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Musings on a Partner for Afrezza

|Includes: MannKind Corporation (MNKD)
The future of MannKind depends on the company's ability to finance itself, either through further current shareholder investment, and/or a partnership with a deep pocketed biopharma company.

Much hope has been expressed that
in the next few months MannKind will be able to announce  such a partner for Afrezza. A partner who will provide the necessary financial resources to allow Afrezza to secure FDA approval, reach the market, and realize its full potential. Let's consider who that might be and when.

If you've been part of an in-licensing or out-licensing team you have had an opportunity to appreciate the very complex interactions involved in any transaction. For the purpose of this discussion I'll focus on the considerations within an in-licensing company and not speculate on the interactions or dynamics within MannKind, or the actual partnership discussions.

Let's make a quick, and indisputable point right up front. Companies don't do deals; people do. And they don't happen by magic. So understanding the interpersonal dynamics within a potential licensee organization as it relates to Afrezza can provide some insight into who might do the deal, and when.

No deal is done without a champion. And for a deal that involves the kind of money needed to support MannKind and Afrezza through to approval that means a high level champion who is able to convince the organization to write a check for at least a couple hundred million dollars. This is the kind of money that can kill a career if it doesn't work out. And by work out we mean a number of things; failure to reach approval, failure to capture sales, or failure to turn a profit. This is not like the often told story of the employee who loses a million dollars and upon offering his resignation is told that the company can't afford to fire someone they just spent a million dollars to educate. A failed deal of this magnitude needs at least one high-level head to roll. There will be plenty of people in the organization who will be ready to say, I told you so. It's too easy to be a naysayer with respect to Afrezza; the odds are stacked against success, as it with all novel pharmaceutical products. This is not an early stage in-licensed product that might fail for reasons that could not have been anticipated and allow a champion to say “who knew”. Afrezza is a product for which the potential reasons for failure are well understood.   Afrezza represents damaged goods by virtue of an ongoing inability to secure FDA approval, the commercial failure of Exubera, and the lingering worry about long term administration of a growth factor to the lungs.

So what kind of company has someone in senior management who wants to be a champion? Well it needs to be a company that has significant financial resources. This limits the list to perhaps fifty companies that can afford to lay down a couple hundred million dollars and not sweat it. It also needs to be a company that already has a franchise in the area of diabetes, even if it is not very large. You wouldn't want to figure out the diabetes business and develop key opinion leaders and prescribers while launching a high profile product like Afrezza. So that probably limits the list to about ten companies.

What about the big boys: Lilly, Novo Nordisk, and Sanofi-Aventis? If they really wanted in they would be in already. Having any one of these three companies involved in the later stage clinicals, or even the regulatory filing, might well have led to a different outcome (assuming Afrezza is actually approvable). But they didn't and I'm pretty sure they won't. Sanofi-Aventis is looking pretty smart for allowing themselves to be bought out of Exubera by Pfizer. All of these companies have substantial insulin/diabetes franchises already and the sales potential of Afrezza will be incremental at best. And if Afrezza is approved, and it gets a good label, and it gets good reimbursement, any of these three companies could negotiate a post-approval co-promotion deal that would be interesting to all parties involved by bringing in resources that could accelerate Afrezza's growth.

Okay so it seems to be that we're looking at a second tier diabetes company, but still a first tier company from the financial perspective. This might mean a GSK, or a Merck, or a Bayer. But all of these companies are on the bubble in terms of sales and profit performance or regulatory compliance issues. They would seem to have little latitude to take a flyer on Afrezza. The win would be relatively small and slow to develop: there is still competition in the short acting insulin area; it will take time to move Type 2 diabetics to insulin even if inhaled; and the issue of reimbursement may take time to settle. But if Afrezza were not approved, or it failed commercially, the company would be severely damaged. The management team, not just the champion (who would be gone by now), would be criticized for making a stupid decision that was sooooo obvious. That would probably lead to the board shaking up management. (Unless of course it was J&J, where it's not clear the board knows how to shake anything.)

Now back to the champion thing. There are only three people in an organization who might take the lead on something this big; the CEO, the head of R&D, or the head of commercial operations. The CEO won't do it, it's too risky and the responsibility would fall directly on their head. They are the ‘decider, not the champion’. (“Mistakes were made, but not by me; I trusted my people”.)

The head of R&D would doubtless not be the champion. They would prefer to keep the resources in their own department for their internal projects. And given the failure of MannKind to date they would probably be required to 'take over the project' if there is any kind of further problem. At the very least they would be held accountable. This would be considered a distraction and drain of resources from other projects. So no way is the head of R&D our Afrezza champion.

The head of commercial operations has two challenges in accepting the role of champion. They need to convince themselves they can do what Pfizer couldn't, even if they have a nominally better product. They will ask themselves if the physicians and patients are ready and willing to make this leap of therapeutic faith. Remember the partnering company will likely have a limited track record in this area. And what about profitability? Can they get reimbursement at levels that don't limit sales? Probably, but that will be a challenge. What about profitability? MannKind will want their share of sales so that hits the operating marging right there, and cost of goods will be high at least to start, and a new therapy like this will take big bucks in sales and marketing costs. Those margins don’t look all that good. And if MannKind wants to 'share' sales and marketing responsibilities for a bigger share of the profit you have a logistical headache. Hmmm - I'm not sure I'd want to make the recommendation.

But even then the marketing/commercial operations person can't make the call on their own. They will need the buy-in of the head of R&D. I can almost see the discussion and negotiation on this. "Well the dossier isn't that strong, and our people see lots of regulatory issues, and the Phase IV commitment is likely to be expensive and demanding - but if you are really committed to Afrezza, ....".

So who's hungry enough to want to take on Afrezza? It's not at all obvious. Post approval partnerships will be a different situation, but if it takes that long it means the launch will be messed up or delayed as the partnering company puts their stamp on the marketing and sales program. A good plan takes a couple of years to develop, and this one is would start post approval.

There is also the real possibility that an approval is delayed and more expensive than originally budgeted. Does the licensee put up more money, or do they cut and run? I've seen companies in just this situation and it's not pretty. It's precisely the type of situation a company, and any champion, does not want to willingly walk into, much less pay, for the privilege of dealing with.

So will MannKind find their partner soon? I doubt it. If they do it will be one of two kinds. A serious partner that ponies up a little, something like $50 MM as an option fee, with the balance on approval. A little money is lost but not their pride, or their head. But that doesn’t really get MannKind close to what they need, although it may convince Dr. Mann to reinvest.

Or it will be a rookie that puts up $100-200 MM and bets the ranch. This is exactly the kind of company that does not have the resources to hang on if there are further costs or delays, nor the experience to optimize the success of Afrezza when it does get approved.

People and companies will be trying to cover their asses in any deal for Afrezza, and that means it will be a very tough licensing negotiation. But that's another issue for another day.

You may want to rethink your investment if it depends on MannKind signing a near term deal with a deep pocketed partner. It's certainly possible, but it will need a champion who is so sure of a profitable outcome that they are willing to bet their career on it. Easier it seems for a champion, or company, to sit on the sidelines and wait until the risk has been reduced, even if the cost will be higher. On a risk adjusted basis it will be a bargain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.