The biotechnology sector of the stock market has one singularly unique aspect that differentiates it from any other sector - the FDA Advisory Committee Meeting, or Adcom, as it's commonly abbreviated. According to the FDA website, Adcoms are "committees and panels to obtain independent expert advice on scientific, technical and policy matters." But to companies that face them, they're perilous dates with destiny that almost always end in disappointment, conclusively determining the fate of a company's commercial product candidate and consequently, the size of a shareholder's remaining position in that company. Because of this, adcoms have become the very definition of the binary event which has one of only two possible outcomes - very positive or very negative.
Last year, there were several of these well-publicized events, and each of them drew the interest of shareholders and opinion piece writers such as myself. Most of them did not turn out favorably as their shareholders had hoped for, with the notable exception of Vanda Pharmaceuticals' Tasimelteon.
I think it's important at this time to review these adcoms of 2013, because they tell us something important about investing in the sector. They're reminders that we must not let our enthusiasm for a company and its product keep us from stepping back to make a more objective appraisal of the situation, which takes into account tangential issues involving politics and psychology, perhaps more so than the medical and mathematical understandings that guided our earlier due diligence.
MannKind's (NASDAQ:MNKD) advisory committee meeting has been scheduled for April 1st and will address the potential commercialization of Afrezza Inhalation Powder. Despite the FDA's seemingly benign synopsis of its mission, the panel will either vote for or against Afrezza approval.
Now before I begin to break this down, I want to state unequivocally that no one, including myself, knows what the outcome of this event will be prior to its having taken place. There are simply too many variables involved, most of which are hidden from our view. There are, however, those of us who are keen to take a position one way or the other, and to share that opinion with you in the hopes of spurring a more thoughtful and profitable discussion.
Here's what I think an advisory committee meeting is.
Having had the privilege of being a writer here for a little over a year now, I've in parallel had the pleasure of observing many of these adcom events unfold. On each and every occasion, I've witnessed shareholders express resolute faith in the company and its product. In the minds of these dedicated investors, there's simply no way that the FDA panel can come to any other conclusion other than approval.
The foundation of this opinion is twofold.
- The product is as good as investors believe it to be. Examples of this would be Amarin's (NASDAQ:AMRN) Vascepa and Dynavax's (NASDAQ:DVAX) Heplisav.
- Investors believe that FDA adcom panels are objective assessments of the commercial viability of a product candidate.
I want that to sink in. I wish I could have 12 inches of blank screen space around that two-word exclamation, but in the absence of editorial approval for my breach of standard practice, we'll let it sit right there.
Investors who honestly believe in the sterile objectivity of human beings inevitably come to one conclusion, and one conclusion only when their perfect product candidate is rejected - the FDA, they say, is corrupt.
At least, no more so than any one of us is. If you hold this idealistic, albeit adolescent opinion, the problem is within you. Your conceptualization is incomplete, and invariably will lead to disappointment.
It's my opinion that in addition to being everything that the FDA implies them to be, and everything that we'd hope for them to be, adcoms are something more. They're agency quorums, required by statute to be held in public, comprised of human beings designed to achieve noble outcomes that are compromised from the outset by the prejudicial nature of our humanity unduly influenced by competing forces of known and unknown origin.
With this understanding, it's easier to see why so many disappointed investors in the aftermath of adcom rejections contend that panel members were dead set against them before a single word was ever spoken on behalf of the petitioning party.
Therefore, under these circumstances, your best chances of success at adcom are to position yourself beneath at least one of the following umbrellas of protection.
- To enter into the advisory committee meeting having already had extensive, sustained and regular contacts within the agency.
- In the absence of this, to be in the presence of a large-cap commercial partner who has influence on these imperfect human beings in the form of extensive, sustained and regular contacts within the agency.
- Sans either of these, to enter your product candidate into a therapeutic space that currently has no competing commercial interests, so that panel member objectivity is optimized.
It should be noted that presently, MannKind has none of these three advantages.
On September 13th of 2013, I amended my article dated June 21st of 2013 in support of Amarin's Vascepa approval with a comment indicating that I had reversed my position. I did this because after having listened to a presentation by the company on August 15th, I became convinced that things weren't going so well in its relationship with the FDA.
I then decided to write an article elaborating on that position because I believed then, and even more so now, that the same skill set that might serve an investor in selecting a stock in this sector is not necessarily the same skill set that might serve them well in predicting the outcome of these highly politicized events.
Put another way, a medical degree might allow you to assess the value of a company's compound more accurately. A mathematical degree would likely enable you to comprehend the statistical significance of a Phase 3 trial result with greater clarity. But a psychology, or political science degree, such as the one I've heard Adam Feuerstein of The Street possesses, might in fact better allow you to parse the words, gauge the emotions and evaluate the behaviors of participants in these upper chamber, power-brokered, economically-influenced confabulations.
The MannKind situation is now stratifying into two camps, which is the normal course of events where an outcome is either win or lose. On one side of the equation we have the pessimists, represented by the aforementioned Adam Feuerstein of The Street, and here on Seeking Alpha, EnhydriPECorp. It's perfectly fine for you to lump me in now with this dour duo.
On the upside, representing the good guys, we have one of the best contributors here on Seeking Alpha, George Rho, as well as the writer who got the MannKind ball rolling in the first place, Joe Springer, and also, PropThink and The Street contributor, Dr. Aafia Chaudhry - offering expert medical endorsement.
My inline disclaimer.
My approach here is a bit different. I'm the dumbest guy in the room. I have no degree, but a small bit of latent pedigree. An enemy once described me as a "bus-driving mystic turned financial blogger," which I find as funny as it is accurate. You should, therefore, as my additional disclaimer advises, pay no attention to what I'm about to tell you.
Why I believe Mannkind's Afrezza will be rejected at adcom.
In my Amarin article, I introduced a concept by the late, great mythologist, Joseph Campbell now known as the pedagogical stunt. You can see the drawing here.
In this picture, you are represented by the larger circle. There is a dividing line between your conscious mind, depicted as a square, and your subconscious mind, displayed as a small circle. According to Campbell, we errantly identify ourselves with the square, when in point of fact, the circle is running the show.
This has several implications relative to the subject at hand.
First, FDA panel members, as is true of all of us, are subconsciously and naturally prejudiced in favor of their long-term friends and associates. As open-minded as they may want to be, it's a struggle. More on that later.
A second outcome spins us off in the direction I'm about to take, which is that what's in your subconscious mind constantly bubbles up to the surface, whether you want it to or not.
In the case of Amarin, for instance, President John Thero's appearance at Canaccord a full two months before Vascepa's adcom, was a curious contradiction telling us in one breath that all was well, while in the next detailing an extensive list of adcom preparations that included the hiring of consultants and the enactment of mock panels.
And just today, in one of the most extraordinarily candid responses I've heard at a public presentation, CFO Matthew Pfeffer of MannKind had trouble composing himself at the 2014 RBC Capital Markets Global Healthcare Conference in New York when asked if there was more news to come relative to the withholding of the full data set from the recently completed pivotal trials.
Yeah, I get a lot of those kind of phone calls. And they're usually stirred up by somebody, I probably shouldn't make these editorial comments but it often surprises me how anybody can write an article and get it posted on the web somewhere, even if they're an admitted short and try to speculate about things and stir up a lot of questions.
Have we presented every little bit of data from the trials, and break down the number of people in the different age ranges and sex and all those? No. You don't put that, that's not part of the high level results. But it's not really relevant or material for most purposes.
And those are the kinds of things you save for the full data set that appears in a CDA or peer review journal. You've seen stuff like that in the past from our prior two trials and those were presented.
We only put out the topline data - the data that's important, the key indicators and things that the FDA is going to rely upon. If there were something else that was material by definition, we would have released it. There just isn't. Everything else is kind of supportive or underlying detail. And frankly, it just isn't that important.
So, is there stuff that we haven't released? Yes. Is it important? No. I don't believe so.
I'm so glad I didn't miss this one.
I had loosely followed the growth of MannKind over the past several years, in part because of my admiration for the accomplishments of its founder, Alfred Mann, and also because of the promise represented by Afrezza as both a pain reducing and ostensibly efficacious product.
So when I saw another article by MannKind apologist, George Rho pop up in my headline list entitled; "MannKind's Day Of Reckoning Is Getting Very Close," I had to give it a look. You see, a "day of reckoning" does not usually imply a positive outcome. I was relieved to see, however, that George had not altered his previously conscious impressions of support for the company, even if his subconscious mind was saying something different in his haste to publication.
The Black Box - Black Swan Argument
And so I let it go. Then, on February 20th, I was greeted by an article authored by the crafty EnhydrisPECorp, in which he claimed that the company was not being at all forthcoming with investors as it should be. I can only imagine that this was the person that the CFO of MannKind was referring to in his angry rant.
The basis of the author's claim was rooted in his impressions of the 2013, Q4 Earnings Call Transcript, which you can find here. Seeing the same visceral reactions on the part of shareholders in the comments section of his article that I experienced in my Amarin piece, I felt compelled to listen to that conference call myself to see if I came to the same conclusions.
I did. And I have no short position in the company or position of any kind.
Now, having said that, I think it's important to say two things.
- I don't think that the full data set is being withheld because there's some dark secret in it that MannKind doesn't want us to know about.
- I don't think it's being withheld as a courtesy to the ethical requirements of the American Diabetes' Association, as MannKind suggests it is.
Another possibility that I think is more to the point, is that MannKind's management is applying the wisdom of silence to the situation. They don't want a public debate raging about that data set, which could sour panelist opinion prior to MannKind being able to state its position in person. And we've already seen that Mathew would prefer a better world where multi-million dollar public companies aren't bothered by the fact that "anybody can write an article and get it posted on the web somewhere."
But you see, you really can't suppress that reality below the line of the pedagogical stunt. It'll just keep bubbling up. As a simple strategy, it doesn't work either. Everyone's talking about that data set now and growing more concerned about its contents every day, even if they shouldn't be.
Why this strategy makes sense to Matthew Pfeffer, I can't tell you. He obviously doesn't make the connection between complete transparency and shareholder trust. Perhaps this happens because he doesn't inhabit the same world that we live in. Raking in $939,498 in executive compensation can make one a little out of touch with the importance of asset protection that occupies the minds of those of us making one-tenth of that, or less.
Consequently, that data set deserves to be made public and two business days before adcom - it likely will be made public, which sort of makes Pfeffer's justification for withholding it seem less plausible than other suggestions proffered by bloggers.
For the sake of MannKind and its shareholders, I do hope that Matthew's opinion of the unimportance of that data set holds true. It likely will, but then again, the unexpected often does occur.
Other things have caught my attention.
Let's go back to the Piper Jaffray Healthcare Conference held on December 4th of last year. In it, CFO Pfeffer starts by going over the history of the change of inhaler devices and the requirement by the FDA of longer efficacy trials. He then notes the successful completion of the trials which met their primary endpoints.
Up steps Hakan Edstrom, president and chief operating officer, who is responding to questions by Josh Schimmer. He starts by noting that he had a couple of meetings with the FDA to discuss trial designs prior to successfully completing those trials. He states that he doesn't know if an adcom will be required, partly because of a change in leadership at the agency. He then goes on to enumerate several of the advantages of Afrezza, including its fast-acting nature and ease of use.
What struck me, however, was the naïveté of Mr. Edstrom that reminded me very much of the naïveté of Mr. Thero at Canaccord. It appears as if corporate executives are not aware of the larger audience to which they speak in these presentations.
Remember now, in my paradigm, FDA panelists are human beings. They establish connections and friendships, like we all do. But their ongoing and meaningful relationships are predominantly with representatives of big pharmaceutical companies like GlaxoSmithKline (NYSE:GSK) that they meet on a daily basis. A company like Amarin may interact with these same individuals no more than a half-dozen times a year. Consequently, no tie of friendship is formed.
By way of comparison, here's John Thero of Amarin at Canaccord talking about GSK's competing heart health treatment - Lovaza.
When we do get that indication which we're counting on, we intend to make it very clear to docs that they have a misconception over Lovaza being approved for that indication. In fact, Lovaza was studied twice for that indication and failed to get approval due to its LDL increase.
Furthermore, we're going to be working with, continuing to work with the payers to insure that they're aware of the off-label use of Lovaza and seek, at least with certain of the plans the opportunity to put further restrictions on off-label use of Lovaza.
So here we have John Thero, just two months prior to adcom, threatening to take food off the plate of GlaxoSmithKline. I don't know what to tell you about that other than it makes little sense to me. It was, however, indicative of the absolute blindness to cause/effect relationships, and to what was coming that guided my reversal of opinion on Vascepa fortunes at Adcom.
Now you ask: what does this have to do with our beloved Mr. Edstrom?
Well Mr. Edstrom, in 34 days' time, will be sitting down with endocrinologists at the Endocrinologic and Metabolic Drugs Advisory Committee Meeting. And I'm quite certain that there have been a few water cooler conversations amongst that clan of specialist practitioners over these remarks at Piper Jaffray, which were made innocently enough in response to a question regarding market entry points through GPs - I assume that means general practitioners, or through endocrine specialists.
Usually, what you see is that GPs, I mean are following what's going in the marketplace and certainly from that point of view, we think that having kind of the endocrine and the specialist understand the product, has kind of endorsed the therapy itself is an important part and certainly of the introduction and marketing of the product.
But we also very much see the GPs being enthusiastic about this product from the point of view of the fact that with significantly less risk of hypoglycemic events for the patients, weight neutrality and most of the time initially even weight loss and good AC control.
It is an opportunity for the GPs to retain the patient inside their practice because normally otherwise as the patient transitions from say oral drugs into injectable drugs and insulin, the GP tend to lose those patients to the specialist. This is an opportunity for them to retain the patient to actually retain the revenue from the patients and that's where the simplicity of our system is very attractive.
Again, if you're paying for professional consultation on adcom appearances, as both Amarin and MannKind have indicated, then I suggest that both companies get better consultants. Perhaps, I should open up my own consulting firm, because I would never have let Mr. Thero's or Mr. Edstrom's words enter into space. Never!
Here's an off-topic pearl before we leave Piper Jaffray.
Having little if anything to do with adcom approval, it took a question from an unidentified analyst at Piper to teach me something about Afrezza that I hadn't to date learned elsewhere. And that is that Afrezza isn't a product that will eliminate the use of needles for insulin patients entirely.
Here's Hakan again.
Normally, what you would expect today is that the patient takes either one or two injections of long-acting. And with the prandial insulins today, there would be one per meal, so there could be in between four and five injections a day. With our products, you could then basically eliminate certainly three injections in conjunction with the meal. You may have one long-acting or possibly two injections of a long-acting insulin.
So, approval of Afrezza isn't really about a complete change of paradigm, but a partial shift toward a new one. Forgive me, it's simply an aside I hadn't considered until now.
So, on we go to the 2013, Q4 Earnings Call that has stirred such a raucous debate. I've already expressed my opinion of the black box theory, in which I ascribe to an alternative idea that withholding the data is more tactic than good form or suspicious behavior.
I am, however, a little concerned in that it appeared management was taking its case to the public in an attempt to pressure the agency before the fact. Before we get to that, let's gauge Chairman of the Board, Alfred Mann's confidence heading into adcom.
Thank you, Hakan, and good afternoon, ladies and gentlemen. As Hakan noted, the FDA's review of the AFREZZA NDA seems to be proceeding well. We've had a number of questions from the agency and have been able to provide responses to all of them in a timely fashion. So, the FDA review appears to be on course for the April 15 PDUFA date.
Use of italics on the words "seems" and "appears" are mine. These comments, as innocent as they might seem, are indicative of doubt. There are already some experts who believe that approval of Afrezza by the PDUFA date is extremely unlikely. The effect of postponement on the share price would be damaging. How much so, I'm not sure.
CEO Mann then addresses the issue of why the adcom was called in the first place, and given the change in leadership of the FDA panel committee, I'm satisfied with his explanation, though I would agree that there's some inconsistency there.
After trumpeting the success of a recently completed small study in type 1 patients sponsored by the Juvenile Diabetes Research Foundation, indicating superior prandial control without hypoglycemia, Mr. Mann said this.
We are actually looking forward to the advisory committee meeting. Our clinical and safety experts see that as an opportunity to discuss the safety and efficacy of AFREZZA in an official public forum.
That sounded like frustration to me.
And if you accept my benign explanation for black boxing the data set, then you have to be a bit upset that Alfred Mann wants to be the only public voice on Afrezza use. Here he is touting it up some more.
By now, most of you are familiar with our innovative inhalers, which we call MedTone and Dreamboat. We also have a tiny single-use disposable inhaler affectionately known as Cricket, which was developed for use in occasional occasions such as to treat chronic pain.
After all, getting pain relief in a couple of minutes from a drug would seem to offer a rather significant and very valuable medical and business opportunity.
Nobody, however, wants to feel backed into a corner when making a decision, and this is the FDA's decision to make, not Alfred Mann's. So why say this?
Once AFREZZA is approved, our patents on Technosphere particles will provide protection until 2030 and 2031, and patents on the inhaler system and its components until 2030, 2031, and 2032.
What you might think of as confidence, I see as someone trying to write the end of the story before the real author has had a chance to. Perhaps it would've been better to say; in lieu of Afrezza approval, our patents...
Am I parsing words? That's exactly what I'm doing, and so should you be.
The leadership of MannKind seems to be evincing some of the same frustrations with the FDA's silence that Amarin was experiencing prior to its adcom. And that's not a good sign.
When an executive leader of a public company pulling a salary of a smidgen less than 7 figures annually thanks to the hard-earned investment dollars of shareholders is complaining in a formal presentation about bloggers posting articles on the web demanding full disclosure, that's not a good sign either. Wouldn't we rather have him hard at work focused on matters related to the successful completion of the Afrezza application?
Then too, there are some big players in the field of insulin production, including but not limited to Eli Lilly (NYSE:LLY), with a market capitalization of $63B, and Novo Nordisk (NYSE:NVO), with a market-cap of $127B, that have much to lose upon Afrezza approval. To say that these companies with influential voices within the FDA would like nothing better than for today's paradigm of insulin therapy to remain unchanged is to understate the case. Preparing to overcome the gravitational pull of these forces might too be a better use of executive time, energy and focus than applying these resource to the musings of more fleeting influences.
In no way am I suggesting that the FDA is participating in, or would ever participate in, any behavior that would undermine a valid petition for drug approval in an unfair fashion. They wouldn't! But as Joseph Campbell so rightly pointed out, our conscious minds aren't really running the show, are they?
What I am suggesting, though, is that these companies have decades-long friendships with people who will sit on that panel. And those friendships will bear a subconscious pressure on the right-mindedness of any panel member. That can't help but be true. Will panel members rise above these subconscious tugs of preference? I hope so.
Amarin's Vascepa is a fine product. The FDA made a mistake in approving an SPA with a faulty control - mineral oil. It happens. But they didn't compound that mistake by approving Vascepa for the Anchor indication.
And though I've made many references to Amarin, I'm making no direct comparison. Amarin executives sold their shares leading up to adcom. MannKind executives have not only held on to theirs, but bought millions while selling only few. Amarin's share price was on a downward spiral leading up to adcom, while MannKind's has steadily risen. MannKind is also being extremely responsible by not damaging shareholder value with a full-blown equity raise, even though funds are extremely tight. And I commend them for those shareholder-friendly actions.
No doubt, MannKind's executives believe they will prevail on April 1st, and I hope they do. I think Afrezza is a terrific product. But so is Heplisav, and something caused the FDA to suddenly develop a grave concern about the adjuvant that they'd been using for the full pivotal trial, which is their right to do.
In the case of Vanda and Tasimelteon, it was easy for panel members to vote yes because there were no competing products or companies in the sleep disorder space belonging exclusively to blind patients. This is why Adam Feuerstein described it as a "love fest" at adcom and why I believe Tasimelteon was unofficially approved 8 months prior the fact when President and CEO Mihael Polymeropoulos toured the country courting the support of blind organizations.
Regardless, MannKind walks into a completely different environment than Vanda did. There are competing products and an unseen alliance of influence surrounding them. And if a panel member needs to reach for an excuse to say no, they don't really have to reach very far, do they?
Here's Alfred Mann talking about how Afrezza really works.
Over the last few years, we have fine-tuned the carrier particle used to deliver insulin and various other active drugs... The optimal particles have better aerodynamic performance so that the powder gets out of the cartridge more fully and with more of it in the [unintelligible] size range, so that much more of the powder gets quickly into the deep lung.
There, at the pH of the moist pulmonary tissue, the powder dissolves in a few seconds, and the insulin and the inert Technosphere carrier then transfer rapidly through the pulmonary membrane into arterial blood. The insulin is then very quickly available for glucose control and the carrier moves out and is disposed of in urine, unchanged.
So that is miraculous! But if indeed someone wanted a way out of approval, one need only say the following.
We're concerned about the long-term effects of powder being placed deep into the lungs several times daily over the course of years, decades and lifetimes. No matter how efficient this process may appear to be, we're unwilling to bear the long-term risk that harm could come of it. At this time, therefore, we're regrettably unable to grant approval of the petitioner's application.
My investment thesis precludes me from holding an entire position through a binary event like this.
There have been numerous opportunities over the past year for MannKind shareholders to take profits from their investment and to reduce their exposure to this upcoming adcom event. If you haven't already done so, I honor your choice. Noting that the majority of these events aren't resolved favorably, however, I only hope that you're conscious of the risk you're taking.
Always be well...
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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: Any information or opinion expressed herein may not be true, accurate or correct and it does not constitute any suggestion to buy, sell, hold or adopt any investment strategy for this stock or any stock that may be mentioned. Reliance upon information in this article is at the sole discretion of the reader. The sole purpose of my article is to entertain by providing information, the accuracy of which is as good as the public sources it was derived from. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. I sometimes make mistakes. There are a myriad of things, which can happen in lieu of any forward-looking statement I have made. Any stock featured or mentioned in an article I compose is subject to all manner of influences, which can change its value in dramatic fashion upwards or downwards. These events can be of a wide variety not limited to news-related occurrences, managerial decisions, trial failures, stock manipulations and so on. I make every effort to declare positions I have in stocks I cover or mention in an article but reserve the right to move in and out of said investments at my own discretion based upon the wisdom of doing so. I implore you to do your own due diligence, invest at your own considerable risk attaining the just reward your efforts have wrought. And always be well.