MannKind (NASDAQ:MNKD) faces an FDA Endocrinologic and Metabolic Drugs Advisory Committee meeting on April 1, 2014, for the review of the company's New Drug Application (NDA) for Afrezza, an ultra rapid-acting insulin developed for the treatment of adult patients with type 1 or type 2 diabetes. Obviously, if the committee will recommend the drug for approval, it could impact the stock price in a significant manner. However, there was a lot of skepticism around the company and the stock in the past few years. MannKind has twice received Complete Response letters (CRLs) from the FDA when seeking approval for Afrezza. Following discussions with the FDA, the company has embarked on two Phase 3 trials that leverage their new dry powder that is considerably simpler for diabetics to use. On August 14, 2013, the company announced that both Phase 3 trials met their primary endpoints, along with the majority of their secondary endpoints. So now all eyes will be turning to the committee votes and to the final decision.
Last week, I had the pleasure of interviewing the head of healthcare research at MLV & Co. and a highly respected Senior Analyst, Dr. Graig Suvannavejh, which has been covering MannKind since last year. Dr. Suvannavejh has over 10 years of experience as a sell-side analyst covering the biotechnology, specialty pharmaceuticals, and large cap pharmaceuticals sectors. Prior to joining MLV, he was a senior analyst covering specialty pharmaceuticals at Jefferies, and before that, a senior analyst covering biotechnology at UBS. He comes from a strong academic background, holding a Ph.D. in Neuroscience from Northwestern University, and an M.S. in Physiology and a B.S. in Biology, both from Georgetown University.
MLV has provided the company with investment banking services in the past, with an ATM agreement that was put in place in March 2013, and another in March 2014.
Ben Yoffe: Dr. Suvannavejh, the next most significant catalysts for MannKind are the April 1 Advisory Committee meeting for Afrezza, followed by the April 15 Prescription Drug User Fee Act (PDUFA) date. What are your expectations?
Dr. Suvannavejh: The April 1 AdCom was a surprise to many of us, including myself. But I really see this as more of a "checking the box" exercise by FDA, especially given a recent change in the leadership at the FDA's Endocrinology and Metabolic Drugs division. Also, there have been some safety issues that have been associated with a number of high-profile diabetes drugs over the past several years. Keep in mind that diabetics are on their meds in essence for the rest of their lives, and while efficacy is certainly important, safety is more so. So perhaps the new head of the division is being a bit conservative for the sake of simply being conservative. After all, there's no real downside to holding an AdCom from an FDA perspective.
In the case of Afrezza, I am not particularly concerned about the outcome of the AdCom given my view that there is nothing worrisome about either the Phase III data itself for Afrezza or the safety profile of the product. A key concern for FDA when it comes to diabetes drugs in the recent past has been the potential increase in cardiovascular adverse events, but from what we've seen from the safety profile of Afrezza, there's no obvious signal. Lastly, what also gives me confidence in a positive AdCom outcome is that Exubera, the very first inhaled insulin product that was approved in 2006, went before an AdCom in September 2005, and it garnered 7-2 votes in favor of FDA approval in both Type I and Type II patients. So unless I'm missing something major, I'll say there is a 90% chance of a positive FDA AdCom outcome. The caveat is that the FDA's briefing documents for the AdCom come out on March 28, two business days before the meeting is scheduled to take place. So I'll have a much better sense of a potential positive outcome then.
As for the April 15 PDUFA, there are two issues that I see: first, the issue of an ultimate FDA thumbs up or thumbs down; and second, the issue of whether the April 15 PDUFA gets delayed or not given the close proximity of the April 1 AdCom. As far as I know, at this point, FDA has not informed MNKD whether it will delay its April 15 approval decision deadline. That said, in my opinion, if they chose to do so, I wouldn't see this as a very big deal, especially if you keep in perspective that the FDA had MNKD conduct an all new and full Phase III program back in 2011, several years after positive data from the initial Phase III trials were already in hand. The issue of two prior complete response letters resulted in essentially a four year delay. So what's another few months or so? But as for my expectations for ultimate FDA approval, I would peg the odds of success at about 80-90%, fully acknowledging that when it comes to the FDA and decisions it makes, particularly on drug approvals and what may be happening behind the scenes, anything goes.
Yoffe: What are the key investor concerns regarding Afrezza's regulatory and commercial outlook, and what is your opinion on these issues?
Dr. Suvannavejh: As far as the regulatory outlook, I think investors have a few concerns. First, there's a bear thesis out there that the data generated from the most recent Phase III trials for Afrezza don't adequately address FDA's concerns that arose from the second complete response letter that was issued in January 2010. My view on this is that while an interesting take, I derive my confidence in the fact that the latest Phase III trials for Afrezza - AFFINITY-1 and AFFINITY-2 - were designed specifically with extensive input from the FDA, and since the data in totality were very positive, at least in my view, I don't think there will be an issue.
A second more theoretical regulatory concern relates to a view that the FDA simply may not want to approve another inhaled insulin product, based on the unknown long-term safety consequences with an insulin product that will be inhaled daily by a diabetic for the rest of his/her life - especially when one keeps in mind that insulin is a known growth factor. My response to that is that every drug that the FDA approves theoretically has unknown long-term safety consequences. This is the exact reason why FDA requires companies to conduct long-term surveillance on newly approved therapies. And so it's my full expectation that assuming Afrezza is approved, MNKD and/or its potential commercialization partner will absolutely be required to carry out some sort of long-term study as a way to stay on top of any potential safety signals with Afrezza that may arise.
In my opinion, it's really the commercial outlook that's likely the bigger investor concern. There are two aspects. First, the prior inhaled insulin, Exubera, turned out to be a major commercial failure - Pfizer (NYSE:PFE) ended up withdrawing that product from the market due to lack of sales and ended up taking a $2 billion write-down on it - and so there is the concern that Afrezza might be a flop as well. My take is that there are many good reasons why Exubera didn't succeed and many good reasons why Afrezza shouldn't follow in Exubera's footsteps.
First, the inhaler device for Exubera was simply huge. Anyone who's familiar with the Exubera device knows that was big, bulky, unattractive, and not discrete in any way; it had a lot of moving parts, and it also required multiple steps for washing and cleaning. So overall, it just wasn't very patient-friendly. Also, in an attempt to recoup the investment that went into developing the product, Pfizer priced Exubera at a significant premium, reportedly as high as $5 a day compared to the current $2-$3 per day for injected insulin. Exubera was also dosed in terms of grams (when insulin is more typically dosed in units). Lastly, by the time Exubera was finally available commercially, the product was linked to a potential increase in cancer. So not good. To be fair, a causal relationship however was never formally established.
I'm not expecting Afrezza to face the exact same problems. First of all, the current Afrezza inhaler, known as Dreamboat, is small and discrete enough to fit in the palm of one's hand. Also, MNKD has said that the price of Afrezza is likely to be much closer to the current price of injected insulin, albeit there might be a slight premium, similar to that seen with the current pen formulations of insulin.
The other major concern that investors have with Afrezza from a commercial perspective is the current lack of a commercial partner. Given MNKD's current stage as a company, it has no real commercial capability to launch Afrezza on its own, and thus it will either A) have to build it from scratch (a lot of execution risk given the capital, time and expertise required) or B) more likely (and preferred from my perspective), it will partner with a larger pharmaceutical company, one that most optimally is one of the big global diabetes players, such as a Novo Nordisk (NYSE:NVO), Eli Lilly (NYSE:LLY) or a Sanofi-Aventis (NYSE:SNY). For sure there are other companies as well beyond what I would call the "Big Three". These include: AstraZeneca (NYSE:AZN), which just acquired the part of Bristol-Myers-Squibb's (NYSE:BMY) diabetes franchise that it didn't already co-own through a JV for a total consideration of $5 billion; Merck (NYSE:MRK), which markets Januvia and Janumet, a combined $6 billion franchise; and Johnson and Johnson (NYSE:JNJ), which has a large presence in diabetes with its very substantial glucose monitoring business and also its diabetes drug Invokana, an SGLT2 inhibitor that is part of a newer class of agents.
But at the moment, Afrezza remains an unpartnered asset. Clearly, at this stage, investors and I would have preferred to have seen MNKD have a global partnership in place by now; however, given how close we are to the PDUFA, my sense is that potential partners are saying that they simply would prefer to see what happens with potential FDA approval. That said, given the totality of the global opportunity there exists for a novel product like Afrezza - and given a rapidly growing diabetes market where the current number of diabetics globally is expected to grow from the current 347 million to potentially as much as 550 million by 2030, we think the likelihood of a commercial partnership for Afrezza remains very high. My guess is that should Afrezza get approved, a partnership of some sort will materialize shortly thereafter.
Yoffe: Could you tell us more about the size of the rapid-acting insulin market, and what kind of revenue contribution are you expecting?
Dr. Suvannavejh: Overall, we estimate that the current global insulin market is about a $15B market, one that is composed of rapid-, short- and longer-acting formulations of insulin. Within the rapid-acting market, we believe the current market is worth approximately $6B. Based on the work we've done, we believe Afrezza can achieve peak sales in excess of $3B worldwide. It's important to note two things. First, our peak revenue forecast assumes US and ex-US regulatory approvals in both Type I and Type II patients. But given that 90-95% of diabetics are Type II in nature, the vast majority of use and revenue we see for Afrezza would come from the Type II diabetic population. And second, we believe that Afrezza is a type of product that is additive to the current diabetes treatment paradigm, and thus, it could help grow the overall insulin market.
Yoffe: In case Afrezza will fail to win FDA approval, what is the value of the rest of the company's pipeline?
Dr. Suvannavejh: MNKD has worked on developing other candidates in the past, including others focused on diabetes and those targeting cancer. However, in order to conserve resources, MNKD has de-prioritized these in the past year or so, even out-licensing two of its three cancer programs. As such, and given very limited visibility, we don't see any other obvious and tangible pipeline drug candidates. What remains left is a recently announced next generation inhaler device called Sprout that MNKD mentioned on its recent 4Q call. It could be used in acute pain settings, but the reality is that we've seen no data for Sprout to date. Therefore, for all intents and purposes, should MNKD be unsuccessful in getting Afrezza approved in the US - which would then probably mean a no-go in ex-US markets - we see little, if not zero, value in the pipeline.
Yoffe: How far can MannKind go with the current funding?
Dr. Suvannavejh: As many familiar with the MNKD story know, funding has always been big question mark for the company, especially in light of the high expenses that come along with sponsoring large Phase III trials in diabetes. In fact, as MNKD mentioned on its 4Q call last week, its cash burn for the year ending 2013 was a whopping $164M. That said, MNKD has been savvy enough in taking advantage of some unique financing vehicles, including an "at the market" (ATM) sales agreement and a $160M debt financing with Deerfield, a well-known and well-respected healthcare focused institutional investor, that has given it additional runway. And so, as of December 31, 2013, MNKD reported having $71M in cash on its balance sheet, which should be good enough to provide funding into the third quarter of this year. In addition, on March 3, 2014, MNKD announced through its 10-K SEC filing, that it was renewing its ATM agreements with MLV & Co. and another bank for yet another $50 million. That said, we'd hope to see additional non-dilutive cash coming into the company in the form of an upfront payment for any potential licensing deal for Afrezza.
Yoffe: As you mentioned, Mannkind renewed its ATM agreement with MLV this month. Do you believe the company will have to use this option to get through its upcoming targets?
Dr. Suvannavejh: It's not a given that they will need to use the ATM, especially if they can sign a big partnership deal for Afrezza. But what's great about the ATM, in my view, is the flexibility it offers companies. As a reminder, the ATM is a financing vehicle whereby companies are able to issue new common shares into the market, and importantly, at prevailing market prices. Like any traditional follow-on offering, yes, it is dilutive to existing shareholders. But another key benefit of the ATM that it also allows companies to raise money without the typical discounts to the current share price that you often see with traditional follow-ons. Obviously this is a very attractive feature.
Yoffe: What is your impression of the management team as leaders?
Dr. Suvannavejh: As visionary founder, CEO, and for all practical purposes, the main financial lifeline for MNKD over the past years, Al Mann has been a clear leader of the company. That said, given his age, it's likely that no matter what the final outcome is with Afrezza regarding potential US and ex-US approvals, new leadership will be needed to steer the company over the next 5-10 years. In my opinion, current President and COO Hakan Edstrom and CFO Matt Pfeffer have both done very solid and credible jobs, and are very likeable. Were I to pick a successor to Al Mann between the two - assuming such a candidate came from internal ranks - I'd probably place my bet with Mr. Edstrom.
Yoffe: In closing, what is your rating and price target for MNKD?
Dr. Suvannavejh: I've had a Buy rating on MNKD shares since I initiated coverage on the company last May. My current price target is $9, which is based on an Afrezza-driven DCF analysis taken out to 2025, assuming a 12% discount rate and 5% terminal growth. My current price target implies there's additional room for the stock to run.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MNKD over the next 72 hours. 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.
Additional disclosure: MLV or any affiliate expects to receive or intends to seek compensation for investment banking services from MannKind in the next three months.