MannKind Corporation‘s (NASDAQ: MNKD) decision to develop an inhalable formulation of Remodulin has proved to be a savvy move. This week, Remodulin’s drug manufacturer, United Therapeutics (NASDAQ: UTHR), agreed to license MannKind’s early-stage version for $45 million, plus milestones and royalties. United Therapeutics’ cash provides the cash-strapped developer of Afrezza, an inhalable insulin, with much-needed financial flexibility, but MannKind still has a problem on its hands. Is this company’s stock worth buying?
In this clip from The Motley Fool’s Industry Focus: Healthcare, analyst Kristine Harjes and Motley Fool contributor Todd Campbell take a closer look at MannKind’s opportunities and challenges.
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A full transcript follows the video.
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This video was recorded on Sept. 5, 2018.
Kristine Harjes: This is a company that has been pretty high interest for the entire time that I’ve been covering biotech. It kind of faded over the last few years, and people stopped talking about it. I guess we should let the cat out of the bag — we’re going to be talking about MannKind Corporation, which is just an epic name. They have been troubled for many, many years, but they were tossed a lifeline. The stock gained 89% yesterday, and actually another 26% last time I looked. It’s around 12:30 right now on Wednesday. That brings them up above a $400 million market cap. This is quite the turnaround for this company that’s had setback after setback.
Todd Campbell: MannKind has really been a tough stock for investors. There was so much excitement at the beginning of this decade for the promise of what MannKind was working on. We’ll get to that in a second. Unfortunately, that promise hasn’t quite been delivered upon. It’s been a really, really tough road for investors as a result, with shares falling dramatically. Many people wondering whether or not MannKind would actually succeed or remained an ongoing concern, because of the amount of cash and the amount of losses that they report on a quarterly basis.
MannKind has one product that’s on the market. It was a very exciting leading up to its approval. It was very exciting, the promise of this drug. It’s called Afrezza. Afrezza is an inhalable insulin. It’s the first inhalable insulin. Around mealtime, if you’re a diabetic and you rely on mealtime insulin, you no longer would have to give yourself a shot. Instead, you could just use a very simple-to-use inhaler, powered by your breath. Very small, the size of a small golf pencil, really. You hold it up to your mouth, take in some breaths, and boom, there, you have your insulin dose right through your lungs.
Although the excitement was there to peg this thing as a blockbuster, it never materialized. They cut some deals, I’m sure we’ll talk about it, to try and get this thing going. But after all the puts and takes, we’re talking about a drug that’s selling, still, at about, I think $3.7 million a quarter as of Q2.
Harjes: MannKind did not invent insulin by any means. What they did was, they used their Technosphere technology platform to make the first-ever inhalable mealtime insulin. That was what really made the difference there. Like you mentioned, Todd, there was a lot of hype, but ultimately, sales just did not perform as expected.
One of the biggest problems was that insurance companies were classifying the drug in a different tier than MannKind had lobbied for. They ended up being listed as tier three rather than the tier two that they had hoped for. That ultimately meant that there were a handful of restrictions, including consumers paying a higher copay. That all added up to them struggling tremendously to market this product and slowly running out of cash.
Campbell: The market for mealtime insulin is pretty huge. There’s over 20 million people with type two diabetes, there’s over a million people with type one diabetes. About 5.8 million people take insulin to help manage their disease, and many more every year. The number of people who are getting diagnosed with diabetes is actually increasing globally.
One of the drawbacks you mentioned was the insurance coverage of this. That was obviously a very big blow. You have this market, and it’s dominated by NovoLog, which is made by Novo Nordisk. Then, you have Humalog, which is made by Eli Lilly. Those two comprise like 95% of the mealtime insulin market. It’s a market that was ripe for disruption, but they just weren’t able to push on through and establish a foothold in it. What made that really surprising to many investors was the fact that they weren’t able to get a foothold even with the help of Sanofi, which is the manufacturer of the top-selling long-lasting insulin, Lantus, which is a mega blockbuster drug. Sanofi had licensed Afrezza from MannKind, paid them up a bunch of money upfront as part of that deal to ostensibly turn loose their sales team that was already calling on people to sell Lantus, to drive demand for Afrezza. Long story short, after about a year, they walked away from the licensing, returned the rights to Afrezza back to MannKind, and ever since, MannKind has had to foot the bill of trying to get this drug in front of prescribers and in front of patients ever since.
Frankly, because of the complexity involved in developing inhalable insulin, and now, all the expenses associated with trying to market it, they’ve just been burning through cash. They’re losing $24 million per quarter. Exiting the second quarter, they only had about $27 million on the books. A lot of people were looking at this company and saying, “Jeez, they’re just not going to have enough money. They’re going to run out of cash, potentially, by some time in the fourth quarter unless they do a deal, or something happens.” Fast forward to yesterday, and sure enough, we get this brand-new deal, this lifeline, as you put it, thrown to it.
Harjes: United Therapeutics, ticker UTHR, stepped in and signed an exclusive global licensing and collaboration agreement with MannKind to develop a dry powder formulation of United Therapeutics’ drug Treprostinil, which we’re just going to call Trep. United Therapeutics sells a bunch of different versions of this drug. They have an injected one, an oral one, they even have their own inhaled one. But, it turns out that MannKind has actually been working on their own version of an inhaled version of this drug. So, what United Therapeutics is doing here is protecting its moat. It’s buying up what could potentially be a competitor someday to its own inhaled version of Trep.
Campbell: This is maybe underappreciated, how big a deal this is for United Therapeutics. Also, big shout-out to MannKind’s management for making this a focus of their pipeline. They didn’t have a lot of money to spend in R&D. Going out and choosing to focus on developing an inhalable version of Trep was brilliant, really. You have a relatively large market. The PAH treatment market is worth about $6 billion annually. Theoretically an inhalable version of Trep would allow you to reach about 45% of that market. What’s really interesting here is that United Therapeutics is just losing patent protection on Remodulin, which is the injectable version of Trep, this year. That’s throwing a lot of concern out there for what could end up happening to this company’s sales going forward. So, it’s had to be on defense, and has been cutting some deals. They recently cut a deal with Watson to delay the entrance of their generic version of United Therapeutics’ inhaled Tyvaso until 2026. Then, by going out and cutting this deal with MannKind, they’re essentially getting control of what could be a competitor to Tyvaso in 2020. Tyvaso has patent protection until about 2026. Obviously very important to protect hundreds of millions of dollars of sales by fending off MannKind before they could even get into phase 3 trials.
Harjes: Right. You mentioned that this is a treatment for PAH. That stands for pulmonary arterial hypertension. Basically, what that means is that the pressure is too high inside the blood vessels of your lungs. Another interesting detail that I want to add to the conversation, because I haven’t seen a lot of the news articles coming out about this mention this — Remodulin was actually created through a combination with MiniMed 21 years ago. MiniMed was an Al Mann product. Al Mann is the founder of MannKind. Before MannKind, he actually founded the company called MiniMed in 1993, which was acquired by Medtronic in 2001. There’s somewhat of a history between, if not MannKind Corporation, at least Al Mann and United Therapeutics.
Campbell: Yeah. We should shouldn’t forget that. Al Mann was a big reason for all of the excitement in MannKind between 2010 in 2014. Mann has had an incredible track record of being a serial entrepreneur, obviously, a billionaire. People assumed, this guy was going to be able to catch lightning in a bottle again and roll out this brand-new type of mealtime insulin, reshape that market, disrupt it, and we’re going to make a lot of money by investing alongside of him. Hasn’t quite worked out that way, has it? Shares have gone from about $6-$7 at their peak, when Sanofi was working with them, to, even after this big rally the last two days, about $2.70 a share. It’s been a very, very tough ride.
I think that any investor who’s looking at this is now wondering, how long is the lifeline? You get this extra $45 million in upfront money that United Therapeutics handed over to MannKind — which is huge, given the fact that otherwise, they’d be running out of cash at some point in the fourth quarter. Plus, you got another $10 million to work on an undisclosed product. You get another $55 million to add to the balance sheet. But even with that $55 million, when you start looking at the numbers, you say yourself, “Well, that really only gets them into Q1 of 2019.”
Harjes: Yeah, and that’s because MannKind is not negotiating from a position of strength here. Everybody knows how much they’re struggling. Years ago, when we were considering, what are the options for MannKind, it was a pretty grim outlook. Any potential partner or acquirer knows that you’re negotiating from a position of weakness. I do wonder how this deal was initiated, and what the negotiating table actually looked like. United Therapeutics got a much better deal than they would have from a more stable company.
Campbell: Yeah, and if you look at MannKind’s earnings conference call, the last one, they actually mentioned, “Hey, look at this deal the United Therapeutics recently cut for this pump version of Remodulin!” Maybe hinting and saying, “Hey, there’s this big deal, we have a deal coming, too.” And then Deerfield — which, actually, they come first, as far as Deerfield lent a bunch of money to MannKind. MannKind has to pay them back. They come first when payments have to be made. They actually put off a payment from July until Aug. 31, for $3 million. Maybe they knew something was in the works here. They wanted to try and give MannKind a little bit more position of strength to operate and negotiate. One way or another, though, this is where we are right now. We have the two companies teamed up now on this PAH drug. We don’t have any idea if it’ll succeed in phase 3. Let’s assume that it does, when would that get to market? Maybe 2020. Again, we still have this big potential cash problem in 2019 that MannKind has to address.
Now, it can earn $50 million in milestones tied to this drug. But I haven’t seen yet the breakout of how much of that is development vs. regulatory approval vs. potential sales milestones. I think there’s still a lot a lot of questions on the financial front that need to be answered before an investor would go out and buy MannKind. But at the same time, I also think that you really can’t be shorting MannKind right now because you have no idea whether or not they’ll earn that $50 million, they’ll sign another deal with another company that might be interested in doing this. There’s also, part of this deal allows for United Therapeutics to give them another $40 million to opt in a second drug. Maybe that second drug will be Adcirca, which is a version of Cialis that’s used in the PAH indication. Theoretically, if you could create an inhalable version of that, it would be pretty exciting, too.
Who knows. I’m just spit balling now on what that other product could be. We just don’t know. But I feel like there are so many question marks, so many things that are left unanswered here, that it’s hard to be either long or short the stock.
Harjes: Well, there are a lot of people that agree with you today that you shouldn’t be short the stock. Previously, it was a heavily shorted stock. Today’s 20% plus move is pretty likely a short squeeze. A little bit of background there — when you are shorting a stock, you’re betting against it. The way that you exit that short position is that you buy back those borrowed shares. Basically, it’s your way of eliminating any further obligation to the broker. You’re limiting your losses. This can start a bit of a buying frenzy, because it pushes the stock higher and higher. So, people who are short, who are potentially facing unlimited losses, are like, “Oh, get me out of here! I’ll eat whatever loss I’m currently going to have to eat, but don’t make me lose any more.” There are certainly fewer people that are looking to start this stock now.
Campbell: There’s also a weird thing, I think Deerfield can convert some of their debt to shares above $1.80 a share. You theoretically could have MannKind go out and maybe raise a little bit of money now that the shares are so much higher than where they were. I mean, they went from $1 to around $2.70. A huge move for investors who were lucky enough to pick it up at $1. But I just think that the risk is too great here to be on either side of this trade, at least until we know for sure that this company has reached cruising altitude with sales of Afrezza. Like I said, $3.7 million a quarter, with $24 million a quarter in losses. That’s just not going to do it.
Harjes: Yeah. Well, I do love a good turnaround story. Even if they haven’t completely righted the ship quite yet, I am somewhat glad that we’re still talking about them.
Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool owns shares of Medtronic. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
