Author: Patrick McFadden, M2 Capital Holdings
Covestor Model: M2 Global
Disclosure: Long MNKD
Good for Mannkind?
The recent insider trading case brought by the SEC against a chemist working in the Center for Drug Evaluation and Research within the FDA, may not bode well for investor confidence. However, specifics of the case may provide positive insight for Mannkind Corp. (NASDAQ: MNKD) and the bid to have its Afrezzarapid acting insulin drug system approved by the FDA in the future.
The SEC accuses the chemist of making profits or avoiding losses totaling $3.6 million over a five year period, via trading in 19 companies. The transactions listed in the case record 19 separate purchases prior to an approval, 6 short sales prior to a non approval and only 2 instances where a stock was owned outright and then sold prior to a non approval. Curiously, the case does not detail date and price of purchase for these 2 instances. Mannkind’s stock falls into this category, with the accused selling shares owned a few weeks prior to Mannkind’s January 2011 non approval letter. Why did he purchase the stock and on what date?
Why could this be positive? Simple, the chemist worked within the Drug group at the FDA, the group with primary regulatory responsibility regarding Mannkind’s new insulin drug delivery system for diabetics. All case information provided indicated short term trading, within weeks of an approval or disapproval date, and the SEC claims that all trades were likely made as a result of the use of a proprietary, real time updated database that allowed certain employees within the Drug group to see what other groups within the FDA were thinking.
Mannkind’s stock traded in a tight range near the price at which the accused chemist actually sold in the weeks prior and actually went up nearly 25% after he sold. The stock then dropped precipitously after the non approval. Given the amount of shares purchased and the history, as defined by the SEC case, one could easily infer that the chemist believed that Mannkind would get a positive FDA response, purchased shares, and then read something on the internal FDA database that made him sell.
Mannkind’s management has been telling the public for some time that it believes the FDA is comfortable with the results and efficacy of Afrezza, its fast acting insulin which is delivered via an inhaler. The insulin is powdered and loaded onto proprietary nano like particles for inhalation via the lungs. This technology, if approved, may be licensed for the delivery of other drugs in the future as well. Since Afrezza has been tested on tens of thousands of patients in trials over the past decade, it would make sense that the drug chemist was familiar with Afrezza and would know whether or not the Drug group at the FDA looked favorably on approval. This is why his purchase is such a potential positive. The fast-acting insulin is a key competitive advantage for Mannkind if they receive approval in the future.
The inhaler is the problem. Over these long human studies, Mannkind utilized a proprietary inhaler for the delivery of Afrezza. These are small, disposable devices about the length of a credit card. However, over the life of these studies Mannkind has been able to make improvements to the inhaler’s size, look, efficiency, ease of use and cost of manufacturing.
Herein lies the problem for Mannkind. The newer, more commercially acceptable inhaler was not directly utilized in the human studies and the FDA isrequiring more human studies with the new inhaler to confirm Mannkind’s belief that it is equivalent or better than the inhaler already extensively studied.
Since the product is a drug & device “system”, the Drug group at the FDA receives consulting reviews from the Device group within the FDA. Informed speculation could point toward the Device group going down to the wire trying to decide whether or not to approve the Mannkind system with the newer inhaler or asking the Drug group to require additional human studies. We know that the latter case may be likely and that the accused may have been forewarned by the internal review database.
The SEC has communicated with Mannkind as to what it would like to see in the new studies with the new inhaler, and Mannkind has already begun enrolling patients for these studies. This may not be convenient for investors and will force Mannkind to continue spending money without an FDA approval or immediate hope for sales revenues. Nevertheless, the company has enough cash to last the year, hundreds of millions in land, new manufacturing facilities, insulin stockpiles and intellectual property.
The company founder and CEO, Alfred Mann, is a serial billionaire entrepreneur who has personally financed nearly all capital expenditures for the company, an amount that approaches $1.5 billion dollars over the past decade plus. Mr.Mann owns nearly a majority of the stock and is the sole banker to the company as well. With all company debt being either convertible or non recourse, the company enjoys a real financial advantage, and I believe Mr. Mann when he says he will finance the company going forward without any additional dilution to current shareholders.
Given that the FDA may already be comfortable with Mannkind’s Afrezzadrug, even while requiring new device studies, as well as the tangible assets described; we believe that the company’s stock is already trading close to alevel for which the company could be sold without any positive FDA action in the future. Remember, Mr. Mann has not encumbered the assets of the company with much of the loans he has provided.
With a global insulin for diabetes market growing past $15 billion, the upside potential for Mannkind is far, far greater than any potential down side from current price levels. Current manufacturing capabilities and insulin stockpile would easily justify a future stock price multiple times today’s price upon a positive FDA review and successful commercialization of Afrezza with the new inhaler.
Mannkind’s stock at these prices is essentially an option on FDA approval and the SEC case may indicate that this option has limited down side from current levels. Truly, this may be positive for Mannkind!
Sources:
“SEC Charges FDA Chemist With Insider Trading Ahead of Drug Approval Announcements” Tim Spangler. Forbes. 4/1. http://blogs.forbes.com/timothyspangler/2011/04/01/sec-charges-fda-chemist-with-insider-trading-ahead-of-drug-approval-announcements/
“FDA Chemist Charged With Insider Trading” Ed Silverman. Pharmalot. 3/29. http://www.pharmalot.com/2011/03/fda-chemist-charged-with-insider-trading/
“Alfred E. Mann” Wikipedia. https://en.wikipedia.org/wiki/Alfred_E._Mann
