MannKind's Path Forward

What a disappointment 2010 was for MannKind longs, including myself.  In January 2010 we had the FDA miss the PDUFA only to continue with delays until finally issuing what was viewed as a pretty “light CRL” in March 2010.  There looked to be a clear path forward with no new studies requested, mainly just concerns about the old MedTone device and the scary phrasing around the “clinical utility” for Afrezza.  Management made it very clear there were “no new trials” and “no safety concerns” expressed by the agency.  This was reiterated again after MNKD’s end of review meeting with the agency in June 2010.  A very quick resubmission followed which included updated trial data and bioequivalancy tests that were, according to management, what the agency requested to demonstrate bioequivalancy between the old and new inhalers.  The path for late 2010 approval was clear for MNKD bulls.  From the bears, the main argument against approval were the phrasing “clinical utility” and the unprecedented swap between the inhaler used during the pivotal Phase III programs and the new inhaler used for the resubmission. 

On December 27^th, 2 days before PDUFA, the FDA called MNKD and informed them they needed “approximately” 4 additional weeks to complete their review.  MannKind was “cautiously optimistic” for approval even with the 4 week delay.  We don’t know exactly what caused the delay but Al Mann at the JP Morgan Healthcare Conference earlier this month referenced an audit of the site which conducted the bioequivalancy tests.  Those on-site audits normally take 3-5 days but this one took a “full 2-weeks” according to Al Mann.  Looking back, that should have been a red flag that the FDA had a concern about the bioequivalancy data supplied by MannKind.   As we now know, this was the crux of the reason for CRL #2 that MannKind received on Tuesday, January 18^th. 

So what happened?  The good news is that the agency may be comfortable with the “clinical utility” of Afrezza because MannKind was adamant that this did not appear in the latest CRL.  This would be a blow to bears who claimed that the agency saw no reason in approving Afrezza given that it was only shown to be non-inferior to rapid-acting insulin as far as HbA1c was concerned.  The most concerning part about the CRL was around new trials to demonstrate bioequivalancy --  the core argument from the bears for another CRL.  There was either a complete lack of understanding from MannKind on what the agency required to show bioequivalancy, the FDA found something in the audit process that gave them some concern about the data captured or the FDA just completely changed their mind, which they are famous for.  The good news for longs is that two clinical trials that MannKind has underway called Affinity 1 (Type 1 diabetes) and Affinity 2 (Type 2 diabetes) were already filed and in the recruitment process.  When these trials were filed in the fall of 2010 after the resubmission, MannKind management explained that these trials were to gather the necessary data required to support approval and Europe as well as for marketing purposes.  The bad news for longs is that the agency requested there be a 3^rd arm in at least one of these trials with patients on the MedTone inhaler so a direct comparison could be made between it and the new inhaler, which isn’t currently a part of the study design for the Affinity trials.  Now did MannKind only start these trials for the purposes stated or did they have some lingering concern that the FDA might want to see the results prior to approval?  We will probably never know.  Does this open up MannKind to potential shareholder lawsuits by one or more of the law firm vultures famous for filing them in an effort to stand up for the lowly shareholder?  Of course these lawsuits generally get settled out of court or if they aren’t, the attorneys make millions while the lead plaintiff and shareholders make pennies per share back.  I don’t know but this is a potential risk for the stock price.

What is the timing for resubmission?  MannKind can’t give guidance as of yet and may not do so until after their end of review meeting.  Since the Affinity trials are underway, it is possible (as management states) that they could halt these for now, add an arm for MedTone and then restart them.  This would certainly be the fastest route.  Hhowever, doing this before MannKind meets with the agency for their end of review meeting would be risky.  Therefore, I believe this is the path they will take but won’t fully start the recruitment process until they have had an opportunity to vet this with the agency.  It will likely take them a few months to fully recruit then 1 month for patient titration and 3 months of patient use before the trials are completed.  MannKind would then need a couple of months to analyze the data, run the proper assays and package for a resubmission.  So here is a timeline estimate based on the currently available data:

·         End of Review Meeting:  Within 60 days

·         Affinity Trials Including MedTone arm:  60 days to recruit and 4 months to execute

·         Resubmission packing:  2 months

·         Total estimated timeline for resubmission:  8-10 months. 

·         New PDUFA:  Assuming a 6-month review, March-May 2012

I don’t see how MannKind could compress this timeline very much, certainly not more than a month or two, so there is little doubt that the next PDUFA will be in the first half of 2012.  This brings up a number of questions for MannKind management to answer in their Q4 Earnings call around February 1^st.  How will MannKind obtain the funding necessary to see this through to completion?  MannKind will either need to cut cost significantly, raise cash through increasing their credit line with Al Mann or through further dilution with the open shelf for up to 200M shares outstanding.  The last option would be to execute a partnership without approval in hand.  MannKind can’t command nearly the premium for an Afrezza partnership that they could have with approval and a final label.  However, I believe many big pharma partners are hungry for a deal for Afrezza and an Arena / Eisai type deal would make since for both.  A small up-front of perhaps $100M with a much larger milestone upon approval and good split would be a win-win for both MannKind and the partner. 

Where does the price go?  Even though I still believe Afrezza is now very likely to gain approval in 2012, it is well over a year away from happening without too many catalysts to create price appreciation in the short term.  I sold out of my entire position and will wait for more clarity for the timing of resubmission and guidance on partnership talks before repurchasing.  Management has lost some credibility as far as I’m concerned and need to regain it back.  A partnership deal would help ease my fears and give me more confidence for investing.  MannKind needs to provide clear financial guidance to support enough capital to see them through the end of 2012.  There still appears to be plenty of buyers given the nice bounce from the post-CRL lows and a lot of stock support in the high $4’s.  It is possible MNKD stays range bound around this level until MannKind provides more guidance in their Q4 call but it is also possible that it retreats further and retests 2009 levels in the $3’s.  Given the marketcap is $600M with a lot of debt and approval for Afrezza delayed for at least a year, the only catalyst for short-term price appreciation would be a partnership announcement.  For now, I’m on the sidelines but I am planning on rebuying when more of the uncertainty around funding and timelines are removed.  The opportunity costs for holding MNKD in 2011 aren’t worth the risk / benefit until this happens.