JPM Presentation - different view

[babaoriley]

Finally got around to listening start to finish last night.  Perhaps due to the negative reviews here, I was preconditioned, but I didn't think it was all that bad.  First, under a time limit, speakers tend to rush, and that seemed to be the case with Al. That's never good, and often leads to the perception of a tone of desperation, rather than what we'd hope would be confident excitement.  Also, given Al's speaking performances over the past several years, I felt this one was proportional to his advancing years.  

Was it good - no, clearly not on any objective standard, but at least okay for Al.  At his age, it's actually pretty darn impressive.  Admittedly, some of the stuff about why this or that stat did not come out as good as it should have, sounded a lot like my explaining why my golf score shoulda/coulda been 6 strokes better than it turned out.  But I don't think it was near the disaster this board prepared me for, and the share price action is some support for my view.

That being said, it's a bit scary to think of Al at the AdCom meeting.  Unfortunately, assuming he's feeling up to it, I don't believe anyone can stop him from attempting to play a prominent role.  That, I don't look forward to.

[rak5555]

Baba - I'm glad all our wining and crying did some good. Actually, I don't think the share price has held up because of anything Al said. I think it has held up because of what he didn't say, as in absolutely nothing about partner negotiations. Whether they have partner or not, their strategy to make no mention whatsoever is brilliant!!!!!!!!!

[spiro]

Another nonsense hit piece from Seeking Alpha. 

Nope, there is only one candidate on the horizon that meets our needs, and that bad boy is MannKind Corp. (MNKD). After listening to CEO Alfred Mann's presentation at the J.P. Morgan Healthcare conference yesterday, I lost all confidence in the company's lead clinical candidate, Afrezza. I now believe the product is destined for a rejection from the FDA, and it will essentially be the death knell of the company.

Prior to this presentation, I thought Afrezza was a relatively benign product that would squeak through its upcoming PDUFA date, and the company would be put up for auction soon thereafter. But what I heard made me take a second look, and the more I dug into this story, the more it fell apart at the seams.

So here is the basic bull thesis: Afrezza is an ultra-fast acting insulin that better mimics the physiology of the pancreas than currently available products. So it's supposed to be superior to fast-acting insulins like Novo Nordisk's (NVS) NovoLog. Secondly, patients will prefer to use Afrezza because it's inhalable, and people generally don't like injections. Flowing from these 'axioms', one would naturally conclude that Afrezza will eventually come to dominate the insulin market, a multi-billion dollar space.

Backing up my brief summary of the bull thesis, here are some paraphrased tidbits of what the CEO said yesterday:

· First product that matches the physiology of the pancreas

· Substantially lower risk of hyperglycemia

· Weight neutral, better than current products

· No safety signals

· Believes Afrezza will grow market among Type II because of lower risk of hyperglycemia

· Product is easy to use, delivers insulin in less than a second

· Clinically superior product compared to NovoLog

The problem with some of these statements is that the Phase 3 clinical trial data actually refutes them. And the funny part is that Mr. Mann made some rather odd statements explaining the mismatch between the company's position on Afrezza's performance compared to the actual trial results.

Turning to the trial results, Afrezza did not outperform NovoLog in terms of A1c levels in type 1 diabetics. It actually performed worse. So Mr. Mann touting Afrezza's 'clinical superiority' is a factually incorrect statement. But what is extremely bizarre is his explanation. During his presentation, he actually blames the patients in the clinical trial for improper fasting procedures, saying that once patients learn how to use the device properly that Afrezza's superiority will be apparent.

I can't say that I've ever heard a CEO blame patients in a clinical trial for their product's performance, but sure, why not?

But it gets better. In the introduction, Mr. Mann claims that Afrezza/Dreamboat are so easy to use that a 4 year old can use it. So let me get this straight, it's so easy a 4 year old can use it, but the patients in the clinical trial were using it improperly?

Which is it?

Mr. Mann also claims that Afrezza offers a "weight advantage" in that it's weight neutral. In Affinity 2, however, patients gained an average of 3.5 lbs when using Afrezza. That's not weight neutral.

Finally, Mr. Mann preaches about how it's "impossible" for Afrezza to cause hypoglycemic events when used properly. According to the clinical trials, however, Afrezza caused more hypoglycemic events than placebo in type 2 diabetics.

So what is the truth? Is everyone using the device improperly? Does that mean it's not so easy to use?

While this may look like I am parsing the man's words, these discrepancies speak to a larger problem with these clinical trial results. The company has been repeatedly criticized for not being more transparent with the results with investors, especially heading into a regulator meeting with the FDA.

Basically, MannKind is telling investors to take their word for it. But as I've shown, their words do not necessarily match reality. The FDA isn't going to be so kind, trust me on that. If Mr. Mann goes beyond the realm of the data, he will more than likely be questioned on it.

So, let's ask a simple question: Why should the FDA approve this product?

Firstly, it offers no clinical advantage per the clinical trial results compared to existing therapies, despite what the company says. In the best light, you could say that it does as well as existing therapies. But you can't tell the FDA the product is clinically superior without actual data to prove it. That dog won't hunt.

Secondly, there is no patient advocacy surrounding the product. While many MannKind investors believe diabetics are scared of needles, the truth is that they generally are not. Try reading any of the numerous blogs on this issue, and you'll see that many diabetics are annoyed by MannKind investors suggesting that diabetics suffer from needle-phobia. I suspect this is why the big pharmas ditched their development programs altogether, as patients don't seem to despise needles as much as the industry thought they did.

At the end of the day, MannKind is left with one card to play: the product is inhalable. Is that enough to get past the FDA? Maybe, maybe not. But they are going to get hammered if they start spouting off about clinical superiority.

Unknowns and the possibility of Black Swans

Getting to the real reason I feel MannKind is going to implode is that there appears to be a very good chance of a Black Swan making an appearance in the briefing documents. The mismatch between the results provided to the public so far, and Mr. Mann's belief in the product's performance, are clearly at odds with one another. My bet is that these are the best results the company has to offer, and there are some naughty surprises that will be revealed in the briefing documents. And this, my friends, is why I suspect the FDA called an Advisory Committee in the first place. If these trial data looked as impressive as the company claims, an Advisory Committee would be a waste of time and effort. So, I don't think they called an ADCOM to rubber stamp Afrezza.

Think about it this way. If reality coincided with Mr. Mann's view of Afrezza, why hasn't a big partner stepped in to either buy the company or partner? The answer is obvious: they don't share his outlook. They either believe Afrezza will be rejected again, or its sales will underwhelm.

My view is that Mr. Mann has gotten emotionally involved in the development of this product, and has therefore lost sight of its significant shortcomings. That's a recipe for disaster.

So in conclusion, my bet is that Afrezza will indeed be rejected come April, and MannKind shares sink below $1. If you're long this stock, you should think carefully about hedging this position.

Additional disclosure: I am using Deep OTM Puts to go short MNKD.