The U.S. Food and Drug Administration (FDA) approved MannKind's (NASDAQ:MNKD) inhaled insulin product, Afrezza, on Friday, June 27, 2014 for use in improving glycemic control in adults with diabetes mellitus - one of the most common and serious healthcare problems in the world, affecting several hundred million people. Importantly, the approval covers both type 1 and type 2 diabetes. The approval was expected, following the overwhelmingly favorable vote by the regulator's Advisory Committee panel on April 1st. Significantly, too, the label and post-marketing requirements were practically precisely in line with expectations and rather benign, almost as clean as one could've reasonably hoped. Afrezza will have a "boxed warning" against its use by patients with asthma and chronic obstructive pulmonary disease, which is not surprising, since it is inhaled. As for post-marketing requirements, MannKind will have to conduct four clinical trials, the first to evaluate the product's pharmacokinetics, safety, and efficacy in pediatric patients, which could expand the target patient population; the second to evaluate the long-term effect of inhaled insulin on the cardiovascular system and on pulmonary function; the third to characterize dose-response; and the last to characterize within-subject variability.
The FDA's decision came out late in Friday's trading session, announced by a press release that was posted on the agency's website. The timing of the announcement, the lag in getting the news out to the general investing public, misleading early media reports, ill-informed assessments of the labeling requirements, an anxious stockholder base, and good-old panic all contributed to an extraordinarily volatile final roughly 30 minutes of trading in MNKD shares. Profit-taking may have played a role, too, and its likely impact was exacerbated, no doubt, by short-selling tactics that may have triggered stop-loss orders, fueling additional pressure on the price. The stock plummeted some 20% in a matter of minutes. It recovered most of those losses in the closing minutes, though. Moreover, the stock gained a full 10% in after-hours trading as investors assessed the FDA's decision more calmly and rationally.
The FDA approval triggers another $40 million payment from Deerfield to MannKind, which further diminishes any concern about the biotech's financial condition. Significantly, if necessary, the company could also tap its ATM facility with minimal dilution, given the prevailing stock price; less than five million shares would have to be sold to raise $50 million. That said, the aforementioned cash is likely to be rendered relatively unimportant in the near future with the securing of a significant other, be it a marketing partner or an acquirer. As noted in a recently published Seeking Alpha article, all indications are that a deal is very close at hand, with management comments in recent Wall Street presentations strongly suggesting that an announcement could be forthcoming in a matter of weeks; the most definitive timeline indicated by one executive was six to eight weeks after the FDA decision, but another executive didn't rule out the possibility that it could happen sooner. (The precise timing may matter to traders and option players, but whether it's two, three, or eight weeks shouldn't matter to investors.) And to the cynics who've repeatedly pointed out that the company has talked about partnerships in the past without ever announcing one, we would note the following: 1) Management achieved every important milestone it's promised over the past three years, including raising the money necessary, completing the Phase 3 trials on schedule, filing the NDA (New Drug Application) on schedule, and getting FDA approval; 2) No partner was announced before because Afrezza wasn't approved before, after all, why would any company want it disclosed that it had agreed to market a drug that wasn't approved, especially in the aftermath of Exubera's abysmal failure.
Looking beyond the partnership announcement (assuming it's not a buyout), stockholders can look forward to myriad potential catalysts for MNKD shares. The near-term possibilities include: 1) Announcements that the partners have filed marketing applications in Europe, Japan, China, and other geographic markets; 2) Licensing deals for the use of Technosphere, a drug delivery platform that's been validated by the Afrezza approval; 3) Development of Technosphere-based proprietary drugs by MannKind; 4) The commercial launch of Afrezza; 5) Prescription data for Afrezza; and 6) Revenues and earnings derived from Afrezza.
Afrezza's Revenue Potential and MannKind's Valuation
We've discussed Afrezza's many benefits in several previous articles, and won't review again here. The same is true of the company's valuation and potential. That said, the following might provide some perspective to the debates about how many diabetics will use Afrezza and whether MannKind is already expensive at a valuation of around $4 billion (at Friday's closing price of $10.00). There are more than 25 million diabetics in the United States, approximately 400 million in the world, and these numbers are growing rapidly every year. Assuming Afrezza is priced competitively with Novolog and Humalog, its primary rivals, MannKind would need just about 500,000 users of its inhaled insulin product to more than justify the current valuation. (Note: This assessment does not take into consideration the value of Technosphere or any of the other pipeline prospects.) Getting one million users would mean a roughly doubling in the stock price. In the context of 400 million diabetics, minus say 390 million who can't afford it, can't use it, prefer 1,095 additional injections a year, etcetera, getting half a million, one million, or even two million users hardly seems a tall order. Indeed, taking into consideration Afrezza's myriad benefits - including the facts that it's inhaled (not injected), works faster (alleviating concerns about hyperglycemia), and leaves the system faster (alleviating concerns about hypoglycemia) - an objective observer might even suggest that getting to two million users might almost seem like a no-brainer.
And last, but certainly not least, our heartiest congratulations to Mr. Mann and his team for persevering for so long and getting Afrezza over the finish line. Congratulations, too, to all the MNKD longs who managed to hang on through all of the trials and tribulations that have come along with ownership of this stock.
Disclosure: The author is long MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to being long MNKD stock, we are long its warrants and have bullish option positions. As well, we have recommended both MNKD stock and warrants to our clients.