Having borne the brunt of downgrades from Wall Street analysts, such as Jay Olson of Goldman Sachs (GS, Financial) in early March, shares of MannKind Corporation (MNKD, Financial) have been struggling to stay above the $5 mark, and last week, they breached that level too. Even those analysts who are still bullish on the company, such as Adnan Butt of RBC Capital Markets, have cut their price targets, based on the perceived slow take-off of MannKind’s inhaled diabetes drug, Afrezza. Trading at less than 50% of its 52-week high and very close to its 52-week low, does this make for an ideal entry point for this biotech stock?
Afrezza take-off concerns
Analysts and consequently, markets seem to be very concerned at the slow uptake of Afrezza and the low number of prescriptions of the drug in the first few weeks since its launch. In the 10th week since its launch, Afrezza had a market share of only 0.05% in a space that is disproportionately dominated by Novolog from Novo Nordisk (NVO, Financial) and Humalog from Eli Lilly and Co. (LLY, Financial), who together control over 86.5% of the market. Despite FDA clearance, concerns still linger about the adverse effects of the inhalable drug on the lungs, which may be prompting some reluctance from doctors to prescribe it. And these concerns are likely to continue until such time as further trials resolve this issue one way or the other. Moreover, there are also expectations that pricing pressures will lead to up to 40% gross-to-net discounts, further affecting profitability of the drug.
A superior drug, a better mechanism
However, as an anti-diabetes drug, there are two things about Afrezza that make it a winner in the current market. One is its rapidly acting formulation that helps the drug leave the body faster than its competitors, potentially reducing the instances of hypoglycaemia. This superior ability for patients to control their own blood sugar level could make it more popular with them and thus could give the drug an edge over other formulations. The second, and a very significant, factor that gives the drug an edge is the fact that it is inhaled instead of being injected.
According to estimates, approximately 20% of the general population suffers from trypanophobia, or the fear of needles or injections. From among this population, at least 20% are supposed to have avoided medical treatment because it could potentially involve injections. For such patients who suffer from diabetes, Afrezza is a boon. Doctors dealing with such patients would also be inclined to prescribe the inhaled drug rather than lose them to another doctor.
Tie-in with Sanofi
MannKind has entered a global licensing agreement with Sanofi SA of France under which Sanofi will market Afrezza globally in return for a share from the profits. This is a very good deal for MannKind which will manage to reach a global market without needing to set up a global marketing network. The company is seeking approval to launch the drug in European Union this year and if the approval comes through, it will be a big positive for the company.
Conclusion
Afrezza may not be the “next big thing” but is certainly a good product. The uptake of the drug may be slow in the first few months, but that is no reason to write it off. Short-term headwinds may exist for MannKind’s stock but the lower prices make for a great entry point from a long term holding perspective. We recommend a BUY on this stock.
