Mannkind: Overlooked Biotech With Excellent Prospects (Part IV)

 Part IV: Mannkind’s (MNKD) partnership opportunities for Technosphere Insulin 

This is Part 4 of my six-part series covering Mannkind. In Part 1, I explained why Technosphere Insulin, Mannkind’s upcoming inhaled insulin, is a breakthrough product with the potential to significantly improve diabetes treatment. In Part 2, I explained why Pfizer’s (PFE) lung cancer scare with Exubera (a competing inhaled insulin) was just that – a scare. In Part 3, I highlighted some of the differences between Pfizer’s failed Exubera and Mannkind’s Technosphere Insulin. I am now going to discuss Mannkind’s partnership opportunities. 

To successfully commercialize a drug, it is not enough to have a superior product. You also have to market it well, especially to doctors. If you do have a superior product, your job is that much easier, because you can concentrate on educating the doctors on how your product is superior. But you will still need to market it; they will not beat a path to your door. Marketing can be quite expensive and involves building a large sales force to visit doctors, etc. (A drug can easily have 1,000 or more salespeople dedicated to convincing doctors to prescribe it.) This is not easy for a small company to build from scratch – practically impossible. Therefore, for Mannkind to be successful with Technosphere Insulin, they will have to do what every small biotech company has to do – partner with Big Pharma. 

Diabetes is a rapidly growing field and predictions are that the rate of diabetes will continue to rise for the foreseeable future. That being so, most pharmaceutical companies are anxious to get a piece of the pie, which gives Mannkind a large field of potential partners to work with. However, there is clearly much to be said for partnering with a company who already has products for diabetes in the market. Such companies will already have a sales force specializing in diabetes, saving time and money in building one from scratch. The sales force will already have a level of rapport with many doctors that we need to reach. The sales force will already have some level of education on the diabetes market in general, although they obviously need to be specifically educated about Technosphere Insulin in particular. Let us take a look at the possibilities. 

Pfizer is arguably considered to be the best marketer in all of Big Pharma. With Lipitor and other blockbusters going off patent, they desperately need new products to replace the revenue stream. However, they have no particular experience with diabetes. Pfizer was widely considered to have done a poor job with marketing Exubera, although admittedly they were handicapped by the fact that Exubera wasn’t such a great product (no medical advantages and some safety problems –see Part 1 and Part 3 of this series). But there’s really no point in thinking much about it. After being burnt with Exubera, I doubt Pfizer is quite ready to jump back into inhaled insulin anytime soon. And frankly, I don’t think that Mannkind wants them as a partner either. 

Moving right along. When we think of diabetes, the two companies that jump to mind are Novo Nordisk (NVO) and Eli Lilly (LLY), the #1 and #2 sellers of insulin in the world. They have a large portfolio covering regular human insulin, long-acting insulin analogs, and rapid-acting insulin analogs. They sell insulin in vials, in disposable pens, in reusable pens. They have large, experienced sales forces that concentrate on diabetes. They would seem to be a good fit for Mannkind’s Technosphere Insulin. 

But on closer inspection, this is not such a good idea, nor a likely one. If Technosphere Insulin were successful, it would cannibalize much of Novo Nordisk’s and Eli Lilly’s present sales, with a large share of the profit going to Mannkind. Obviously, Novo Nordisk and Eli Lilly are not quite rooting for Technosphere Insulin’s success. Although it’s true that it is better to cannibalize your own product than have someone else cannibalize it for you, I think that Mannkind would have to be wary about whether Novo Nordisk and Eli Lilly would really market Technosphere Insulin heart and soul. Would they portray it as a revolutionary product that can replace many of the other insulins or as a niche product that some people might prefer? I think that Mannkind could do better with a partner that has less conflict of interest, and, again, I don’t know if Novo Nordisk and Eli Lilly are even interested, having dropped their own inhaled insulin programs. 

This still leaves many pharmaceutical companies as good partners. Glaxosmithkline (GSK), who sells Avandia (a pill used in treating diabetes), and Bristol-Myers Squibb (BMY) are both looking to beef up their diabetes division. Another strong choice would be Johnson & Johnson (JNJ). They have a lot of experience with medical devices in general (which would include the inhaler used with Technosphere Insulin). And they are actively involved in the diabetes market, selling blood sugar meters in their Lifescan division and selling insulin pumps in their Animas division. They are, in fact, the #2 seller of insulin pumps in the world. 

But on due consideration, one company cries out from among all others as a match made in heaven: Sanofi-Aventis (SNY). Sanofi-Aventis is the #3 seller of insulin in the world, with their extremely popular product Lantus, the most popular long-acting insulin in the world. But, crucially, there is virtually no overlap between their product portfolio and Technosphere Insulin – no cannibalization for them to fear. 

A bit of background: There are different types of insulin, differentiated by how quickly they peak and how long they last. Lantus is a long-acting insulin, meant to be taken once a day by injection to cover the round-the-clock insulin needs of the body. Most diabetics also need to take a rapid-acting insulin at mealtimes to cover the insulin needs of that meal. Technosphere Insulin is a “super-rapid-acting” insulin, which makes it ideal for mealtime use. Thus, Technosphere Insulin dovetails with Lantus beautifully, filling in the gap in Sanofi-Aventis’s portfolio. (To be fully honest, Sanofi-Aventis has a rapid-acting insulin also, Apidra. But its sales are off the charts, in a bad way, and don’t begin to match Novo Nordisk’s Novolog or Eli Lilly’s Humalog. Sanofi-Aventis doesn’t even discuss Apidra at all in their annual reports or in their periodic letters to their shareholders. Sanofi-Aventis’s Lantus, on the other hand is the long-acting insulin in the market, far outpacing the old and outdated NPH and Novo Nordisk’s newer Levemir.) I think that Sanofi-Aventis would love to be able to market Technosphere Insulin side-by-side with their Lantus: Lantus for your long-acting insulin needs and Technosphere Insulin for your rapid-acting mealtime insulin needs. It would truly be a dream match. 

But either which way, there are certainly many possibilities open to Mannkind. Mannkind has indicated that they are considering entering into a couple of regional partnerships (one for the U.S., one for Europe, etc.) instead of one global partnership. Mannkind has also said that they want to build their own sales force side-by-side with that of a partner, at least in the United States. This would give them more control over their marketing message. 

After Pfizer’s April 9 cancer announcement that Exubera had a higher incidence of lung cancer (which I discussed in detail in Part 2), Mannkind announced that they are postponing finding a partner until after all their Phase 3 data is in (at the end of this year) so as to give them more ammunition in their negotiations. Some people seem to fear that with all the “bad” news (i.e. Pfizer’s cancer announcement, Exubera’s commercial failure, and Novo Nordisk & Eli Lilly dropping out), Mannkind will have trouble finding a partner. I believe that these fears are totally unfounded. Firstly, I believe that pharmaceutical companies are capable of looking at the issues sophisticatedly, ignoring the superficial similarities. More to the point, however, it is quite common for pharmaceutical companies to make partnerships with built-in milestones. We will pay this much on partnering, this much on FDA approval, this much on European approval, this much if it reaches blockbuster status, etc. Royalties are often ratcheted based on sales levels so that as the drug is more successful in the market, the company who developed it gets more royalties. Therefore, any pharmaceutical company who has lingering doubts about Technosphere Insulin’s viability in the market will simply cover their back with well-crafted milestone agreements. This will also make it unnecessary for Mannkind to “sell out” for less than they should. 

On a positive note, Mannkind’s negotiating position is strengthened by how far developed their product is. Most small biotechs are forced to find a partner much earlier in the process, before the data has really proven their drug effective and safe. In addition, the small biotech is usually seeking a partner who will foot the bill for the rest of the development, a hefty outlay of money. But Mannkind is taking Technosphere Insulin all through the end of Phase 3 to filing by themselves (they intend to file for approval by the end of this year). This means that they are approaching potential partners with a more proven drug, backed by reams of data. It also means that the partner will not have to fund much development. Together, these reasons cause that Mannkind should be able to get a much sweeter deal than small biotechs usually get, with a much higher percentage of the sales going to Mannkind. 

Mannkind’s negotiating position is further strengthened by their large cash position. In their most recent 10-Q (the quarterly report that public corporations must file with the SEC) as of March 31, 2008, Mannkind had $269 million of cash on hand. In addition, they have a line of credit for another $350 million available from Al Mann, their founder, Chairman, and CEO, on very good terms. With a cash position like this, they are negotiating from a position of strength. 

A note about Al Mann: Al Mann is a self-made multi-billionaire who made his money as a serial entrepreneur. He has founded a dozen medical device companies, successfully introducing many innovative products to market and bringing his companies to ultimate success. Interestingly, Al Mann found himself in a similar position as today by MiniMed, a company he founded to make insulin pumps. There too, a competitor had severe problems with their product, with some people even dying in the trials. That competitor ceased their development as did everyone else working on insulin pumps, including Novo Nordisk and Eli Lilly. MiniMed’s stock plummeted. But MiniMed forged on with their superior product to become the #1 seller of insulin pumps in the world today. From a low of $1.75, they rose and rose until they were bought out by Medtronic for a split-adjusted $192. Today too, Mannkind’s competitors have stumbled and Mannkind is besieged on all sides by doubters. Mannkind, with Al Mann at the helm, is ignoring their doubters and forging on with their superior product. It really is déjà vu all over again. 

In Part 5, I will discuss Mannkind’s drug pipeline (besides Technosphere Insulin, obviously). 

For my full report on Mannkind, see here.

Disclosure: Author bought MNKD at $2.95 and is considering buying more. Author has no position in any other stock mentioned.

Comments

[R J Steffens]

Hi Ahithophel. You have interesting thoughts and I look foward to your articles. I wrote a few about another biotech- Generex. Terms for a partnership should be more lucrative considering Mannkind has brought Technosphere into Phase III alone. They have done a great job and efficacy seems clear. The main concern to a potential partner would be the odds of success for another "inhalable" insulin and perhaps long term safety issues. All of the data Mannkind presents could show could be very positive, but diabetics and endros may shun another inhalable until time erases doubt. Not all, but a percentage. Right now this large marketing hurdles. That would bring with it a huge orientation and educational need, on top of what already would be needed for any new delivery option.

The regional deals do remind me of Generex's position. They have signed distribution deals with Shreya Life Science in India and Bioton's Sci Gen in the China region. The terms are unique- with the partner paying regulatory costs for submission of approval, marketing, educational and be responsible for sales and distribution. They also provide the insulin crystals used to make their Oral-lyn buccal spray. (Oral-lyn is not an inhalable.) For the US and other large markets, we do not know if a more typical partnership will ensue. Generex has also brought there product to Phase III and for such a tiny firm this was a great accomplishment:

Friday, June 13, 2008

Biomed Notebook
By Ryan McBride
Oral insulin back in Worcester

<In the turbulent business of developing insulin taken orally rather than by injection, a Canadian biotech with R&D operations in Worcester hopes to pick up where such drug industry giants as Pfizer Inc. and Eli Lilly & Co. left off.

Generex Biotechnology Corp., a Toronto-based firm with a 12-person lab in Massachusetts, said last week it has launched a Phase 3 clinical trial of an oral insulin spray. Once seen as a Holy Grail of drug delivery, orally administered insulin has lost some luster because New York’s Pfizer, Eli Lilly of Indianapolis, Denmark’s Novo Nordisk AS have all pulled the plug on inhaled insulin programs in the past year.

No large U.S. drug companies have formed partnerships related to the oral insulin product with Generex — as Eli Lilly did with Cambridge biotech firm Alkermes Inc. — but Generex CEO Anna Gluskin indicated that her firm wouldn’t jump into a partnership without a big payday. “They are the ones that failed,” Gluskin said of Pfizer, Lilly and Novo. “So they really have to look at paying us a lot of money.”>

www.masshightech.com/s...

I hope they ALL succeed and give diabetics the choice they deserve. That would be a welcome change from a prison sentance of needles. It will be interesting to see how this plays out for Mannkind and what kind of terms they could now procure. From the strong efforts of Mannkind to the novel system developed by Generex, a new dawn in diabetic care is near.

[R J Steffens]

PS. I hope you delve into the GLP1 product. I also wanted to use my real name and step into the light. The psuedos sometimes fall into default and cause confusion. Neither of us are psuedoname types of people. Keep up the good work.

[Ahithophel Weissberger]

"I hope they ALL succeed and give diabetics the choice they deserve." -- R. J. Steffens

Amen!

[Mr BSG]

AW, this is a major issue to MNKD's survival;


" are postponing finding a partner until after all their Phase 3 data is in (at the end of this year) "

" Mannkind had $269 million of cash on hand."

With a burn rate of $100 Mil a Q, this cash will be gone by year end 2008 and no partner in sight.

The FDA will send them back to PIII for a larger trial to counter or disprove PFE's health issues with exubera, including lung cancer. They WILL NOT make the same mistake twice. That will push MNKD into 2011 and with a cash burn of $100M a Q, that will be game, set, match.

The insulin pump comparison is apples to oranges. The pump had technical issues that had to be resolved, not health issues as with inhaling insulin into your lungs.

The success of one product in one area, does not guarantee success in a totally different area. That logic can lose investors a lot of cash, in fact for those that invested in MNKD two years ago, they are well aware of that pain.

I won't say it's impossible but I will say extremely unlikely that any BF will lay out $500 M to $1 Billion to partner with MNKD on a similar product that has already been proven to be a total failure.

In just 2 years, their stock has gone from $22.75 to $2.75 !

My prediction is a $1.00 by Dec 2008.

The writing is on the wall, MNKD is done....investors beware.

[Mr BSG]

A pictures worth a thousand words;

139.142.147.19/StockCh...

[Mr BSG]

LOL and you're pumping this report on the MNKD Forum on Yahoo!

I see you're not to popular over there.

messages.finance.yahoo...


Hit $2.59 today.....by the time Part VI comes out, MNKD will be at $2.00...lol...good work.

[Ahithophel Weissberger]

"With a burn rate of $100 Mil a Q, this cash will be gone by year end 2008" -- Mr. BSG

As I mentioned before, Mannkind has stated numerous times that although they certainly will not be making profits for the next while, which is to be expected, they expect the cash burn rate to decline (from the present rate of $100 million per quarter) after the next quarter or two. Please permit me to repeat my response to your skepticism about this statement of mine, in case you missed it in my comments on my previous articles.

I will quote some sections from their recent quarterly conference calls.

"As I said on our last call in November, we anticipate our cash burn could increase significantly over the next two to three quarters and would then decline." -- Richard Ansderson, CFO of Mannkind

That quote is from their 4th quarter (of 2007) conference call, held on March 4, 2008. A transcript can be found at seekingalpha.com/artic...

"We anticipate our cash burn may increase further over the next one to two quarters and should then decline." -- Matthew Pfeffer, CFO of Mannkind

That quote is from their 1st quarter conference call, held on May 5, 2008. A transcript can be found at seekingalpha.com/artic...

[flashpoint]

In reply to Mr BSG "A pictures worth a thousand words;" You are absolutely correct, assuming that your are holding the picture right side up!
quotes.nasdaq.com/quot...

[retired pharma]

AW,

I just read part 4 and left you a post on part 3..My mom is recovering from a recent setback at age 86 and I am behind in my readings. She is doing better now.

I must say the more I read your blog the more I become interested!

I gave you my list of prospects as you know and we were aligned w/ the exception of Sanofi-Aventis.Thanks for the Heads up on LA Insulin Lantus vs MannLind TI(short-immediate acting) mealtime dose.I can see your logic and must confess it has probably been discussed and SNY is awaiting the right moment in time to announce.

Does Mr. Mann really want to establish his own Sales Force..because that is a huge/expensive undertaking.Let me give you some numbers.Best Reps who know this Market plus perks are making $150,000 per year...times 1000 reps equals a startup cost=$150M...a better move would be to partner w/ a SNY for US and exUS w/ an option to develop said Nannkind Force eventually but in the meantime like NOW... start up a "Scientific Affairs Liasson" division w/ sole Scientific and NO SALES initiative. This force of say 50 officers would go out into the field to support Scientific Forum only.They would set up all phase 4 sites for post marketing and they would recruit the best Sales Reps from their geographies for the actual US Marketing push.They would attend all Diabetes Meetings and cover the Boths and Scientific Forum.They would be in touch by (Cell) w/ all US thought/opinion leaders and they would lay down the SCIENCE!

This should be done now (maybe 10-20 people) and grow over the nearterm in a small way prior to P-3 finalization to prepare for NDA to FDA.I know not if this is part of MNKD's strategy but it is the RIGHT strategy and everyone in our INDUSTRY already knows this as fact!

Please tell me I am correct or I will write to AL for you!

[Mr BSG]

Are you purposely trying to confuse people here. What exactly don't you understand about the following;

" Mannkind had $269 million of cash on hand."

" With a burn rate of $100 Mil a Q, this cash will be gone by year end 2008 and no partner in sight."

$100 mil a Q, 3 Q's left in the year is $300 Mil...they only have $269Mil. They will be out of cash BEFORE the end of this year.

What are you talking about?

You keep repeating yourself but don't address the issue I'm raising. They will be out of cash before year end, they aren't even looking for a partner and they have 600 employees to pay, plus all of the expenses associated with this company.

This stock will be at a $1 by year end but for arguments sake, lets use $2.00.

$100 Mil a Q = $400 Mil a year.

Assuming anyone will buy into a PP, that's 200 million shares at $2 to raise the $400 Mil required just to get through 2009.

That takes MNKD's shares to 300 Million, tripling todays numbers.

Now if you use my number of a $1.00 a share, then the total number of outstanding shares hits 500 Million!!



No partner, no FDA approval, no income.

What do you think 300 million shares will be worth.

I say a $1.00 by Dec 2008 and bankrupt in 2009.

[Ahithophel Weissberger]

"$100 mil a Q, 3 Q's left in the year is $300 Mil...they only have $269Mil. They will be out of cash BEFORE the end of this year." -- Mr. BSG

As mentioned in the article, besides the $269 million in cash on hand, Mannkind also has a $350 million line of credit available from Al Mann, their CEO, on very favorable terms. That line of credit has not been drawn on at all as of now. Together that totals $619 million available to Mannkind before they have to start raising more money. Mannkind has repeatedly said that they have enough money to last them until the end of 2009 before they need more money (either through partnerships or through financing).

[Mr BSG]

That $350 Million has to be paid back and the only option MNKD will ever have is to issue stock. Slice and dice it which ever way you please but this is serious MAJOR debt accumulating here.

" In October 2007, we issued and sold a total of 27,014,686 shares of our common stock. Of this total, 15,940,489 shares were sold to our principal stockholder at a price per share of $9.41 and 11,074,197 shares were sold to other investors at a price per share of $9.03. "

"other investors" are on the hook for a $100 Million worth of stock they purchased in Oct 2007. That investment is now worth $30 Million.


Mr Manns investment of $150 M is now worth $42 Mil.

Good luck finding one investor that will throw any serious money at this company.

If it weren't for Mr Manns deep pockets, it'd be bankrupt by now, nevermind 2009.

[Ahithophel Weissberger]

"That $350 Million has to be paid back and the only option MNKD will ever have is to issue stock." -- Mr. BSG

Well, that is certainly true according to your reading that the FDA will not approve it (at least not right away) and that they will have trouble finding a partner.

However, I believe that the FDA WILL approve TI within a year of filing and that they WILL be able to find a partner. In that case, they may very well not need to sell stock at all. (And even if they wanted to, presumably the stock would significantly rise in those events and the dilution would be much less than your projections.)

You are certainly entitled to your analysis that this won't happen, and in the same token I am entitled to my analysis that this will most likely happen.

[Ahithophel Weissberger]

Retired pharma:
"Does Mr. Mann really want to establish his own Sales Force..because that is a huge/expensive undertaking. Let me give you some numbers. Best Reps who know this Market plus perks are making $150,000 per year ... times 1000 reps equals a startup cost=$150M" -- Retired pharma

Well, I don't think that they are planning to launch a full 1,000 strong sales force for the reason that you outlined so forcefully. I think that their plans are more along the lines of establishing a smaller side-by-side sales force, perhaps only to endocrinologists, perhaps only to opinion leaders. Obviously, I am not privy to their innermost strategy sessions and presumably nothing can possibly be set in stone until they have a firm commitment with a partner and a mutual plan is decided on. That said, your suggestions definitely make plenty of sense and I trust that Mannkind's executives are weighing their options carefully -- they're not neophytes, you know.

Let me quote some pertinent lines from one of their quarterly conference calls.

"In order to facilitate the launch of Technosphere Insulin we plan to create a decision infrastructure support group to educate the broad medical community and make the transition easier and smoother. We are already developing our science supporting launch program. We are also implementing a program of scientific publications and we are launching medical education and opinion leader outreach programs." -- Alfred Mann, founder and CEO of Mannkind

That quote is directly drom their fourth quarter (of 2007) conference call held on March 4, 2008. A transcript can be found at seekingalpha.com/artic...

[V.P.]

Great article AW: You certainly are entitled to your opinion on TI!

However, management has already burned $1.1 billion in develpoing TI. While the current $619 million should last them until 2009/10 (assuming their operating expenses go down as planned), I expect the FDA to adopt a cautious stance if and when the NDA for TI is filed. Tell me, how soon do you think the management can earn the $1.1 billion burnt in TI's development so far? Additionally, I do not see the management launching a new product in the coming 5 years based on their threadbare pipeline beyond TI.

[Ahithophel Weissberger]

V.P.:
"However, management has already burned $1.1 billion in develpoing TI. ... Tell me, how soon do you think the management can earn the $1.1 billion burnt in TI's development so far?" -- V.P.

That is an interesting question, but it is only relevant to whether it was worth it for Mannkind to have invested the $1.1 billion that it did back then. That is not the question on the table now and it is not really a relevant question for an investor who is considering buying MNKD now. Mannkind's market cap is right now $290 million. If you buy a share in Mannkind NOW, you are buying this company (with a drug that I believe will definitely pass FDA inspection and probably do well in the marketplace) for a fraction of its worth. Ask yourself: If Technosphere Insulin IS successful, will Mannkind deserve to be worth only $290 million? That is the only relevant question when it comes to valuating MNKD the stock (in addition, of course, to whether you think Technosphere Insulin will be succesfull or not). We don't care whether the original investors make back their money with enough profit to make it worth it.