if a partner Is not secured, all signs point to something getting done sooner rather than later, using a phrase we're not particularly fond of. As to the identity of the potential partner/acquirer or what the deal might look like, there are so many variables we see very little value to speculating.
As long-term investors, we remain confident that MannKind remains on track to launching its innovative inhaled insulin product in the year's second half. Indeed, our thesis on the company's stock remains unchanged. And in this regard, in the interest of full disclosure, following are the changes that have been made to our financial interest in MannKind: Our long position in the stock and warrants, which we detailed previously, remains unchanged. So, too, does our bullish call spread, long the January 2015 $5 calls and short the 2015 $7 calls. We did close out our short January 2014 $7 puts about a month ago, booking a profit of about $3 a share. Simultaneously, we opened new positions in the January 2015 $15 puts, selling them for $11, and buying January 2016 $3 calls at a cost of $3. On a final note, we prefer not to receive emails from individuals, particularly anonymous ones, seeking specific investment advice.