Running in circles

Running in circles

Way back in the day when MannKind (NASDAQ: MNKD), who reported results last night, first started we noted that while Afrezza was a vast improvement over Exubera  yet at the end of the day Afrezza was a multi-million-dollar product not a billion-dollar product. We knew Afrezza worked and there was a place for the drug in the treatment regimen. Yet we also knew the drug faced several formidable obstacles that would prevent the drug from becoming the blockbuster so many thought it would be.

Our biggest takeaway after seeing the results, reading the call transcript and reviewing the slides used during last night’s call is the company could end up exactly where we thought it would or put simply Afrezza will never be more than a niche drug. Now we must admit this road trip has taken much longer than anyone thought it would and to be honest the company still isn’t out of the woods just yet.

Let’s look at the positives first and give credit where credit is due. When Michael Castagna came in to run the company he inherited a mess as MannKind was on the brink of extinction. Sanofi (NYSE: SNY) had terminated their partnership with the company, sales were dismal, and the company was bleeding cash. Things were so bad that no one could blame Mike for not having a long-term strategy as he was fighting to keep the company operating. Let’s be honest its difficult if not impossible to think about what the next five years might be like when your worried about the next five months.

To his credit Mike has kept the company afloat as he went about cleaning up the mess he inherited. Mike was also the beneficiary of low expectations as no one believed MannKind would survive. Mike also benefited from how the late Al Mann structured the deal with Sanofi. We won’t say that Al could have sold ice cubes to Eskimos, but he would have come damn close. And let’s be honest Sanofi may be a big company but as we have seen size and being smart have nothing to do with each other.

Today the company has successfully restructured their debt, has some cash and for the first time in a long time can exhale. Mike has assembled his team and scored a major victory when he added Dr. David Kendall as the company’s medical director. Simply put Mike can now look to the future and as he noted during the call it’s time for this team to execute. This as Momma Kliff used to say is the good news.

But alias some very formidable obstacles have not gone away. Yes, the company has breathing room, but their financial footing still is not solid. Based on the company’s guidance for the year Afrezza net revenues between $25 and $30 million, burn rate of between $90 and $100 million and just $48 million in cash therefore the company must find away to raise more capital in the future.

Operating expenses remain out of whack. Per the press release;

“Selling, general and administrative expenses were $75.0 million for the year ended December 31, 2017 compared to $46.9 million for the prior year, an increase of $28.1 million primarily due to the creation of a commercial support infrastructure after termination of the Sanofi license and collaboration agreement.”

Think about that when, also according to the release;

“For the year ended December 31, 2017, total net revenue of $11.7 million was comprised of $9.2 million of Afrezza net revenue, $1.7 million from the net revenue of surplus bulk insulin to a third party, $0.6 million from the sale of certain oncology intellectual property, and $0.3 million from collaboration net revenue.”

Fourth quarter results provide a clear picture of the problem facing MannKind, in the quarter net revenue for Afrezza was $4.5 million costs of goods sold in the quarter was $5 million.

So, let’s say the company does everything Mike says it can do. The biggest problem of all hasn’t changed since Afrezza was approved by the FDA. Namely how do you get the drug onto formulary in a favorable position and ultimately get it into the hands of more patients. How do you transform Afrezza from a blip on the radar screen to the niche product we think it can be? Let’s be clear here Afrezza will never ever become the billion-dollar product so many analysts thought it would be. But it can become a $100 million product.

Which begs the question can MannKind align costs and expectations to reflect this reality. And let’s not forget that Afrezza is a short-acting insulin and while none of the Afrezza fans want to acknowledge this a biosimilar short-acting is coming which will just destroy the short-acting market segment.

So, when it’s all said and done we’re in the same place we’ve always been with Afrezza. Yes, the drug works, no one has ever questioned that. And yes, there is a place for Afrezza in the treatment paradigm, no one has ever questioned that either. However injectable insulins are cheaper, they are well established and a biosimilar is coming. MannKind is not just fighting Lilly (NYSE: LLY), Novo Nordisk (NYSE: NVO) and their former partner Sanofi, they are fighting payors whose one and only concern is cost.

Mike should be commended for the job he has done so far but the job isn’t over by any means.