Does New Data Make This Biotech a Good Buy?

Sherrie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apparently, the third time's a charm for MannKind’s (NASDAQ: MNKD) Afrezza, an inhaled insulin device that has been rejected by the FDA on two other occasions. MannKind accepted guidance from the FDA, recently completed two Phase 3 trials for Type 1 and 2 diabetes, and now will likely earn a marketing approval. On Wednesday, the stock traded higher by nearly 11% after this news, making its gains 230% in 2013. But MannKind still has a few concerns moving forward.

Will Afrezza Be A Market Success?

With a $2.3 billion market cap, investors are betting big that MannKind will turn Afrezza into a future blockbuster.

In the company’s two Phase 3 trials, Afrezza proved to be more effective than insulin and oral diabetic therapies in both of its studies. Compared to these two controls, Afrezza lowered fasting blood glucose levels and led to fewer incidences of hypoglycemia, which are important in the treatment of this particular patient population.

While the study produced good news, it isn’t all that surprising. Analysts at Summer Street and Bank of America had both been optimistic, as were several other firms. The more important question is whether or not Afrezza will be a marketing success.

If Afrezza is FDA-approved, it would be the second inhaled insulin device in the diabetes market, other being Exubera. Furthermore, the healthcare community is fairly sold on its belief that injected insulin is a more stable and better form of insulin delivery, since physicians don’t have to worry about the uptake of the insulin.

In 2011, the global insulin market was estimated to be worth $16.7 billion. Therefore, the market is large enough for Afrezza to be a success. The problem is that this market is controlled by Big Pharma.

Eli Lilly and Novo Nordisk both have short-acting insulins. Johnson & Johnson has a recently approved medicatio, and Bristol-Myers is also involved in the space. In other words, it is a crowded, highly competitive market, with many millions spent on brand awareness.

Can MannKind separate its inhaled insulin from the pack, and convince physicians that it is better than injectables? With a $2.3 billion valuation, investors expect success, but the road to riches could be long and challenging.

Can They Find A Partner?

With the insulin market so competitive and potentially lucrative, many believe that MannKind will either be bought, or will find a partner. Most analysts who cover the stock favor the latter option, but believe MannKind won't find an ally until long after it’s product is FDA approved.

I tend to agree with the notion that this could be a difficult search for MannKind. The drug has already been rejected by the FDA twice. Therefore, it seems logical that a large partner will want marketing approval before sinking millions into the venture.

Also, the FDA is historically erratic when reviewing diabetic products. Back in February, the FDA rejected Novo’s long-acting insulin, which really shook the market given the company’s success in the short-acting space. Prior to that, AstraZeneca had an inhibitor that was rejected. Given MannKind’s track record, it makes sense that Big Pharma would wait.

In many ways, I think it’s good to view MannKind like Amarin (NASDAQ: AMRN). While I am not suggesting that the stock performance will be the same, there are a lot of similarities.

Amarin grew to a $2 billion company after its FDA approval of Vascepa, a fish oil product used to lower high triglycerides. Investors thought Amarin would be quick to find a partner, but then the company announced financing to fund its product launch.

Immediately, the stock fell, and has never recovered. Amarin, with no commercial experience, was forced to market Vascepa in an industry that is loaded with over-the-counter fish oil products. MannKind doesn’t face OTC competition, but it does face a stiff challenge in penetrating a heavily weighted market.

Is There A Financial Risk?

If MannKind cannot find a partner, then it will be put in a horrible financial position. The company has debt in excess of $330 million, creating a debt-to-assets ratio of more than 150%.

Also, MannKind has an accumulated deficit of nearly $2.2 billion. While this deficit may not reflect as debt or liabilities on the company’s balance sheet, it does mirror past dilution.

Looking ahead, if MannKind can’t find a partner, it will have to further dilute the stock, which could be quite a blow to investor sentiment.

No Catalysts

Finally, after a near-11% gain and its massive YTD performance, MannKind has reached a point where nearly all catalysts that might boost its shares have already occurred.

The only remaining catalyst would be either a buyout or partnership, which appears unlikely prior to an FDA approval. Therefore, in a waiting period that could take one year for a decision by the FDA, MannKind investors have an extended period of time to process all of the concerns that I have presented.

Until these questions can be answered, MannKind and its $2.3 billion market capitalization look quite risky. Investors should at least consider this fact.

Sherrie Stone has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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