The gist of the message was, although MannKind’s inhaled insulin, Afrezza, was highly likely to win the FDA’s approval on its original PDUFA date of April 15 — which we just learned has changed — it wasn’t a great buy at the then-inflated price.
See, based on histories of other similarly hyped drugs, not only was MNKD stock apt to hit a major peak just a few minutes following any news of the drug’s approval, but the bulk of its near-term bullish “trading” potential had already been injected into the stock’s value. There was little short-term upside left to reward MNKD newcomers.
It wasn’t a well-received idea, judging from the heated responses to my theory. There’s certainly no shortage of MannKind supporters out there who believe Afrezza could be a game-changer for the diabetes treatment world. And those supporters were anything but shy about using some … shall we say, “colorful” words to explain why I was wrong.
That’s fine — I’ve got thick skin. But, I’m not going to change my bearish thesis.
I will, however, add to that thesis making the long-term (and that’s the key distinction) bullish argument for MNKD stock on the heels of Afrezza’s approval.
Afrezza Really Is a Game-Changer
For those unfamiliar with the story, MannKind shares jumped nearly 75% last Wednesday following news that an advisory panel to the Food and Drug Administration recommended that the government’s drug authority approve Afrezza for type 1 and type 2 diabetes. If the FDA takes the panel’s advice — and it does about 75% of the time — Afrezza would become the market’s only inhaled insulin, circumventing the need for diabetics to continue poking themselves with a needle.
The marketability of such a product is clear. Even those diabetics who have grown comfortable putting a needle into their own flesh, breathing something instead is a far more palatable option … even compared to the relatively pain-free ultra-thin needles some diabetics use to inject insulin.
And in some regards, an inhaled insulin is a better-suited option for diabetics. The powder is dissolved from the lungs and absorbed into the bloodstream in 12 to 15 minutes, vs. 45 to 90 minutes for injected fast-acting insulins. While the FDA’s Endocrinologic and Metabolic Drugs Advisory Committee was concerned about Afrezza’s safety and tempered efficacy compared to injected insulins, the decided outcome of the panel’s voting makes it pretty clear that the upside of Afrezza at least matches (if not exceeds) the downside.
While, incredibly enough, there are no clear market-based studies that would indicate how much of that demand diabetics would direct toward an inhalable insulin, the blockbuster-level projections that were being thrown around the first time Afrezza was up for approval ranged anywhere from $2 billion to $5 billion per year. That’s a relatively modest and achievable 15% of the total insulin market, particularly given that the drug could mean the end of needles altogether for many diabetics.
And, compared to MannKind Corporation’s current $2.5 billion market cap, that kind of revenue potential justifies an even higher MNKD stock price down the road.
Potential Risks to MNKD Stock
With all of that being said, no good discussion of MannKind and Afrezza can avoid pointing out that this isn’t the market’s first inhalable insulin.
Pfizer (PFE) brought its inhalable insulin, Exubera, to the market in early 2007. By late 2007, after only producing $12 million in sales during the first three quarters of that year, Pfizer pulled the plug on the program. It wasn’t even selling close to well enough, with no real hope for improvement.
Explanations for Exubara’s failure have been numerous, ranging from the ridiculous size of the inhaler to the cost of the drug compared to its efficacy. More specifically, the delivery device for Exubara was about a foot long (anything but convenient), and Exubera cost about 30% more than the going rate for insulin treatments at the time … still affordable, but tough to justify. Insurance companies weren’t jumping at a chance to pay a premium for the treatment either.
While Exubera was ultimately a failure, Afrezza largely solves many of the problems that led to Exubara’s demise.
For instance, Afrezza is delivered via a palm-sized inhaler, and while the question of cost has yet to be answered, some observers expect Afrezza to cost about 10% to 20% more than the typical price of injectable insulin. That’s a very modest premium to pay for the needle-adverse. On that note…
While self-injections might seem like a miserable way of life for non-diabetics, many onlookers would agree (and bear in mind, hindsight is 20/20) that Pfizer simply overestimated how miserable insulin needles were for diabetics. Many of them don’t mind using needles, now that ultrafine syringes make the injection process a minimally-painful experience. Efficacy and safety and price and complexity really aren’t the issue. The core of the issue is the needle, or lack thereof.
Still, in that regard, the scale tips slightly in MannKind’s favor.
Bottom Line for MannKind
So I’m ready to change the bearish stance on MNKD stock that I took on Wednesday, now that I’m seeing the insulin’s upside? Nope, at least not yet, and probably not for a while … a even longer while, now that the FDA’s final decision date has been pushed back from April 15 to July 15.
As I said then, my expectation for a pullback from this stock beginning right around the time of an approval for Afrezza on July 15 is neither a judgment call on the company nor a judgment call on the drug. It’s a judgment call on how traders think and act when they get more than a little too euphoric.
Eventually, the dust will settle, and the value of MNKD stock will roughly reflect the potential of Afrezza. It’s the “in the meantime” that could dole out some pain.
And how does the postponed PDUFA date change the dynamics here?
Not a lot. If there’s any impact to stem from the delay, it would probably be to the stock’s disadvantage, as the market’s interpretation of the postponement will likely lead some traders to think the FDA still has a problem with the drug despite the advisory panel’s recommendation. That might be the current read given MNKD’s double-digit decline at today’s open.
More likely, though, the delay is more of a procedural one than a true red flag, and will become somewhat irrelevant in July.
Oh, some of the recent buyers will drop out of their positions between now and then simply because holding MNKD stock for three extra months was never part of their plan. But by and large, anybody who was willing to stick with MannKind shares through April 15 still will be willing to take on those same risks three months from now.
In any case, my critics were quick to point out that any post-approval weakness is just going to be a little volatility, and won’t matter later … especially when and if a partner steps up to the plate. Those are good points. But, post-approval responses to other similarly hyped drugs have shown that little bit of volatility might not be so little. Indeed, it might be big enough to rattle even the staunchest of shareholders.
Moreover, one can’t assume a partner is waiting on the wings, ready to swoop in with a bag of cash a few moments after any approval. Interested partners have been few and far between thus far.
Could I be wrong? Sure. From my risk-vs.-reward perspective, however, even for long-term shareholders there seems to be too much risk and not enough reward left to justify paying the current frothy price of MNKD stock, let alone any price appreciation we see between now and July 15.
After July 15, however — and after any sizable pullback — that risk-reward ratio starts to favor the stock again for the long haul, as Afrezza is still a good-looking solution.
And in this game, risk management is half the battle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.