Investors face a binary outcome with MannKind (NASDAQ:MNKD). The Dec. 29 FDA deadline came and went with the regulatory body declaring it needs four more weeks to render a decision on MannKind's Afrezza. Afreeza fills an unmet need for inhaled insulin, which is preferred over needle injections by diabetics whom use insulin therapy to reduce the risk of hypoglycemia. According to a study done by Diabetes Care in 2006, 48.3 million people will be diagnosed with diabetes in the US by 2050.
The original decision date came from the time line under the Prescription Drug User Fee Act (aka PDUFA date) in which MannKind paid fees under its new drug application in order to obtain a decision date. By this date, the FDA has the option to approve the drug, implement a new CRL, or reject the drug.
The FDA is also doing a double-take, as it approved Pfizer's (NYSE:PFE) and Nektar (NASDAQ:NKTR) Exhubra inhaled insulin in 2006. The drug was pulled after poor sales (just $12 million), a result of a botched marketing effort by Pfizer, which lead to a poor understanding of the drug by doctors.
So what are the major differences this time around? Afreeza acts within 12-14 minutes while comparable offerings Exhubra and Sanofi-aventis' Apidra which act in 49 and 60 minutes, respectively.
MannKind bears the name of its founder, Alfred Mann, a billionaire who serves as CEO and chairman of the company's board, a position he has held since 2003. Prior to MannKind, Mann founded various other bioscience and medical device companies, including seminal divisions of Medtronic, Pacesetter Systems, Second Sight and Advanced Bionics Corporation. Advanced Bionics Corp was acquired by Boston Scientific in June 2004, only to be segmentally repurchased by former stockholders to form Advanced Bionics LLC for cochlear implants and Infusion Systems LLC for infusion pumps.
If approved, Afreeza has blockbuster potential reaching $2-3 billion given the size and growth of the diabetic drug market, assuming, once approved, the company can secure a partnership deal with pharmaceutical company intent on commercializing the drug. Assuming a 50/50 split profit sharing agreement, a 25% to 30% royalty share on sales abroad, we estimate present fair value in the $12-$18 per share range. However, fair value estimates could be higher over the medium to long term if the company can bring the drug to market in 2011, which would subsequently allow the company to turn profitable by 2014 or 2015 and continue to expand margins for the foreseeable future. A higher valuation also assumes proper marketing and patient and doctor adoption.
Overall, yesterday's delay is mostly a positive because FDA tends to finalize labeling, marketing and handling restrictions following a continuation before rendering a final approval. However, execution risks do still exist for MNKD even if eventual approval is likely, so do you own due diligence prior to taking a position.
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