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There is a Tide in the Affairs of MannKind: When Taken At the Flood, Will Lead to Fortune

August 14, 2014 | About:
Disclosure: I am long on MannKind.

Introduction

On August 11, 2014, investors witnessed MannKind's partnership announcement stating the company has entered into collaboration and a licensing agreement with Sanofi SA (ADR) (NYSE:SNY). By partnering up with the "French Pharmaceutical Powerhouse," MannKind Corporation (MNKD) believes that it will successfully launch the company's FDA approved diabetic drug, Afrezza, as early as within the next six months.

Source: MannKind

The MannKind-Sanofi commercial partnership

“Afrezza is an innovative drug-device combination product consisting of a dry formulation of human insulin delivered through a small, discreet inhaler,” said Pierre Chancel, Sanofi senior vice president of the Diabetes Division. Under the partnership terms, Sanofi committed to pay MannKind up front $150 million plus $775 million in milestone payments. Sanofi will also absorb up to $175 million in commercialization expenses.

Source: Sanofi

Upon profit sharing, MannKind will receive 35 percent of profits whereas Sanofi will take the other 65 percent. Due to this, some argued that Sanofi could have been more generous by giving MannKind at least 50 percent of the profits to justify this so-called "equal partnership." However, what they do not realize is that most developmental biopharmaceuticals only receive less than 15 percent profits in such partnership agreements. Thus, the 35 percent slice of the profits seems favorable to MannKind.

The stepping stone partnership not only marks a strategic victory for MannKind but also delivers hope to millions of patients suffering from obesity and diabetes. Research shows that more than 61 percent of the U.S. population are either overweight or obese. Also, there are roughly 8.3 percent or 29 million Americans currently suffering from diabetes. According to the guidelines, physicians treat diabetes by recommending patients to increase exercise as well as dieting and using the treatment approach known as "therapeutic lifestyles modifications" or (TLC). Nonetheless, diabetes and obesity are inadequately managed with TLC; therefore, the clinician would later add a drug on top of TLC. Again, oral medicines tend to "buy more time" for patients with diabetes; they will eventually need insulin. The typical insulin regimen consists of multiple injections of short acting or mealtime insulin plus another shot of long acting insulin.

Source: Sanofi

In addition, the partnership with Sanofi is a "win-win" situation for both MannKind and Sanofi. According to Dr. Mann, CEO and founder, “Sanofi is the ideal partner given their complementary product portfolio, their vast insulin market presence and a leading global commercial infrastructure. Our profit-sharing agreement aligns the interests of MannKind and Sanofi to optimize development, commercialization and manufacturing costs.”

MannKind to leverage Sanofi's global powerhouse sales and marketing

MannKind also recently signed a supply partnership with another French specialty pharmaceutical company, Amphastar, to order a $130 million minimum (with the option to purchase additional supply) of the recombinant human insulin needed to make Afrezza. Hence, MannKind could use the upfront fees of $150 million from its commercial partner (Sanofi) to pay Amphastar as well as to pay for other commercialization costs. More importantly, MannKind can now leverage Sanofi's global powerhouse sales and marketing teams to rapidly deliver Afrezza to treat the vast number of patient afflicted by diabetes.

Afrezza will help Lantus' upcoming patent expiration

According to Sanofi VP Pierre Chancel, “Afrezza is a further addition to our growing portfolio of integrated diabetes solutions. It is uniquely positioned to provide patients with another insulin therapy option to manage their diabetes but does not require multiple daily injections.” Given that Sanofi's long acting insulin, Lantus, is facing patent expiration in February 2015, Afrezza would be a godsend not only for patients with diabetes but also for Sanofi, as our multidisciplinary research shows that Afrezza should take complete dominance in the $29 billion U.S. insulin market, growing at the rate of 12.4 percent annually and expected to reach $45 billion by 2020.

Facing Lantus' upcoming patent expiration, Sanofi has already partnered with Regeneron (NASDAQ: REGN) to commercialize Regeneron's revolutionary anti-lipid drug alirocumab – a powerful drug that posted excellent phase 3 data in its unparalleled ability to reduce LDL-cholesterol with similar safety yet much better efficacy than the Illustrious Blockbuster drug, Lipitor, that recognized more than $12 billion peak revenue for Pfizer. Now with Afrezza on board, Sanofi will not only be replacing Lantus’ upcoming loss in revenues due to its patent's cliff, but the French drugmaker will catalyze its next phase of earnings growth.

Investors should note that MannKind partnered up with not just a winner but also one that would enable Afrezza to achieve complete dominance in this diabetes market. Sanofi is a global powerhouse and supreme leader in diabetes that delivered the top prescribed basal (long acting) insulin Lantus for 2013. Backed by recommendations from the American Diabetes Association as the basal insulin of choice, Lantus is widely prescribed in 120 countries delivering more than $6 billion in annual revenues for Sanofi. Now Afrezza has become the chosen one to replace, and probably outperform, Lantus.

360 Biotech's research shows that Afrezza will initially be prescribed as a mealtime insulin but doctors will soon realize its stellar efficacy and safety in combination with Lantus (prescribed at higher doses as seen fit by the clinicians). This will lead to significant improvement in A1c (a monitoring marker for diabetes), and physicians will start to prescribe it off-label for prediabetes or obesity to optimize insulin sensitivity. Another likely scenario is that Sanofi, with its extensive experience, deep pockets and diabetes expertise, will file for Afrezza's label extension for prediabetes treatment.

Prediabetes is the area commonly overlooked but the statistics show that the market for prediabetes is even larger than diabetes per se. Given the American Diabetes Association pushing for early insulin treatment, it's highly likely that the future trend will be toward treating prediabetes. Hence, the market will be surprised, as Sanofi-MannKind will leverage Afrezza to take complete dominance in the unconquered land of prediabetes and obesity.

Given that obesity, high cholesterol and insulin resistance tend to occur together in what is known as "co-morbidities," Sanofi's global powerhouse sales/marketing teams could cut down cost and synergistically deliver alirocumab (to treat high LDL-cholesterol) and Afrezza (to nip insulin resistance in the bud to treat both prediabetes and diabetes). It was no coincidence that Sanofi, a world leader with an expert research team and a highly intelligent/strategic board picked Afrezza as the chosen one…the partnership is indeed a match made in heaven! Nonetheless, while the experts at Sanofi and others saw that, Mr. Market is distorting the reality to scare unseasoned investors with drastic share declines and misinterpretations of the deal.

Shareholders need to be cautious of the 3-Cs of investing: complacency, concerns and capitulation

In facing Wall Street’s misguided pessimism and what many believe to be coordinated media attacks on MannKind trying to "bail out" 72.5 million shares sold short, I am also experiencing stress as a weekend worrier like many shareholders. While not applicable to all, it is not far from the truth to state that many investors (myself included) began as weekend worriers and transitioned to weekday worrying as we read the endless flux of negative headlines prior to the partnership deal, which sent share price lower. Despite the positive announcement of Partnerships for MannKind, Mr. Market grumpily quoted MannKind shares up by a meager 4.9 percent on Monday, August 10, and sent shares price down by more than 12 percent the next day.

What I found helpful in blocking out Mr. Market's shouting is to go over the research and review the trial data, as well as to follow and read the experts with integrity like Dr. Alfred Mann (CEO and founder), Benjamin Graham, Warren Buffett (Trades, Portfolio), Peter Lynch, Mohnish Pabrai (Trades, Portfolio), John Templeton and Phillip Fisher. Prior to the ADCOM when Mr. Market scared shareholders, I read Benjamin Graham's "The Intelligent Investor" Chapter 8 to a fund manager friend. I also found Lynch's advice quite helpful. The intelligent investors should take heed to guard against the 3-Cs of investingcomplacency, concerns, and capitulation – as Lynch discussed during his December 2013 TV interview with Charlie Rose.

As a MannKind shareholder like you, I have been disappointed with the recent shares decline when Mr. Market is shouting more doomsday scenarios coupled with countless "what ifs." While selling MannKind might give you temporary emotional relief because fear is one of the most powerful emotions causing investors to commit foolish acts, you all could learn to filter out the noise and to remain "long and strong."

You have many advantages over the professional manager. "Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand," said Peter Lynch.

Main Street physicians and experts heavily favor Afrezza

In my previous clinical work as an MD, I prescribed medicines and treated many patients afflicted by diabetes. I spent more than a decade learning science, biochemistry, medicine and statistics. My medical background and my near decade studying and researching investments revealed to me that Afrezza is a great drug and MannKind is an investment opportunity of a lifetime. In addition, the FDA Advisory Committee's Experts and Mr. Eric Fenar – the April ADCOM speaker and a patient suffering from diabetes – are highly confident in Afrezza. Furthermore, Dr. Jay Skyler, who is the deputy director for Diabetes Research at the Miller School of Medicine, is also strongly confident in Afrezza's superiority over conventional mealtime insulin (Novolog and Humalog) and Exubera.

Source: UHealthSystem

Short on Time and Restricted by Regulations: Many Financial Experts Will Miss Out on MannKind as A Prudent Investment

By being close to "Main Street" medicine, medical experts see the value in Afrezza and MannKind better than Wall Street. This does not mean physicians are smarter than fund managers. Instead, it simply means doctors know and understand the science and marketing factors that make a superb drug like Afrezza, Lantus or Lipitor blockbusters long before Wall Street due to our professional expertise and daily prescribing of drugs to patients.

In addition, Peter Lynch mentioned fund managers are limited by their travels, meetings, paper works, corporate dinners and lunches, as well as restrictions from buying certain stocks. Interestingly, the Legendary Investor also said that "given the choices to pick between an established company or an unknown yet promising growth company, most managers will pick the established and well-known company." The reason being that "they will not lose their job losing clients' money on a company like IBM, as IBM is a popular company."

Even if the professional money managers do not have such restrictions and ample time to thoroughly research a biopharmaceutical thesis, the highly difficult to understand medical jargon would bore most managers or cause stress so that they rather hire an analyst to do the job. It takes physicians more than a decade of training to master or at least be comfortable with our craft. Given that most managers and analysts do not have the medical background, the research expertise, or the clinical experience of treating diseases and prescribing drugs, it would be prudent to tap into physicians' insights to accurately forecast trials data, as well as to analyze the potential market success of a stellar drug. MannKind did just that last year when the company hired an independent research firm, which showed the overwhelming majority of physicians would prescribe Afrezza. My informal survey of physician colleagues and patients with diabetes at the hospital, clinics, and Better Health echoed nearly unanimous welcome for Afrezza. I would be greatly surprised if Sanofi has not performed their own due diligence given their deep pockets and expertise.

Wall Street experts and physicians should respect each other and share wisdom to enjoy outperforming returns

Conversely, physician and medical experts might not have the financial expertise and would benefit from the wisdom of WS analysts/fund managers. Likewise, it is best for WS experts to tap into a physician's wisdom to have more insights and to gain an edge in this biopharmaceutical space.

In relying on Wall Street's perspective alone, investors will miss great investing opportunities like InterMune (prior to its jump from $10 to $45) or JAZZ when it was on sale for roughly $1 per share. Similarly, investors who rely exclusively on views from WS will miss the real story of MannKind-Sanofi's partnership that will launch Afrezza into the ranks of elite blockbusters in 2015.

My extensive research and thousands of pages of reading regarding diabetes and Afrezza over the years shows that MannKind will be registering multibillions in revenues for Afrezza and the stock price will move up significantly over the years. The super rapid acting insulin will replace and outperform Lantus' multibillion-dollar revenue for Sanofi. By then, mainstream financial media will follow the new tide and heavily promote MannKind, which will push the share price much higher.

Everyone can make money in the market with diligence, patience, and the conviction to buy shares on the dips

In One Up on Wall Street, Peter Lynch said, "Everyone can make money in the stock market but rule number one, you have to stop listening to the professional money managers."

Regarding the current market situation, I imagine it has been stressful for MannKind investors, as the media is promoting Mr. Market's pessimistic view. Keep in mind that Mr. Market, you and I have access to the same information available through the SEC and MannKind Corporation's websites. So instead of feeling stressed out due to market noises, you should confirm your thesis by reading the information available. There isn't anything about Afrezza that Mr. Market knows that physician experts like those of the ADCOM, Dr. Jay Skyler, or yours truly do not know. Physicians have access to the same information available through the SEC and MannKind Corporation, but we are extensively trained to master science, medicine and to use databases for research. Though not true for all, many fund managers are not as knowledgeable in medicine or as familiar in using certain research databases to decipher clinical trials biostatistics as physicians. The reason is that WS experts and physicians are trained in different disciplines.

Peter Lynch said that retail investors "now know the same thing that I do" in his 2013 TV interview with Charlie Rose as he referred to the wide availability of information in today's digital-technology age. The corporate news and SEC documents are freely available to both WS experts and the everyday investor, through the SEC and company's websites. I combed through nearly all of them or at least the important ones for companies that I cover over the years. You could use 360 Biotech's research available to you for free to help you in your due diligence.

If you are to take one key point from this article, I want you to build a stronger stomach to refrain from selling out MannKind as the share price drops or, as I would rather put it, "becomes increasingly affordable." Investors without strong conviction, patience and diligence will be market victims, as they will sell their good stocks only to rebuy later at significantly higher premiums when Mr. Market's mood changes. Unless you have a strong stomach and you are patient, you should not invest because you will probably lose money in the long run. My personal experience shows that I rarely lose money when I invest for the long haul, but I tend to lose money when I listen to others and buy or sell due to quick promises, fear or panic.

MannKind now has minimal downsides and tremendous upsides after Afrezza's FDA approval and Sanofi's partnership

Biopharmaceutical investing, especially in early stage companies, is tricky. The earlier the stage the biotech is in, the riskier the investment because there is limited supporting clinical data. I tend to be skeptical of highly optimistic investing theses on early stage development biotechnology firms. Nonetheless, there are great early stage companies based on their science… but the number is limited.

It's puzzling to witness some market broadcasters who predominantly promote small biotech companies that either post failed clinical data or severely limited data, as they relentlessly frown upon MannKind when Afrezza cleared nearly all risk-hurdles in biopharma investing. Concerns regarding MannKind could have had material consequences if MannKind had failed to secure its partners because it takes significant capital and time to build effective sales and marketing infrastructures. For instance, sales reps need time to develop their expanding networks with hospitals and clinics. By partnered with Sanofi, MannKind now has access to one of the most, if not the most, dominant elite powerhouse sales/marketing teams in the world as previously mentioned.

In addition, all "doomsday scenarios" and "what ifs" from many media platforms brought tremendous stress for shareholders, but none of those scenarios has materialized. Hence, current market pessimism creates stress but gives prudent investors the opportunity to pick up MannKind shares at bargain prices.

Investors should also be cognizant that Afrezza risks have been deleveraged or greatly lowered because the super rapid acting insulin received positive phase 1 through phase 3 trial data, strong votes of confidence from the FDA Advisory Committee (ADCOM) experts, and approval by the FDA. Afrezza indeed scored a major victory for millions of patients and shareholders with MannKind's recent partnership announcements with a highly dominant global commercial partner (Sanofi) and a stellar recombinant insulin supply partner (Amphastar). Despite MannKind still having to prove Afrezza's prowess into market launch expected early in 2015, I voted 360 biotech's highest confidence that Afrezza and MannKind will do well in 2015 as MannKind and Sanofi will launch the super rapid acting insulin "en masse" to capture the enormous multi-billion-dollar diabetes market.

Furthermore, the stressful and lengthy wait for MannKind to secure a partnership for Afrezza was worthwhile as MannKind indeed secured a significantly higher profit share of 35 percent than if the company had closed a partnership deal prior to FDA approval for Afrezza. As a rule-of-thumb, companies that form partnerships early in their lead drug's development tend to receive less than 10 percent of the profits. I suggest that it was no coincidence MannKind delayed closing the partnership deal until after FDA approval because members of management such as Dr. Mann are highly experienced in deal making as well as having unparalleled track records of performance.

I vote my confidence in the deal-making skills of Dr. Mann, a highly experienced inventor/philanthropist rather than Mr. Market's persistent negative opinions such as " [url="]The+biotech[/url] (as in MannKind) used to own 100% of the rights to Afrezza. Now it owns just 35%. That's a big haircut. There's no sugarcoating it, MannKind is giving up a lot of upside."

Perhaps Wall Street persistently doubts MannKind and Afrezza's prospects due to the history of another inhalable insulin, Exubera, which was FDA approved in 2006 only to be withdrawn from the market by Pfizer due to poor sales. Needless to say, Afrezza is distinctly superior to Exubera from the standpoints of both pharmacology and user experience. Exubera was simply normal kinetics insulin being delivered through a device as big as a water bottle making it inconvenient. Despite the media association of Exubera with the "bong", investors should note that data gathered from Exubera indeed contributed to the development of Afrezza.

The billionaire inventor philanthropist Dr. Mann aligned his interests with shareholders

Similar to the Oracle of Omaha, Warren Buffett (Trades, Portfolio), Dr. Mann "put his money where his mouth is" by investing more than $1 billion of his own money into developing Afrezza. The highly successful entrepreneur/philanthropist founded the Alfred Mann Foundation as well as more than 17 companies – of note was MiniMed, through which Dr. Mann invented the insulin pump that revolutionized the treatment for millions of patients afflicted by Type 1 diabetes.



Source: MannKind

Like other great managers who aligned their interests with shareholders, Dr. Mann has yet to sell one share. While some critics could question whether Dr. Mann's advancing age could impact MannKind, the deal with Sanofi and Amphastar completed the infrastructure needed for Afrezza manufacturing and commercialization to be self-sufficient without requiring quite as much as much of Dr. Mann’s time.

Rising short interests and universal pessimism creates wide margins of safety presenting MannKind as highly prudent investment

Before regular trading hours on the morning following the partnership announcement, MannKind shares rallied more than 30 percent making the stock less affordable, but shares were still in the land of deep bargains. In regular hours, 62.3 million shares (versus the 10.2 million daily average volume) traded in a deep discount range of $8.31 to $10.08.

MannKind's shares were on sale Wednesday, August 12, with an additional mouth watering discount of more than 12 percent, as the stock traded in the range of $7.22 to $8.29. Discounted for patients with diabetes and who also have COPD and/or asthma, MannKind shares were still valued at least $38.5 per shares based on Integrated Investing Research.



Source: Nasdaq

Conclusion

In spite of Dr. Mann's revolutionary inventions like the hearing aid as well as the bionic limb and insulin pump, I strongly believe his ultimate gift to MannKind will be Afrezza and the novel Technosphere drug delivery platform. The super rapid acting insulin Afrezza is revolutionary for its ability to mimic a healthy pancreas, which enables it to deliver mealtime insulin immediately before eating through a small inconspicuous and easy to use inhaler called DreamBoat. With the removal of barriers to care such as fear of needles, stigma and inconvenience, Afrezza will deliver optimal patient compliance, thus reducing the striking $245 billion annual spending on treatments for diabetes. Despite investing research being an imperfect science preventing our ability to make any guarantees, my contrarian views analysis suggested that Afrezza will be one of the most dominant blockbusters for decades to come.

Given Sanofi's partnership with another stellar company, Regeneron, to commercialize alirocumab (a drug to treat high LDL-cholesterol with phase 3 data showing similar safety and better efficacy than Lipitor) it is no coincidence the powerhouse Sanofi now chose Afrezza. As Lantus will face its patent expiration soon, Sanofi being a highly dominant global leader in diabetes is not looking to solely replace Lantus (the top-selling basal insulin in the world that is highly recommended by the American Diabetes Association as the drug of choice) but rather to reduce costs via synergistic sales/marketing for Afrezza and alirocumab and to take the next leap in Sanofi's earnings growth.

Most patients who suffer from obesity tend to have diabetes and high cholesterol, and Sanofi with its highly intelligent expertise and deep pockets is planning to reduce costs of sales/marketing by delivering both Afrezza and Alirocumab to the same patients. What's also interesting in Afrezza and Alirocumab as two-pronged ingenious strategic plans is that the resourceful French drugmaker will file for label expansion for Afrezza to capture an even greater market of prediabetes that have similar prevalence with obesity and greater prevalence than the $29 billion insulin market that is growing at an astounding rate. It seems the incoming tide of diabetes is only growing larger by the day. We doctors have not been able to curb the rapidly expanding number of patients afflicted by obesity, diabetes and high cholesterol.

In Phillip Fisher's famous book, "Common Stock and Uncommon Profits," the Father of Growth Investing (who is an inspiration to Warren Buffett (Trades, Portfolio)) states, "Scuttlebutt is simply about finding out from real, 'Main Street' sources if a firm is strong or weak. Most folks don't use this approach, relying instead on the local rumor mill and Wall Street noises, most of which is aimed at selling you product."

Source: Fisher Investment

Phillip Fisher continues, "There is a tide in the affairs of men. When taken at the flood will lead to great fortune" as the Legendary investor quotes Shakespeare (Julius Caesar Act V) calling for investors to be cognizant of great opportunities and to take full advantages when opportunities such as MannKind Corporation arise. Though short-term share price will go up and down, I strongly believe that the tides have come from Main Street, and it is up to the intelligent investors to take full advantage of this investing opportunity of a lifetime … at the flood to outperform the market in the long run as well as to help honest working Americans and millions of patients suffering from diabetes.

"Integrity, Ingenuity, Essence, And Essentially All Else Follow"

About the author:

hvt2107
I have the background as an MD and a researcher. I am currently the Chief Medical Analyst for Retail Investor 360 and I host my internet show 360 Biotech With Doctor Tran. I am also a contributing author for Seeking Alpha.

Visit hvt2107's Website


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