Insulin Inhaler Too Puffed Up?

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After years of struggling to develop a revolutionary insulin inhaler, MannKind Corp. feared last year it was running out of money and sought new financing.

The Valencia biotech went to investor conferences and scored with Seaside 88 LP, a private-equity group that agreed to buy as much as $100 million in newly issued stock.

But there was a condition: Shares had to remain above $6.50, which they did for several months as Seaside bought $20 million in stock. Then the shares cratered early this year after regulators said the latest version of the inhaler needed more testing.

“It was a huge misstep,” said Avik Roy, an analyst at New York’s Monness Crespi Hardt & Co., who contends that the company should have known tests on earlier versions wouldn’t get it final approval. “They gave investors the impression that the FDA had signed off on it.”

Now, some shareholders who lost big on MannKind are suing and say the company knew all along that its standing with the Food and Drug Administration was worse than was let on – and that the company misled investors in order to raise capital.

Shares had actually climbed above $10 as Seaside acquired stock, before falling below $5 in January. Shares closed Nov. 16 at $3.07.

“MannKind repeatedly emphasized they had gotten preapproval from the FDA for their testing (methods), but those were false statements,” said Coby Turner, an attorney representing shareholders who bought MannKind stock after May of last year. “They ended up getting denied because the testing was inadequate.”

Whether that complaint is legitimate or just the griping of sore losers figures to be settled in court. But several purported class-action lawsuits have been consolidated into one case in federal court in Los Angeles, and the case appears to have legs: Last week, U.S. District Court Judge Gary Feess said he expected to deny MannKind’s motion to dismiss the lawsuit, which has not been certified as class action. He made the statement prior to oral arguments and had not yet issued a ruling.

Matt Pfeffer, MannKind’s chief financial officer, denied the allegations, saying the company had not been aware of potential problems with testing and that it hadn’t felt pressure to keep up share prices to receive funding.

“I don’t believe we made any misleading statements,” Pfeffer said. “I think we had some reason for confidence and have a lot of belief in our product, but you can never predict with certainty what the FDA was going to do.”

In court filings, the company has additionally argued that the plaintiffs have not proved any intent to defraud.

New model

When the FDA broke the bad news to MannKind in January, it said that the company had wrongly assumed that previous testing results for its older dispenser, called Medtone, would apply to its next-generation dispenser, nicknamed Dreamboat. That meant the company had to go back and do head-to-head studies if it was going to switch dispensers.

It was the second time the FDA had kicked the inhaler back for further testing, despite $1.5 billion already spent by the company on development, much of that from the personal fortune of billionaire founder and Chief Executive Alfred Mann.

The lawsuits accuse the company of assuring investors in conference calls and conferences that the FDA had “blessed” and “vetted” its approach of using old data for its new device in order to strike its deal with Seaside in August 2010.

At the time of the deal, some analysts believed it could keep the company funded for at least another year since Mann agreed to match Seaside’s investment. A request for comment sent to Seaside, based in North Palm Beach, Fla., was not returned.

Mary Manesis, an attorney who has defended several pharmaceutical companies against similar allegations, said an important part of the case will be exactly what MannKind knew prior to the FDA’s decision.

“What would be key in any trial is to really understand the nature of the dealings and communications between the company and the FDA,” Manesis said.

If the lawsuit isn’t dismissed, MannKind is looking at a long and painful discovery process.

Plaintiffs’ legal teams will likely depose research personnel and demand all documents related to the inhaler’s development. Manesis said the case was especially complex and could potentially drag on for years.

Mark Greenfield, an attorney who reviewed the case for the Business Journal, framed the problem.

“There’s a very interesting line being drawn as to whether the company is entitled to be optimistic about its prospects versus whether the company can potentially step over the line by being optimistic to the point of deliberately misleading,” Greenfield said. “It’s too early in the case to see which side of the line it will fall on.”

Running dry

By the time it is clear, some analysts say there may not be much of MannKind left.

The company has struggled to pay for another round of testing, which Mann has estimated could cost $200 million, and is running out of cash. In its last quarterly report, MannKind said it had about $68 million in cash and credit – enough to keep the company going only through the first quarter of next year.

To scrape together more financing, the company announced two months ago that it would sell $370 million in debt. But it has yet to fill the offering.

“If there’s an appetite, a deal like that can close in a day,” said analyst Roy. “In this case, we haven’t heard anything in two months. Clearly people are concerned the company won’t repay the debt.”

He’s not alone in his skepticism. Of 10 analysts listed by Bloomberg News, three rate the stock a “buy,” two rate it a “hold” and five rate it a “sell.”

CFO Pfeffer said the company also has other fundraising options, including more funding from Mann.

Failure would place MannKind alongside other pharmaceutical giants like New York’s Pfizer Inc., which spent more than $2 billion on an insulin inhaler called Exubera. That product received FDA approval in 2006 but was pulled off the market the next year due to safety concerns and slow sales.

However, Pfizer, the world’s largest drug company, survived the debacle.

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