LQDA - Mannkind Corporation: Ready For Your Biotech Portfolio

Summary

• Once a highly speculative, non-revenue generating biotech on the verge of bankruptcy MNKD has de-risked much of the previous market concerns over bankruptcy, debt and credit issues.
• Their flagship product sold under the brand name AFREZZA is the only FDA approved rapid acting, 'dry powder inhalation formula' for meal time glucose management.
• Social media outlets provide a platform for patients to share their stories about their experiences using Afrezza.
• CEO Dr. Michael Castagna, PharmD, MBA has been able to navigate Team MNKD through treacherous financial obstacles and the sentiment is turning positive since his rein began in May 2017.
• The 'treat to fail' mentality is a silent and tragic irony practiced in many physician's offices and perpetuated by the current Standard of Care for the treatment of diabetes.

MannKind Corporation (MNKD) is a small biopharmaceutical company focusing on the discovery, development and commercialization of therapeutics focusing on endocrine and orphan lung diseases. They currently manufacture two commercialized FDA approved therapies, two drug delivery inhalation devices and within the last quarter, acquired V-Go...manufacturers of a wearable insulin delivery patch-like system that provides blood sugar control.

Based in Danbury, Connecticut, the company was founded in February 1991 by billionaire entrepreneur Alfred E. Mann and it's listed on the NASDAQ Composite under the ticker symbol MNKD. As of August 26, 2022, its share price was $3.96, the average traded volume was 4M shares and it has a market cap of $1.019B. The 52W high is $5.44 and the 52W low is $2.49.

As part of my long term portfolio of biotech industry company's, I've been invested in MNKD for about seven years and I've watched the story unfold. Therefore, what I'm going to share with potential new investors are the reasons why you should, at long last, seriously consider adding MNKD to your long term biotech growth portfolio, too.

Quant Factor Grades

Momentum Grade "B+" (Top Metric)

Looking back over the same five-year period under Dr. Castagna's leadership, we can see that MNKD share price has an 88.89% return vs the S&P 500 62.20%. The three year return is a whopping 224.55%, or an annualized rate of 74.85%. YTD and one-year returns are in line with the S&P 500 declines with a slight edge to the S&P performing better.

Profitability Grade D (Bottom Metric)

Relative to other stocks in the sector, MNKD is not yet profitable. A blueprint to turn that metric around is at the top of Team MNKD list to check off. More realized gains from the continued expected growth in Afrezza, the acquisition of V-GO and the expected accretive growth in the coming year, along with the United Therapeutics Corporation ( UTHR ) collaboration and services revenue and royalties on Tyvaso, DPI will help improve this quant metric.

Wall Street Analyst Coverage/Recommendations

As of August 2022, six financial analysts cover the stock. Four have a "Strong Buy," one has a "Buy," and one has a "Hold" recommendation.

Revenue Sources

Afrezza

MNKD's flagship product, sold under the brand name AFREZZA, is the only FDA approved rapid acting, "dry powder inhalation formula" for mealtime glucose management. People with diabetes ((PWD)) also utilize Afrezza for relief from those pesky high blood sugar excursions that don't seem to want to come back into range, so it's not just used for mealtime dosing. Why? Because its pharmacokinetic insulin profile has shown in trials that the drug's uptake begins immediately through the blood stream via the deep lungs where exchanges with our blood take place, similar to our oxygen exchange, rather its insulin being exchanged. The peak effect occurs between 35 and 45 minutes before leaving the bloodstream after about 60 - 180 minutes, depending on the strength of the dose. Thus, the ultra "rapid acting" affect and the appeal to PWD who use Afrezza.

The illustration below compares the 4u and 12u sizes.

Users of Afrezza inhale the insulin powder utilizing MNKDs proprietary delivery technology, an FDA approved device that allows patients to select and insert cartridges depending on their needs, a 4u, 8u or 12u cartridge (below). This is a key feature that differentiates it from other insulins. Whereas needles are typically used for the delivery of insulin, either sub-q or intra-dermal, this is inhaled. Afrezza net revenue is $10.6M; an increase of 7% vs. 2021, Total Rx increased 12% 2Q vs. 1Q in 2022.

Tyvaso DPI

The second FDA approved commercially available product is another dry powder inhalation formula marketed by United Therapeutics as Tyvaso, DPI to treat patients suffering from Pulmonary Arterial Hypertension ((PAH)) and Pulmonary Hypertension associated with Interstitial Lung Disease ((PH-ILD)). Like Afrezza, single dose cartridges come pre-filled with the drug treprostinil and is taken four times daily (see below). Like Afrezza, the FDA approved inhaling device is used to deliver the formula directly to patients' lungs for uptake and relief.

MNKD manufactures Tyvaso, DPI and Afrezza along with their delivery devices at their 264,000 square foot manufacturing facility in Danbury, CT. The facility was recently sold by MNKD in a "sale-leaseback" transaction in November 2021 that raised over $102M in non-dilutive cash. V-GO

On May 17, 2022, Mannkind Corporation announced the acquisition of V-GO from EU based company Zealand Pharma for $15 million, including intellectual property, inventory and equipment. This addition allows MannKind to expand its mission to " help more people live life humann ^{SM "} by providing them with additional mealtime choices in order to help control their diabetes. V-GO is worn like a patch and as an insulin delivery device, helps to provide glucose control, is patient friendly, and like other wearable devices eliminates the need to take multiple daily injections.

“The easy click-and-go mechanism of V-Go and its ability to be flexibly placed on your body each day aligns with our mission of providing products that allow patients living with diabetes to experience life without limits,” said Alejandro Galindo, Executive Vice President, Endocrine Business Unit for MannKind Corporation. “V-Go joins our ultra rapid-acting inhaled insulin product, Afrezza ^® , in expanding MannKind’s portfolio of products that change the way diabetes is treated.”

The purchase of V-GO is expected to produce a net-revenue run rate of $18M-$22M and accretive the following years according to the Q2 2022 quarterly conference call and presentation found on the Seeking Alpha website. Investor message boards lit up as investors were stymied when the announcement was first made, curiously wondering how this purchase was going to help MNKD. It didn't take long to get the answer from their CEO. More clarity on the acquisition was provided during a podcast, "The Business of Pharmacy" found on YouTube after host Mike Koelzer asked Michael Castagna about increasing revenues via mergers.

To grow at a faster rate you need more scale...we need more sales reps at the end of the day to cover more physicians. We only cover about 35% of the insulin market. So, in order to expand those reps, we needed more products to sell...we were able to get a decent deal...and that gives our reps a reason to go in and help those patients and doctors... and between both products you can service more of the needs of your customer. That's what good M&A is all about. Does one plus one equal three or one point five?

Collaboration and Services

In the second quarter, MNKD recorded revenue in this category primarily associated with UTHR for $5.4 million, including manufacturing services revenue of $4.7 million. They deferred $4.1 million of revenue to the balance sheet in Q2, with roughly half associated with inventory which remains on their balance sheet. This inventory will be sold to UTHR in the current quarter and should be recognized as deferred revenues. There was a total of $29.8 million of deferred revenue associated with UTHR on MNKDs balance sheet as of June 30, 2022.

Investment Thesis

Once a highly speculative, non-revenue generating biotech on the verge of bankruptcy, MNKD has de-risked much of the previous market concerns by continuously exploring new opportunities that have benefited investors, developed a proven delivery platform that is in use with two drugs (with the potential for more currently undergoing research), is on a trajectory to book increased revenues from four sources, and is steadily marching towards improving their balance sheet and their cash position.

But, before I begin to cover the unfolding story, allow me to share with you a few of the "garden variety" universally preached themes that've been used to skewer MNKD for the last several years; bankruptcy is imminent, ad hominem attacks on the character or qualifications of management, lack of revenue (even back when it was a pre-revenue biotech), debt and credit issues, losses, dilutions, reverse splits, class action lawsuits, black box labels, they're out of time, their drug isn't gaining traction and the latest favorite, "Scripts are not moving."

Other than the attempts to smear Dr. Castagna's reputation and his qualifications, everything about the dire situation at MNKD was previously true. Considering the forecast of dire "market concerns" during the previous five years (noted above), the turnaround of MNKD in the last few years with CEO Michael Castagna, PharmD, MBA at the helm continues to be a compelling reason to invest.

The problem with all of the MNKD short thesis' over the last few years has been the ability of Dr. Castagna and his team to navigate through credit refinancing, interest rate negotiations, debt restructuring, FDA approvals, achievement of non-dilutive income generating goals, codifying a partnership with United Therapeutics while expanding their pipeline's revenue. When I first bought into the MNKD story, before CEO Michael Castagna took over the helm, MNKD was all but ready to be tossed into the "Desert of 1,000 Biotech Failures."

Leadership

CEO Dr. Michael Castagna

MNKD was fortunate to have hired Mr. Castagna, from Amgen (AMGN), first as their Chief Commercial Officer and later promoted into the role of CEO on May 25, 2017. Dr. Castagna has been in this position for over 5 years. He said this, as announced in a corporate press release ,

"I am honored to lead MannKind into its next phase of growth. Our inhaled insulin, Afrezza, is a truly differentiated brand that will help millions of people suffering from diabetes. Our relentless focus on empowering people to conquer the daily struggle of managing their diabetes will set MannKind apart."

I'll admit, he made a bold commitment and refocused the core mission of MNKD at that very moment when he said, "Our relentless focus on empowering people to conquer the daily struggle of managing their diabetes will set MannKind apart." That hasn't changed much in five years as their core mission remains, " To help more people live life more humann ^SM"

Furthermore, improvement in MNKD's organizational foundation is where it all must begin. Their mission and guiding values set the stage for what is expected from every employee, including the top C-Suite executives down to the parking lot security guards. These values are integral to the mission and are the guiding principles for what is expected while honoring their founder and visionary, Alfred E. Mann; Do It Right, Win Together, Own It, Be Tenacious and Push Boundaries .

Doing Things Right v Doing the Right Thing

"Doing things right" does not take any intellect, creativity, emotion or require one to step outside their comfort zone. If you follow this script, it's a matter of doing what you always did because that's how you do things. It's an innate response to the policies, procedures, practices and rules of the road when making tactical decisions in business. It's a solid principle that more aligns with what is expected from you as an employee of the business and adds a measure of accountability.

On the other hand, 'doing the right thing' takes common sense, intelligence, emotion, empathy, and compassion to go above and beyond the standards set in writing, such as mission statements, policies, roadmaps and guidelines. The corporate slogan, " To help more people live life more human " exemplifies "Doing the right thing." That style of strategic leadership is infectious and you point your finger to those leaders and say to others inside the organization, "Hey, you want to follow him/her and you'll also be a success" because of those intangibles personified in that style of leadership. Leadership that espouses the theme of helping others, going the extra mile and making a difference, even when it's not their job, is a platform that creates a leader's lasting legacy.

Yet, it's not enough to simply establish organizational values and be a strategic leader. Leaders must live and breathe these workplace behaviors everyday if they expects their high performance teams to develop into their full potential, reach their goals and become successful. Examples abound of Dr. Castagna's leadership throughout the last few years and positive results are beginning to show signs in the share price as it has grown over 270% since August 2019. But first, a look at the external opportunities.

S ocial Media Platforms

Pushing The Narratives

Investors of all types can thank social media outlets for providing a platform that enables them to gain new insights into patient outcomes. Twitter, Instagram, Facebook, TikTok and others are cyberspace portals for the younger generation to commingle, share their thoughts and congregate, not like the malls and main streets of the past. Here is where they're seen and want to be seen. It's also a source of entertainment and pride for this generation who seek as many active followers as possible, especially for celebrities who use it to build their star power and promote their social justice agendas or, simply use it as brag board.

To a perverse degree, some must feel an odd sense of self-actualization and achievement when in reality, it's nothing more than a glorified substitute for the old telephone conversations we used to have or the letters we used to write to our closest friends and relatives. The difference? We wouldn't dare air our dirty laundry to strangers, much less our neighbors next door for them to share with millions of others.

It's also through these outlets where they're recording, reporting and sharing almost all facets of their daily lives, including those suffering from all sorts of maladies. Actress Brec Bassinger is no exception. Brec Bassinger is an American actress with over 1.5M followers on Instagram and 367K followers on TikTok. She fits the profile of this younger generation who use social media as influencers and to increase their celebrity star power. Recently, on World Diabetes Day, she posted a video on TikTok about what her life is like as a person with diabetes ((PWD)), having lived with the condition for fourteen years. Captioned below the video it reads, " This is just one day of the rollercoaster of having t1d…def not my best day…def not my worst ."

In short, the video captures how Ms. Bassinger uses Afrezza to control her diabetes in combination with her long acting insulin and her daily struggles to stay in range. She notes how she "loves" her inhaled insulin, referring to Afrezza while loading an Afrezza cartridge into her delivery device. Brec's video captured over 1,150 comments many unaware that an inhaled insulin exists (more on that later), nearly 860 followers shared her video and she garnered over 153K likes.

I also encourage readers to follow the link and read the story of Ginger Vieira, an Afrezza user. Ms. Vieira is an author, writer and speaker who is dedicated to helping PWD in order to improve their quality of life. Her story titled, "One Year Later: Why I Still Love Inhaled Insulin for Type 1 Diabetes" is linked here to the Beyond Type 1 website. Founded in 2015, Beyond Type 1 is a non-profit organization that advocates for all people with diabetes making sure everyone has access to care for this chronic illness. Ms. Vieira describes her personal story with everyday challenges addressing topics that include fewer injections to control her diabetes, the flexibility Afrezza offers her for maintaining an exercise regimen, her discovery she's now afforded to try new foods without fear, her increased confidence at achieving her time in range and how she was able to overcome the learning curve with Afrezza.

To sum up her experience,

The two things I treasure most in my diabetes management tool kit today? My inhaled insulin and my CGM...Today, my only diabetes regret is that I didn’t try using Afrezza sooner.

Stories like Ginger Vieira's and Brec Bassinger's are being shared everyday across all the social media platforms yet, obstacles remain. It's one thing to recognize the growing acknowledgement by users such as Brec and Ginger and the effort they share to speak out on their personal health. They have supportive physicians who help them fight their personal health battles. Yet, it's entirely a different ballgame to get more physicians, general practitioners and endocrinologists to recognize the irony in their current "treat to fail" approach for PWD under their care.

Risks

The Silent and Tragic Irony in the current Standard of Care

Doctors are entrenched in what they learned in medical school and are reluctant to deviate too far outside the standard of care for the treatment of diabetes. As mentioned above, CEO Michael Castagna was recently featured in the podcast entitled, "The Business of Pharmacy " hosted by Mike Koelzer, where he touches on this exact topic.

In essence, doctors are reluctant to try something different, or they don't offer inhaled insulin as a choice to their patients because they haven't taken the time to study the drug's profile and, as previously noted, are entrenched in their old methods of treatment. He describes it as a "treat to fail mentality." This "treat to fail mentality" highlights the problem that exists with many physicians treating diabetes today.

At the 34:42 mark of the podcast Dr. Castagna points out that 80% or 4 out of 5 diabetics taking insulin are "not at goal" which, as a result, could eventually lead to coronary disease, dialysis, blindness, peripheral neuropathy and more. The reason? Doctors don't want to push more insulin onto patients to treat high blood sugar out of the fear their patient may suffer from hypoglycemia (low blood sugar) as a result of injecting 'too much' insulin into the body.

It's a life and death situation...no doctors are paid for outcomes, patients are told they're failures, especially the type 2s and everyone in diabetes is depressed because nobody is getting any better.

Consequently, the 'treat to fail' mentality is a silent and tragic irony practiced throughout most of the diabetes care network.

Insurance Coverage

Compounding the problem with Afrezza and the current standard of care as an obstacle to gaining more traction with users is the acceptance by the insurance industry to cover Afrezza as a top tiered insulin for frontline treatment. Patients have to fight, scratch and claw every inch of their way around, through, under and over their insurance companies to get coverage because rapid acting inhaled insulin is not the preferred treatment for the management of diabetes under the Standard of Care.

Regardless of the speed of prescription and prescription refill traction over the last several years, there has been an ongoing increase in revenue that can be attributed to more user adoption combined with increased insurance coverage and pricing.

Liquidia

From their website:

Liquida ( LQDA ) is biopharmaceutical company focused on the development and commercialization of products that address unmet patient needs, with current focus directed towards the treatment of pulmonary arterial hypertension ((PAH)).

Liquidia conducts research, development and manufacturing of novel products by applying its proprietary PRINT technology, a particle engineering platform, to enable precise production of uniform drug particles engineered to improve the safety, efficacy and performance of a wide range of therapies.

Liquidia's Yutrepia is in competition with UTHR's Tyvaso, DPI and litigation between the parties over a patent violation claim by UTHR, is unresolved. LQDA shares tumbled on Thursday, August 30, 2022 after a judge denied a motion filed by LQDA to stay the judges' decision, citing "undue prejudice" towards UTHR if the stay was granted on the patent claims. LQDA is hosting an update for investors on September 1, 2022, regarding the most recent decision. A letter to investors outlines their positive outlook going forward after the recent motion was denied. How much penetration can LQDA make and take from UTHR's stranglehold on the PAH market remains to be seen. Regardless, according to a February 2022 Global Newswire report,

The global PAH market size is anticipated to reach USD 11.0 billion by 2030. The market is expected to expand at a lucrative CAGR of 5.2% from 2022 to 2030. The key factors driving the market growth include the increasing prevalence of pulmonary arterial hypertension, drug development and technological advancements, product approvals, and initiatives by key companies.

Fundamentals

A current peak into their latest Form 10Q reveals in the six months ending in June 2022, they have roughly $285.7M in cash compared to the prior six months ending with $321.1M (December 2021) with a quarterly burn rate of roughly $17.6M per quarter.

Assets

Liabilities

MNKD did not exercise their right to borrow an additional $60M under Tranche 3 of their existing credit agreement with Midcap, rather remaining prudent and cautious due to the prevailing interest rate themes in the credit markets. They've also been able to negotiate current interest rate caps limiting their exposure to no more than 1% of the current rates on the existing loan balance.

10 Year EPS Estimates

Technical Overview

I'm intentionally not going to over-analyze the charts, rather these are being used to represent, in order, the period approximately six months after Dr. Michael Castagna took over the reins at MNKD Corporation through the current period. These are one and two year charts with daily candles.

Chart #1 Sept 2017- Sept 2019

This two year chart shows the share price action shortly after May 2017, when Dr. Castagna took over with his efforts to restructure the framework at MNKD, exercise his strategic initiatives; focused on preventing losses and controlling costs, managing risks, DTC marketing initiatives, execution, on boarding new personnel and creating his vision and expectations.

Not much you can expect to happen here. In retrospect, Team MNKD was doing everything possible not to go bankrupt. Dilutions and a 1:5 Reverse split in March 2017 reduced MNKDs share count from 700,000,000 to 140,000,000 shares.

The run up in October 2017 could be attributed to the announcement of the debt restructuring of convertible notes and a registered direct $60M public offering which helped to mitigate any immediate Wall Street concern of MNKD going out of business. As you can see, the parabolic move up was short lived (as most of those moves are) however, a profit of 284% on the run up was up for grabs by short term traders. The average share price for the 52W period between 09/2018 - 09/2019 was $1.60

Chart#2

This chart, marked by the outbreak of COVID in late 2019 and the lockdown in March 2020 stays relatively unchanged. Moving Averages, 50, 100 and 200 are flat, the low for the period is .79 cents in March 2020, coinciding with the lockdowns. It would mark the worst share price MNKD would see under the new leadership. Like all of the major indices during this time, DOW, NASDAQ and S&P 500, would eventually recover.

If you bought MNKD at .79 in March 2020 and sold in late June 2020, you would have locked in a plus 200% gain. Investors like myself added to their positions during the lows. Many took advantage of the price and lowered their averages. Others ran for the exits. The average share price for the 52W period between 09/2019 - 09/2020 was $1.70

Chart#3

Recognition and adoption of Afrezza remains a challenge throughout the pandemic period. Regardless, this period begins to see some share price appreciation due to the recognition of MNKD booking milestone payments after the signed agreement with United Therapeutics for Tyvaso, DPI, a restructure to the Midcap Credit Facility is reached, it's announced that trials of Tyvaso, DPI reached objectives and the New Drug Application ((NDA)) was accepted. The low for the period is the tail end of the previous chart and reached $1.56 with a high in early 2021 at $6.25. The average share price for the 52W period 09/2020 - 09/2021 is $4.00.

Chart #4

The period has taken a "wait and see" approach for the last 12 months. The low for the period is $2.49 and the high is $5.44. The average share price for this 52W period 09/2021 - 09/2022 is also $4.00. Shocking, as I discovered for myself, considering this is the period that includes some of the largest decreases in all of the major indices as well as the biotech ETFs that hold MNKD in their portfolios, in many, many years. This price stability is also reflected in the slight beat by MNKD in the 1M and 6M price returns while a slight loss compared to the S&P in the annual return (Quant ratings above).

Conclusion

I invest in biotech stocks and hold the shares for years while the story unfolds and either suffer losses or benefit from the rewards. This is true for my current biotech and medical device holdings in ( INO ), ( MNKD ), ( AQST ), ( KPTI ), ( MYOV ), ( SENS ), ( MDVL ) and ( OTCQB:CYDY ).

I'm not invested in them as a "get rich quick" gimmick. Rather, I stay invested based on their stories, their potential and their growing probability of success. Furthermore, I not only invest in these companies expecting to make profits down the line, but to also watch them grow over the years while they de-risk their platforms and generate revenue that can eventually lead to profits or develop into a potential merger and acquisition candidate.

Naturally, the icing on the cake is being able to eventually read the stories from patients who have reaped the benefits of a drug that can help them improve their quality of life and while at the same time feel good about being a part of something bigger. We can thank social media and electronic news media for that opportunity.

While the "horse" of most pre-revenue biotechnology companies is the science, coupled with the probability of success increasing as products in the pipeline become de-risked or as progress and achievements are made in lengthy clinical trials, a transition from betting on the horse to betting on the jockey becomes relevant to your investing. I'm betting on the jockey who has taken MNKD from nearly going bankrupt with less than six months of cash available to fund operations and the near death of Afrezza in the early commercialization period with Sanofi, to reshaping the vision at MNKD that has allowed this story to turn around 180 degrees.

Dr. Michael Castagna and his team have gone from one to four growing sources of revenue during his tenure. He is competent, caring, compassionate and concerned with the current climate surrounding the Standard of Care being provided to PWD and the "treat to fail" mentality throughout the industry.

The share price increases, as demonstrated above, are beginning to tell the bigger story on MNKD's future. I haven't even delved into the Receptor Life Sciences deal wherein the potential to develop a cannabinoid dry powder inhaled therapy for anxiety disorders (for example) is in trials and on the horizon. Or, the other deals that may take place with other potential partners. Over the years, the charts clearly show long-term price appreciation is being recognized and Wall Street, whether you love them or hate them, they will leave you behind. At this price point, parking some money in MNKD may represent a nice opportunity to watch a small and emerging growth story unfold in the biotech space.

Authors Note:

It's important to note the disclaimer made by the editors of Beyond Type 1 regarding contributing writer Ginger Vieira:

Educational content related to inhaled insulin is made possible with support from MannKind, and editorial control rests solely on Beyond Type 1 . This article includes Ginger Vieira’s personal experience using Afrezza, and what has worked for her may not work for everyone. Please consult your healthcare team before making any changes to your diabetes care regimen.

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Mannkind Corporation: Ready For Your Biotech Portfolio