MannKind: Red Sky In The Morning Warning

| About: MannKind Corporation (MNKD)

Summary

My thoughts on the return of Afrezza to MannKind.

The history of inhaled products will be outlined.

My thoughts on the future for MannKind will be offered.

The Drug is Back in MannKind's Hands:

With Sanofi (NYSE:SNY) opting for canceling their partnership with MannKind (NASDAQ:MNKD), the date (4-5-16) has arrived for the complete return of the Afrezza asset to MannKind. Looking back over the time frame for this partnership, where from the very beginning, we saw MannKind with one foot on a banana peel while standing at the top of a long downward sloping money sucking abyss. With this return, in my opinion, MannKind now has both feet on the banana peel. They went from a partnership providing needed money to continue in operation, only now being back to the status of running quickly out of operating funds. Now with the 1st Quarter of 2016 completed, it will be interesting to see what MannKind reveals in their SEC filing. Most critical is the status of cash they have that will keep them in compliance with their loan covenants. Considering they will need to seek outside money at the current time, it wouldn't look good seeking money when you are not in compliance with current outstanding debt. The old adage about never seeking a loan when you are broke certainly is appropriate for MannKind's situation.

Sanofi executives made the decision to rid themselves of this massive money losing operation as soon as contract provisions would allow. One of the many reasons that Sanofi gave for the breakup was the lack of patients wanting to continue their use of Afrezza. Sanofi cited a dropout rate of 65% by the end of 2015.

Afrezza Weekly Data for 2016"
Week: Date: Nrx: Up/Down Trx: Up/Down
1 1/1/2016 216 0 300 0
2 1/8/2016 199 -8% 239 -20%
3 1/15/2016 160 -20% 236 -1%
4 1/22/2016 209 31% 228 -3%
5 1/29/2016 210 0% 194 -15%
6 2/5/2016 159 -24% 211 9%
7 2/12/2016 174 9% 212 0%
8 2/19/2016 174 0% 206 -3%
9 2/26/2016 143 -18% 216 5%
10 3/4/2016 153 7% 203 -6%
11 3/11/2016 149 -3% 221 9%
12 3/18/2016 140 -6% 239 8%
13 25-Mar 127 -9% 209 -13%
Click to enlarge

Based on the above chart we see, now 13 weeks into 2016, the erosion of new prescriptions and refills are picking up speed to the downside. Going back to 10/23/15, we saw the largest weekly number of new prescriptions being written-421. Now looking at the last week's number we see a mere 127 prescription being written by prescribing physicians. This represents a decline of 70% from the previous high-water mark. With the March 25th, 127 prescription, one would have to go back to the 4th week (2015) of the launch to see a lower number being written.

As if new prescription woes aren't enough, we now see the refills have continued dropping. The sparseness for refilled prescriptions has grown by 30% since 1/1/2016. Sanofi citing a 65% dropout rate as being a major catalyst impacting their cancelling their partnership, with the last 13 weeks of data we see that the dropout rate is now running about 80%.

This could be a valid point for those pundits who claim the drop off for new prescriptions is acceptable, because Sanofi isn't marketing the drug. However, that point isn't valid as it relates to the drop-out rate. Sanofi, and even MannKind, have made a point that Afrezza will continue being available for patients. So if MannKind is going to maintain Afrezza in the market place when all rights have been returned to them, then it begs one to ask some simple questions!

MannKind states they are working to obtain new partnerships for marketing Afrezza. If that is the case, what new partner would be interested in trying to market a product that has a clear track record of new patients having 80% likelihood they will not renew their prescriptions? One can never forget, during the clinical trials, over 5,000 patients were getting Afrezza at no charge to them. Even then the dropout rates were massive considering the nature of the patient's underlying condition for needing insulin. Those few doctors who had prescribed Afrezza, and with most of them now avoiding their continuation for prescribing the product, how will a nonexistent marketing team operating with a miniscule budget be able to generate more prescriptions and maintain these Afrezza users?

The History of Inhaled Drug's Failures:

In an earlier article published on Seeking Alpha, I went into great detail concerning the fact that inhale technology is "old school" methodology and inhalers are commodity products. However, there are many pundits and die-hard advocates for Afrezza that think an inhaled product, being delivered directly to a patient's lung, is a panacea that will immediately make their investment bring in a gold mine of wealth for them.

Maybe it would be a good time to look at the recent history with inhaled products and just how much of a panacea they have been for investor's bank accounts. For starters we know that Pfizer only a few years ago had the first inhaled insulin product on the market. This product, Exubera, was a disastrous flop. Pfizer quickly wrote off this inhaled product to the tune of a multi-billion dollar fiasco. Next in line we had Allergan with an inhaled drug designed to address the massive migraine market. Allergan has had more rejections of this drug by the FDA than probably the number of wives that Mickey Rooney had.

Now let us jump to a more recent inhaled product that basically follows the Afrezza timeline for marketing to the public:

"May, 2013:Teva Pharmaceuticals USA, Inc., a subsidiary of Teva Pharmaceutical Industries Ltd (NYSE: TEVA), and Alexza Pharmaceuticals, Inc. (NASDAQ: ALXA) announced today that the companies have entered into an exclusive U.S. license and supply agreement for ADASUVE (loxapine) inhalation powder 10 mg for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults. Teva will be responsible for all U.S. commercial and clinical activities for ADASUVE, including U.S. post-approval clinical studies, and has gained rights to conduct additional clinical trials of ADASUVE for potential new indications in neurological disorders. Alexza will be responsible for manufacturing and supplying ADASUVE to Teva for commercial sales and clinical trials. "

"Approximately 4 to 5 million patients with bipolar I disorder or schizophrenia in the U.S. experience and seek treatment for agitation episodes"

"Approximately 4 to 5 million patients with bipolar I disorder or schizophrenia in the U.S. experience and seek treatment for agitation episodes," stated Larry Downey, President, North America Specialty Medicines. "This agreement reflects our business development strategy to pursue opportunities in our core therapeutic areas where we can apply our expertise and experience to enhance treatment options for patients. ADASUVE is a compelling addition to our U.S. Specialty Medicines portfolio, and we look forward to working with Alexza as we commercialize this important treatment option."

"Teva brings an established commercial presence in hospital and psychiatric markets. ADASUVE is approved to address agitation episodes in the hospital-setting, providing a fast-acting, non-coercive treatment option to patients with schizophrenia and bipolar I disorder," said Thomas B. King, Alexza President and CEO. "Teva has considerable strength and market presence with the Teva Select Brands group, and we are confident of their ability to deliver commercial success for this important new product."

With the announcement of the signing for this deal in 2013, now let us jump to February, 2016:

"Feb. 24, 2016 -- Alexza Pharmaceuticals, Inc. announced today that it has reacquired U.S. commercial rights for ADASUVE® (loxapine) inhalation powder from Teva Pharmaceuticals USA, Inc., a subsidiary of Teva Pharmaceutical Industries Ltd. Alexza and Teva have also restructured the obligations under the outstanding note from Teva. In conjunction with the reacquisition of U.S. ADASUVE rights, Alexza and Teva have completed a transition agreement, which is intended to provide continued availability of ADASUVE by Alexza to patients and health care providers.

"We appreciate the efforts that Teva has made to date and are looking forward to continuing to build the ADASUVE brand. We remain confident in ADASUVE's long-term commercial prospects and plan to continue to work with Teva to effect a smooth transition," said Thomas B. King, Alexza President and CEO. "Moving forward, Alexza will have primary responsibility for the immediate commercial aspects of ADASUVE and is working diligently to identify a new U.S. commercial partner for ADASUVE."

When Teva signed the deal with Alexza, Alexza's stock was trading for $5.55. When the stock market closed on April 1st, 2016, you could buy all the Alexza stocks you wanted for $0.46 a share. That is 46 pennies!

So now we have a history of four of the world's largest pharmaceutical companies involved with inhaled products. Allergan can't get their product approved by the FDA. Pfizer, Sanofi and Teva are companies that now have a history of colossal failures with an inhaled product in the market place. Pfizer, Sanofi and Teva combined have annual revenues that exceed $100Billion in annual revenues.

Litany of Excuses:

So what are the prevailing excuses for these failures being attributed to these highly successful pharmaceutical companies? Especially for the MannKind investors who continue wanting to believe in Afrezza:

  1. It was a grand conspiracy by the FDA.
  2. Sanofi only came on board so they could kill the product and stop it from dominating the world's insulin market. Sanofi had no intention in trying to sell Afrezza.
  3. Sanofi was using an outdated marketing plan for such a fantastic new product.
  4. Orchestrated cabal by short-sellers to undermine MannKind.

So what is the current position for the company after getting their drug back under their control?

Simply they have learned a lesson as for how not to market Afrezza and can "now" market the drug by themselves, and they can do it with no money! One has to forget that MannKind's current CEO sought out Sanofi to market Afrezza knowing the company had no money to market Afrezza. This is evidenced by the fact he agreed to such a disastrous contract in the first place. MannKind's cash was so precarious he actually had to arrange loan provisions from Sanofi in order to cover their share of Sanofi's marketing plans. So now that MannKind owes Sanofi about $50 million for a failed marketing plan, without enough money to operate beyond the end of this quarter, he has a plan to market Afrezza better than Sanofi could. But as I contemplate this new ability, I always remember the CEO admitting to investors many times that what he had said was "awkward". So considering he didn't understanding accounting principles, when he was just the CFO, makes one ponder why overnight he has become a marketing expert. When he sought out Sanofi the company had no money to operate with. Now they don't have the deep pockets of Sanofi loaning them their share of marketing expenses, he once again is manning a ship with no money. All this makes one wonder why the CEO sought to find a partner to market Afrezza in the first place. Amazing that MannKind executives thought they once needed a partnership since they had no operating money. Now that Afrezza has failed miserably in the market place, MannKind finds they are in a dire financial situation where they need money. Only now, with the same cast of characters, they think they can become marketing gurus with no money in the cash box.

From the very beginning, and when details of the Sanofi with MannKind were announced, I attempted pointing out to investors that the deal was one-sided where Sanofi had covered with claw-back provisions every aspect of their obligations under the deal. Even the amount of money Sanofi offered MannKind should have been a clear warning that Sanofi had grave reservations about the product being successful. My warnings fell on deaf ears, so now we have come full circle, where MannKind has no operating funds to pay their expenses.

One example of Sanofi's ironclad contract is when Sanofi announced their termination of the contract. The pro-MannKind pundits immediately started their campaign that Sanofi would need to pay MannKind a huge settlement fee for them canceling the partnership. The reality being that on 4/5/16 MannKind announces the return of Afrezza with no mention of any break-up money being paid. Be assured that Sanofi wouldn't return the drug without a full agreement for the details of an unencumbered ending of the partnership.

Comparison With Another Sanofi Partnership:

In order to provide better clarity on this issue, let's look at another partnership deal done by Sanofi with a partner having a diabetes product that isn't even approved by the FDA. Never forget--Afrezza was a drug already approved by the FDA. The Lexicon (NASDAQ:LXRX) is still in Phase II and III testing.

Partnerships Signed by Sanofi For Diabetic Market

MNKD

LXRX

Upfront Payments:

$150M

$300M

Milestone Payments:

$950M

$1.7B

Shared Market Expenses:

35%

0%

Shared Net Revenue:

35%

Double Digit %

Marketing Rights

None

Option for USA Market

Future Development Cost:

35%

Max of $100M

Stage of Drug Development:

FDA App.

Phase III and Phase II

Manufacturing Obligation:

100%

0%

Followup Safety Test Obligation

35%

0%

Up To

Loan Obligations to Partner

$175M

0%

Click to enlarge

The End is Nigh:

Afrezza is an insulin product! Insulin is a proven entity when it comes to addressing the medical needs for a diabetic patient. With Afrezza a huge amount of money was spent in validating the merits of a drug being delivered as an inhaled product. With years and years of effort, upwards of 7,000 trial patients, and MannKind spending more than one billion dollars, all the data collected indicates that Afrezza works no better than injected insulin. Injected insulin can be produced for nearly 50% less than Afrezza, therefore, costing the patient much less in out-of-pocket expenses. For those who opt for using Afrezza they have extensive requirements needing being done before the physician can prescribe their first prescription. Then after starting the use of Afrezza, MannKind will now need to spend around $500M is further validating the safety of the drug. While all this is happening Afrezza has a long and well validated history that patients will stop using the product.

MannKind shifted their marketing plan last year where they would become a technology driven company. This plan was based on their underlying Technosphere product. However, now for decades they have been unable to secure any meaningful partnerships for this product. Last year they indicated they were pursuing three identified products that would expand the Technosphere product. Now a year later they once again shifted the plans from last year's promises. The latest is a partnership with a mystery company that doesn't even have a phone number for one to seek basic information about who is behind such a company. And once again, there was no upfront money being provided by the possible "ghost" operation. With MannKind any meaningful events will always occur "tomorrow."

So all of these factors will prompt me to conclude my points with the famous adage:

"Red sky at night, sailor's delight. Red sky in morning, sailor's warning"

It's morning for MannKind investors, but it's not a new morning. MannKind is merely recycling events that have unfolded for years, where promises have gone unfulfilled. The morning sky is a vivid red, and the sunset for their stock, in my opinion, will be running in red ink! Investors can continue sailing on HMS Banana Peel, but you can't say that you haven't had enough warnings!

Good luck with your investing decisions! It is my sincere hope and wish that Afrezza will remain as an option for those patients needing options in treating their medical condition.

Disclosure: I am/we are long LXRX.

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.

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