Dispruptive technology and new medicines

[falconquest]

I would like to introduce a conversation about subject matter. I am going to use another company as a comparison to what is happening with Afrezza. It is not my intent to promote the other company at all I am simply using it as a case study reference to foster discussion about the subject and then ask some questions for which I would like to get comments.

Mannkind spent over a billion dollars and took ten years (shouldn't have taken that long as we all know) to develop Afrezza. Once it was proven as a viable candidate the implications in the market place began to sink in and we saw numerous attacks from "analysts" etc. who criticized the drug, Mannkind and Dr. Mann. This continued (as we all no know) with the partnership with Sanofi where they essentially sandbagged Afrezza. We all know that Afrezza is a disruptive technology that could shake up the entire insulin market. We also know that it is an amazing drug. It performs so well that some patients are able to live their lives as people without diabetes do. That brings us to my mention of another drug company.

Anavex Life Sciences has developed an Alzheimer's treatment that in early clinical trials is proving to be the most effective treatment ever developed for this disease. So here we are again with a disruptive technology. The market for an effective Alzheimer's treatment is huge as there are only a handful of mostly ineffective treatments available with a market size that exceeds 13 billion dollars (depending on your source). Anavex recently announced a reverse split and moved from the OTC market to Nasdaq which generated strong support on the street. Almost immediately however, just as with Mannkind, the Shkrelli's and Feursteins of the world jumped all over it, started criticizing the company, it's trials, it's people etc. and drove the price down just as they did Mannkind. This leads to questions regarding the ability of investors to make rational judgements about investing in biotechnology.

While I have many questions, I would certainly appreciate any comments regarding this topic. I understand that drug companies may be sensitive to new technology that could disrupt their existing revenue stream. I don't want to go off into the whole conspiracy theory realm about destroying companies but the actions of Sanofi with Afrezza and Genzyme certainly stand out. I don't understand why rather than attempt to eliminate the new technology, someone doesn't embrace it and profit significantly from it? This happens in the tech world all the time where an app or program or device is developed and Apple or Google gobbles it up. Is it too early for that to happen with Afrezza? Does every new drug that has the potential of actually making people's lives better become the target of attacks? If that's the case then as an investor should that process be recognized and a strategy employed to invest only after the surviving company is past these attacks and is viable in the marketplace? What does it say about our capitalist system that new drugs that could actually make people better in a more effective way get quashed by big drug companies rather than embraced? I must say that for the ten years of owning Mannkind stock I have become very disillusioned and frustrated with the process of how new drugs are brought to market. (don't even get me started on the FDA) Additionally, what does this say about our capitalist system where you cannot make an honest investment in a company that develops new technology with out becoming the victim of wall street raids? Okay, so I am not naive and I ask these questions from a  philosophical stand point. Is this the system we want? How can it be changed? Is every biotech running around with a target on their back? Alright, I'll stop now and look forward to your comments.      

[patten1962]

I was told by someone Close to Sanofi that they really did sit on it. Sanofi has a long acting Insulin I see on tv adds. Cost them 200 million it sit on Affrezza bet the made millions maybe billions on there drug. Was kinda smart but not good for mannkind. Must be a good drug for Sanofi to do this!!!

[matt]

Biotech is not for the faint of heart. The problem, in most cases, is that the people looking at a technology don't understand enough about the science, and the implications of the science, to make an intelligent investment decision. When new technology arrives that is truly breakthrough technology, instead of just claimed breakthroughs, the big pharmas will throw BILLIONS at it immediately.

Anavex is a good case in point. They claim to have a new Alzheimer's drug but the balance sheet is a joke. To get a new metabolic drug to market if absolutely everything goes right the first time is on the order of $400 million, and nothing ever goes right the first time, which is why big pharma has an advantage in bringing drugs to market. However, Anavex is not working on a metabolic drug, they are working on a neurological drug that is likely to be orders of magnitude more expensive to get through the trial process. As of the last 10-Q they had just $15 million.

There is a reason people are throwing the BS flag on this company. If they really had something credible they would be in a lucrative partnership already. I have been in the industry since the late 1970's and I have never once seen a single promising new drug or device get sandbagged. Pharma executives are not as evil as Hollywood makes them out to be. We have children and spouses and parents and grandparents who get disease and die just like you do. Even if the evil executives were that evil, you can make more money for yourself by launching a truly new technology than you can by sitting on it.

I have done due diligence on lots of potential deals, and the warts only became evident after spending a month of more of investigating the opportunity. I normally worked with a diligence team that included regulatory, scientific, clinical, legal, finance, and marketing talent. We looked at everything. We paid to convene private focus groups of practicing physicians (many of them experts in their field) to get their opinions on the potential product and ask a lot of questions about what it would take to get them to prescribe. A lot of times we heard "yeah, that looks good but save your investment capital because here are all the problems with that approach . . ." When that happened we usually sold the patents to a willing buyer who then formed a small biotech company to develop the idea further while we moved onto the next thing.

Even with decades of experience in the industry and years of doing due diligence, I got surprised by the due diligence team more often than not. It was often some esoteric little point that I could not possibly have known about, but somebody on the team caught it and stopped the deal because it was a failure waiting to happen. If I could not spot all the pitfalls despite years of deal making, what is the chance of a retail investor truly understanding a biotech. There are many 10-15 biotechs in the entire world that I understand completely (maybe even half that amount), and for most of those I have run them myself or run one of their competitors in the past so I know where all the warts and soft spots are.

It is not so much that the game is rigged against retail investors, it is that you are playing a different game than the financial funds. Anavex smells like scam (this my personal opinion from someone who has done zero due diligence on that particular company) so the predatory funds will crush them and the retail investors who have invested. Afrezza was a clever idea, but I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch. If there was really pent up demand for inhaled insulin, Sanofi could have done zero marketing and still made a go of it. In pharma, if the idea is really good then there is a 99% chance that leading healthcare VCs hold a controlling interest, but if the drug is already in retail hands via a public company then it probably won't be a blockbuster. Afrezza is not too early to be gobbled up, it is too late.

Look for companies where a group of healthcare VCs (not just any funds, known healthcare funds) have provided the cash to get through Phase II and well into Phase III, and where those same funds and insiders hold maybe 40% of the stock (Al Mann is an individual and does not count as a VC). The big healthcare funds perform due diligence on opportunities that is nearly as brutal as corporate buyers. If the healthcare VCs have already exited their position in a public company, then take the hint and stay away. If the VCs are still hanging in there, they are expecting a bigger payday. Learn which funds are fundamental investors that pick and choose investments versus index funds that have to own the stock just because it is 0.005% of the NASDAQ index (ask the folks at TASE how buying the biotech index worked out). A lot of institutional money is passively invested (i.e. stupid money), and you need to follow the smart money not just any random institution.

[peppy]

Feb 6, 2016 9:45:37 GMT -5 matt said:

Biotech is not for the faint of heart. The problem, in most cases, is that the people looking at a technology don't understand enough about the science, and the implications of the science, to make an intelligent investment decision. When new technology arrives that is truly breakthrough technology, instead of just claimed breakthroughs, the big pharmas will throw BILLIONS at it immediately.

Anavex is a good case in point. They claim to have a new Alzheimer's drug but the balance sheet is a joke. To get a new metabolic drug to market if absolutely everything goes right the first time is on the order of $400 million, and nothing ever goes right the first time, which is why big pharma has an advantage in bringing drugs to market. However, Anavex is not working on a metabolic drug, they are working on a neurological drug that is likely to be orders of magnitude more expensive to get through the trial process. As of the last 10-Q they had just $15 million.

There is a reason people are throwing the BS flag on this company. If they really had something credible they would be in a lucrative partnership already. I have been in the industry since the late 1970's and I have never once seen a single promising new drug or device get sandbagged. Pharma executives are not as evil as Hollywood makes them out to be. We have children and spouses and parents and grandparents who get disease and die just like you do. Even if the evil executives were that evil, you can make more money for yourself by launching a truly new technology than you can by sitting on it.

I have done due diligence on lots of potential deals, and the warts only became evident after spending a month of more of investigating the opportunity. I normally worked with a diligence team that included regulatory, scientific, clinical, legal, finance, and marketing talent. We looked at everything. We paid to convene private focus groups of practicing physicians (many of them experts in their field) to get their opinions on the potential product and ask a lot of questions about what it would take to get them to prescribe. A lot of times we heard "yeah, that looks good but save your investment capital because here are all the problems with that approach . . ." When that happened we usually sold the patents to a willing buyer who then formed a small biotech company to develop the idea further while we moved onto the next thing.

Even with decades of experience in the industry and years of doing due diligence, I got surprised by the due diligence team more often than not. It was often some esoteric little point that I could not possibly have known about, but somebody on the team caught it and stopped the deal because it was a failure waiting to happen. If I could not spot all the pitfalls despite years of deal making, what is the chance of a retail investor truly understanding a biotech. There are many 10-15 biotechs in the entire world that I understand completely (maybe even half that amount), and for most of those I have run them myself or run one of their competitors in the past so I know where all the warts and soft spots are.

It is not so much that the game is rigged against retail investors, it is that you are playing a different game than the financial funds. Anavex smells like scam (this my personal opinion from someone who has done zero due diligence on that particular company) so the predatory funds will crush them and the retail investors who have invested. Afrezza was a clever idea, but I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch. If there was really pent up demand for inhaled insulin, Sanofi could have done zero marketing and still made a go of it. In pharma, if the idea is really good then there is a 99% chance that leading healthcare VCs hold a controlling interest, but if the drug is already in retail hands via a public company then it probably won't be a blockbuster. Afrezza is not too early to be gobbled up, it is too late.

Look for companies where a group of healthcare VCs (not just any funds, known healthcare funds) have provided the cash to get through Phase II and well into Phase III, and where those same funds and insiders hold maybe 40% of the stock (Al Mann is an individual and does not count as a VC). The big healthcare funds perform due diligence on opportunities that is nearly as brutal as corporate buyers. If the healthcare VCs have already exited their position in a public company, then take the hint and stay away. If the VCs are still hanging in there, they are expecting a bigger payday. Learn which funds are fundamental investors that pick and choose investments versus index funds that have to own the stock just because it is 0.005% of the NASDAQ index (ask the folks at TASE how buying the biotech index worked out). A lot of institutional money is passively invested (i.e. stupid money), and you need to follow the smart money not just any random institution.

quote: I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch.

reply: I see what you are saying. I have seen it in the faces of interviewed endo's.  You know the ones, the ones that think injected insulin is fine.

It makes me wonder why, the focus group would give sending glucose out your urine/kidneys a thumbs up.  www.januvia.com/

[agedhippie]

Feb 6, 2016 10:06:17 GMT -5 peppy said:

quote: I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch.

reply: I see what you are saying. I have seen it in the faces of interviewed endo's.  You know the ones, the ones that think injected insulin is fine.

It makes me wonder why, the focus group would give sending glucose out your urine/kidneys a thumbs up.  www.januvia.com/

You may be being ironic, but that's how the body work normally. The normal kidneys start filtering out glucose once you hit 140 to 160. They cannot control the level alone however as there is a limit to their filter capacity. Januvia is a DPP-4 inhibitor so it doesn't act on that process, did you mean Farxiga or Invokana which are SGLT2 inhibitors and do enhance that effect?

[greg]

"Afrezza was a clever idea, but I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch. If there was really pent up demand for inhaled insulin, Sanofi could have done zero marketing and still made a go of it. In pharma, if the idea is really good then there is a 99% chance that leading healthcare VCs hold a controlling interest, but if the drug is already in retail hands via a public company then it probably won't be a blockbuster. Afrezza is not too early to be gobbled up, it is too late."

Matt,

Pfizer spent a decade and $3 billion developing its "inhaled version of a hormone." Novo Nordisk and Eli Lilly also invested considerably resources developing their own versions of same. Presumably, the three companies, and their respective (small) partners, conducted substantial due diligence, including focus groups, before allocating so their resources to these endeavors. I was a healthcare analyst on Wall Street when these products were under development, and there wasn't a single research report that didn't tout the commercial potential of inhaled insulin. Presumably, all of the authors of those research reports conducted their own dd to determine the potential demand.

MannKind conducted substantial research in recent years to ascertain interest in inhaled insulin among physicians and diabetics. Presumably, Greenhill, Deerfield, and Sanofi ran their own focus groups prior to Sanofi signing up with MannKind. Clearly, the fact that SNY did, in fact, sign up with MannKind indicates that the focus group results were positive. If the opposite were true, then one has to ask what motivated SNY to ink that deal.

As to your comments regarding the slow launch, the validation of your suspicion that the focus group gave a thumbs down, and zero marketing, etc., I couldn't disagree more on so many counts. First, we have absolutely no idea when or if a focus group was convened by SNY before it decided to pull the plug. Second, the slow launch is attributable to so many factors, spirometry requirements, delays in getting to see an endo., PA requirements, ignorance on the part of physicians and patients, conservatism on the part of physicians, etc. Third, other than products like sovaldi, where physicians will warehouse patients in anticipation of the availability of a breakthrough medicine, how many drugs see a rapid ramp-up in sales, especially when there are suitable alternatives? Fourth, I don't think many longs are claiming there is pent-up demand for inhaled insulin. We do believe, however, that there is a potentially substantial market for same, a market that can easily be developed by effective advertising. Fifth, the ubiquitous advertising of drugs on television underscores the importance of ads in selling drugs.

You make it sound like SNY was a good partner, doing whatever was necessary to ensure Afrezza's success. Perhaps you can explain why it price the product at such a huge premium to rival products, which, according to what could be claimed, were as good as Afrezza. Perhaps you could also explain why it made zero efforts to get the product approved in other countries. Perhaps you could explain why no efforts were made towards being able to improve the product's label. 

[kball]

Shaping up as a very good thread

[dictatorsaurus]

Feb 6, 2016 10:41:28 GMT -5 greg said:

You make it sound like SNY was a good partner, doing whatever was necessary to ensure Afrezza's success. Perhaps you can explain why it price the product at such a huge premium to rival products, which, according to what could be claimed, were as good as Afrezza. Perhaps you could also explain why it made zero efforts to get the product approved in other countries. Perhaps you could explain why no efforts were made towards being able to improve the product's label. 

I noticed that as well.  Well worded portraying SNY as partner with good intentions that simply couldn't promote a sucky concept such as inhaled insulin!

[kbrion77]

Feb 6, 2016 10:46:49 GMT -5 kball said:

Shaping up as a very good thread

Agreed, I always respect what Greg and Matt publish.  When MNKD first signed the deal I was thrilled because in my opinion we needed a big pharma on our side for Afrezza and ultimately MNKD to succeed.  The partnership turned out to be a disaster from the start.  Once Afrezza was priced at a premium to other rapids we should have known it wasn't going to go well.  I try to stay optimistic these days but as each and every day passes and more cash gets burned it's hard to.  The optimist in me says with the incredible results and now almost somewhat of a slowdown of the disease (from what we see from early users), Sanofi just wasn't ready to cannibalize their existing products/devices for 65% of profits.  MNKD has their backs against the wall but from an early standpoint it looks like Matt and Ray are both going to fight until the end, and we all know Al will as well.  

[nylefty]

I have to wonder why Matt spends so much time and effort bashing Afrezza and MannKind when he owns no shares in the company. He has said that he's an options trader.  Guess that explains it. 

[falconquest]

Feb 6, 2016 9:45:37 GMT -5 matt said:

Biotech is not for the faint of heart. The problem, in most cases, is that the people looking at a technology don't understand enough about the science, and the implications of the science, to make an intelligent investment decision. When new technology arrives that is truly breakthrough technology, instead of just claimed breakthroughs, the big pharmas will throw BILLIONS at it immediately.

Anavex is a good case in point. They claim to have a new Alzheimer's drug but the balance sheet is a joke. To get a new metabolic drug to market if absolutely everything goes right the first time is on the order of $400 million, and nothing ever goes right the first time, which is why big pharma has an advantage in bringing drugs to market. However, Anavex is not working on a metabolic drug, they are working on a neurological drug that is likely to be orders of magnitude more expensive to get through the trial process. As of the last 10-Q they had just $15 million.

There is a reason people are throwing the BS flag on this company. If they really had something credible they would be in a lucrative partnership already. I have been in the industry since the late 1970's and I have never once seen a single promising new drug or device get sandbagged. Pharma executives are not as evil as Hollywood makes them out to be. We have children and spouses and parents and grandparents who get disease and die just like you do. Even if the evil executives were that evil, you can make more money for yourself by launching a truly new technology than you can by sitting on it.

I have done due diligence on lots of potential deals, and the warts only became evident after spending a month of more of investigating the opportunity. I normally worked with a diligence team that included regulatory, scientific, clinical, legal, finance, and marketing talent. We looked at everything. We paid to convene private focus groups of practicing physicians (many of them experts in their field) to get their opinions on the potential product and ask a lot of questions about what it would take to get them to prescribe. A lot of times we heard "yeah, that looks good but save your investment capital because here are all the problems with that approach . . ." When that happened we usually sold the patents to a willing buyer who then formed a small biotech company to develop the idea further while we moved onto the next thing.

Even with decades of experience in the industry and years of doing due diligence, I got surprised by the due diligence team more often than not. It was often some esoteric little point that I could not possibly have known about, but somebody on the team caught it and stopped the deal because it was a failure waiting to happen. If I could not spot all the pitfalls despite years of deal making, what is the chance of a retail investor truly understanding a biotech. There are many 10-15 biotechs in the entire world that I understand completely (maybe even half that amount), and for most of those I have run them myself or run one of their competitors in the past so I know where all the warts and soft spots are.

It is not so much that the game is rigged against retail investors, it is that you are playing a different game than the financial funds. Anavex smells like scam (this my personal opinion from someone who has done zero due diligence on that particular company) so the predatory funds will crush them and the retail investors who have invested. Afrezza was a clever idea, but I suspect that the focus groups turned thumbs down on an inhaled version of a hormone and that was validated by the slow sales after launch. If there was really pent up demand for inhaled insulin, Sanofi could have done zero marketing and still made a go of it. In pharma, if the idea is really good then there is a 99% chance that leading healthcare VCs hold a controlling interest, but if the drug is already in retail hands via a public company then it probably won't be a blockbuster. Afrezza is not too early to be gobbled up, it is too late.

Look for companies where a group of healthcare VCs (not just any funds, known healthcare funds) have provided the cash to get through Phase II and well into Phase III, and where those same funds and insiders hold maybe 40% of the stock (Al Mann is an individual and does not count as a VC). The big healthcare funds perform due diligence on opportunities that is nearly as brutal as corporate buyers. If the healthcare VCs have already exited their position in a public company, then take the hint and stay away. If the VCs are still hanging in there, they are expecting a bigger payday. Learn which funds are fundamental investors that pick and choose investments versus index funds that have to own the stock just because it is 0.005% of the NASDAQ index (ask the folks at TASE how buying the biotech index worked out). A lot of institutional money is passively invested (i.e. stupid money), and you need to follow the smart money not just any random institution.

Matt,
I appreciate your comments and perspective. Your premise is reasoned and seems valid. I have to ask though, if Mannkind were likely not to succeed based on your healthcare VC model then why are companies like Blackrock and Vanguard so heavily invested? I'm not saying these fit the model of your healthcare VC's but they are no slouches when it comes to investing. The other question I have for you is, I suspect you own shares of Mannkind otherwise you wouldn't be here. So is this a case of "Do as I say, not as I do"? How do you reconcile your position here? Thank you.

[kball]

Feb 6, 2016 12:28:58 GMT -5 nylefty said:

I have to wonder why Matt spends so much time and effort bashing Afrezza and MannKind when he owns no shares in the company. He has said that he's an options trader.  Guess that explains it. 

Maybe there are lessons to be learned, besides just enormous investing mistakes that will take some of us several years or more to recover from, by his posts?

[agedhippie]

Feb 6, 2016 12:49:09 GMT -5 falconquest said:

Matt,
I appreciate your comments and perspective. Your premise is reasoned and seems valid. I have to ask though, if Mannkind were likely not to succeed based on your healthcare VC model then why are companies like Blackrock and Vanguard so heavily invested?

Why? Tracker funds. Same reason all those Israeli funds are holding Mannkind stock, it's non-discretionary. The down side is that unless  the market cap picks up they have to sell a lot of those holdings at the next rebalancing.

[greg]

Feb 6, 2016 12:28:58 GMT -5 nylefty said:

I have to wonder why Matt spends so much time and effort bashing Afrezza and MannKind when he owns no shares in the company. He has said that he's an options trader.  Guess that explains it. 

I've been an options trader for almost three decades and have had various bullish positions on MNKD, including being short deep-in-the-money puts and being long (edited to add "long") both deep-in-the-money calls and vertical spreads. It's extremely tough to play options with penny stocks, however, and I have no option positions now. Certainly makes very little sense to buy puts, not much upside potential without taking large positions. May make a little more sense taking bullish positions, be it naked calls or vertical spreads, but, again, not an attractive proposition with low priced stocks. And obviously, if i did have a bullish position, I wouldn't spend so much time trying to inject fear and uncertainty.

I have no interest in impugning or questioning Matt's motivations, but my history with MNKD has made me very suspicious. Beyond the obvious high profile characters that have been trashing the company, there are many others who spend a lot of time trying to undermine investor confidence, some blatantly and others far more subtle. Read the comments on any SA article and you'll see the same folks spending so much time doing their dirty deed. WHY?? And, unfortunately, some are very good. WHY do they spend so much time bashing a penny stock? 

[falconquest]

Feb 6, 2016 12:57:25 GMT -5 agedhippie said:

Feb 6, 2016 12:49:09 GMT -5 falconquest said:

Matt,
I appreciate your comments and perspective. Your premise is reasoned and seems valid. I have to ask though, if Mannkind were likely not to succeed based on your healthcare VC model then why are companies like Blackrock and Vanguard so heavily invested?

Why? Tracker funds. Same reason all those Israeli funds are holding Mannkind stock, it's non-discretionary. The down side is that unless  the market cap picks up they have to sell a lot of those holdings at the next rebalancing.

Well, it's interesting that they didn't sell off considerably at the end of last year. I would assume that would typically be a time when funds rebalance their portfolios. So the top five fund holders own roughly 58.7 million shares. Are you telling me that all those shares will hit the market at once? I hear people saying things but I certainly don't see the evidence. Can you support your statement?