Biotech Values

[DewDiligence]

Barron’s interviewee manhandles MannKind:

[For those who like to short overvalued biotechs, the recent IPO, MNKD, appears to be deserving of attention. Following is an excerpt from a Barron’s interview with John Borzilleri, operator of the GRT Healthcare hedge fund. Borzilleri also pans GIVN but likes NVS, PFE, ISTA, and DOVP.]

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Q: How about a pan?

A: One of my shorts is MannKind. It just went public in July and has about a $530 million market cap. They are developing an inhaled form of insulin. It's been an area of a lot of investor focus for a decade. There are four other companies doing inhaled insulin. The first one is called Nektar, which is developing it with Pfizer and Aventis. They filed for approval in Europe this year and are supposed to file in the U.S. anytime now.

Developing inhaled insulin has been very challenging. There are big safety concerns based on potential effects on the lungs from inhaling significant volumes of insulin on a regular basis. Insulin is a growth factor -- it can stimulate cell growth -- and so there have been some concerns about pulmonary function and to a lesser extent cancer. At any rate, there are huge regulatory hurdles to inhaled insulin. Pfizer and Nektar have been working for 10 years on it and have spent an enormous amount of money -- it is estimated they spent a billion dollars -- and Pfizer and Aventis built a plant that cost $300 million or $400 million for it. They are only now hitting the point of filing with the FDA. Then MannKind comes out of nowhere with very aggressive timelines for starting Phase 3 trials by the end of 2004 or early 2005 and filing in 2006.

Q: What's MannKind's track record?

A: Part of the reason MannKind is an overvalued stock is because the founder of the company, Al Mann, has had some big successes in medical-device companies. He founded a company called MiniMed, which made insulin pumps. He developed another private company, that makes cochlear implants for the hearing-impaired, that was bought eventually by Boston Scientific. People are giving him a big benefit of the doubt. But drugs are much more complicated to get through the FDA than devices. Where he succeeded in the past is far different from where he is headed now.

There are two other main issues with the product. MannKind doesn't have a partner and yet insulin is sold only by three companies in the world: Aventis, Eli Lilly and Novo-Nordisk. Those three already have partners with which they are trying to develop inhaled insulin, and so it is really unclear as to who could possibly be a partner and supply high volumes of insulin for MannKind. The other issue for MannKind involves safety. They claim their form of inhaled insulin will be absorbed in the bloodstream in 10 minutes, whereas the other four companies say it takes 30 to 40 minutes to get the insulin into the bloodstream at a significant level. What MannKind is doing is adding some kind of an organic chemical to the insulin, and there could be safety issues surrounding that.

This is a $16 stock that should be half that, at most, based upon the risk factors. Also, they are burning through the cash raised in the initial public offering, and have enough to last through the second quarter of 2005. There are so many things that can go wrong with this, including their claim they are going to have a partner by the end of the fourth quarter. They are expecting big money from a partner, but I don't know where it could possibly be coming from.
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