A Biopharmaceutical Lottery Ticket

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

The recent failure of Pfizer (NYSE: PFE) in selling its inhalable insulin Exubera is forcing investors to seriously discount the commercial potential of inhalable insulin. It was the primary reason that major players such as Eli Lilly (NYSE: LLY) abandoned their own inhalable insulin products.

The bad market sentiment about inhalable insulin has seriously affected the valuations of MannKind (NASDAQ: MNKD). This is the only reason it is trading at such cheap valuations and giving a 118% return on its mean sell side price target. I believe this market sentiment is misplaced and have discussed below why AFREZZA will not face the same troubles as Exubera. The results of Phase III trials will be announced by the end of Q1 2013, and that can be a major catalyst for the stock price. I recommend investors take advantage of these cheap valuations and buy this lottery ticket.

MannKind

MannKind focuses on the discovery, development, and commercialization of therapeutics for the treatment of cancer and diabetes. Its primary candidate AFREZZA is still in late stage clinical trials. The drug is being developed by MannKind for the treatment of late type 1 & type II diabetes in adults. The company also has its cancer treatment candidate MKC1106-MT in Phase II clinical trials. MannKind focuses on the use of epitopes, plasmids, and peptides for its cancer immunotherapy products.

The opportunity

A basic problem with all treatment of type 1 & type II diabetes is the delivery mechanism. The insulin is delivered through a needle-based delivery system, and with patients forced to take the injection multiple times daily, it becomes a major inconvenience. This creates the demand for research on alternative delivery mechanisms. Although it might seem only a case of changing the delivery mechanism, it’s not so simple. As the insulin is an expensive compound, maintaining a high rate of efficiency is integral. A very low rate of efficiency of any alternate delivery mechanism can increase the cost of the drug and make it uncompetitive.

Past Failures

Pfizer was the first major corporation that was successful in launching an inhalable insulin product. The company invested approximately $2 billion dollar in bringing its novel insulin inhaler to the market. The product, Exubera, failed and managed a meager $12 million in sales, after the industry was expecting annual sales of more than $2 billion. The primary reason behind the failure of Exubera was the hesitation of doctors in prescribing Exubera due to the fear of long term after-effects on the lungs.

Initially regulators were reluctant of approving the drug because with Exubera only 10% of the insulin ended up in the blood stream, and the remaining 90% was deposited in the lungs. This was a major safety hazard and led to restrictions on its use. It was not recommended for users with asthma, lung cancer, or smoker,s and all other users were recommended regular lung exams.

This failure also forced other companies to shut down their inhalable insulin efforts. Eli Lilly announced after the failure of Exubera that it was shutting down its development of an inhale insulin product, which it was developing in partnership with Alkermes.  The company took a relatively small charge for this abandonment as compared to the billion dollar hit its competitor Pfizer had taken. It said that one of the primary reasons behind the abandonment was the questionable commercial potential for the product.

AFREZZA

This is the primary candidate of MannKind and holds the key to its valuations. The drug is a treatment for type I and type II diabetes and is administered through an inhaler. It is an ultra-rapid insulin, which means that it peak after merely 12-15 min of administration. This rapid activation ensures that the drug stays in the system for a very short period of time. This gives it an edge over not only previous attempts at inhaler insulin, but also injection products, because it works just like the kinetic synchronization of the liver system; restoring natural hepatic function and reducing gluconeogenesis.

What’s the Difference?

A major reason behind the low valuations of MannKind is the skepticism of investors after the past failures of Exubera. The concern seems valid at first glance, but there are difference in the basic structure of both products which ensure that AFREZZA will not share Exubera’s fate.

i)  As I have explained above, AFREZZA is ultra-rapid insulin. This means that the drug spends a minimum amount of time in the system. This increases its utility to diabetics because it will have a far lower chance of causing problems like hypoglycemia and obesity. Unlike Exubera, this makes AFREZZA more attractive compared to injectable insulin products.

ii)  The dreamboat delivery mechanism is a more efficient and convenient (breath activated) way of delivering Insulin to the blood stream. It reduces the impact of the drugs on the lungs (conclusive evidence will be available after trial results), and will therefore warrant a less strict guideline from regulators and less hesitation by doctors.

iii)  A major problem with Exurbera was its high price. A day’s treatment with Exubera was priced at approximately $5, as compared to $2-$3 for regular insulin products. This high price was in part due to low absorption rates of Exubera. On the other hand, AFREZZA is only 10%-15% more expensive than insulin treatments currently being used by patients.

 


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