seeking alpha

Prana Biotechnology And MannKind Corp.: Bad News Obeys Its Own Special Laws
Feb. 19, 2014 12:33 PM ET | 62 comments | About: MNKD, PRAN
Disclosure: I am short MNKD. (More...)
This article was first released only to PRO subscribers. Learn More
Nothing travels faster than the speed of light with the possible exception of bad news, which obeys its own special laws

Douglas Adams - Hitchhiker's Guide to the Galaxy

I find this quote from the Hitchhiker's Guide to be particularly apt when thinking about how the biotech sector operates in general, and especially when considering MannKind (MNKD) and Prana Biotechnology (PRAN) in particular. Namely, these two companies are somehow able to give investors bad news without it sinking into the collective mindset of the investing community - at least not yet.

Prana, for example, released negative results from their Phase 2 trial for Huntington's Disease yesterday, but the stock still exploded nearly 50% upwards at one point. What the heck?

MannKind wasn't to be outdone. The company held a conference call to discuss their fourth quarter earnings report, where they gave investors myriad causes for concern ahead of their Advisory Committee, or AdCom, for Afrezza. Nonetheless, social media was abuzz with glowing views of the report, and MannKind shares continued to climb in afterhours trading.

I know it's a bad idea to poke the biotech bulls when they're raging, but I thought the average investor thinking of taking a position in these stocks deserves an alternative viewpoint. So, let's get to it!

Prana trades in parallel universe where clinical failures are handsomely rewarded

In case you missed it, Prana finally announced their Phase 2 trial results for their Huntington's Disease trial, causing the stock to finish up 39% in yesterday's action. Specifically, the company reported that their experimental drug PBT2 met both its primary and secondary endpoints.

A closer look, however, reveals this is totally false.

Let's recap:

Primary efficacy endpoint was cognition. Here are the efficacy results reported in Prana's investor presentation yesterday:

· Improvement in Trail Making Test Part B was significant at 12 (p<0.001) and 26 weeks (p=0.042)

· Among all participants, there was a trend toward improvement in the composite executive function for those randomized to PBT2 250mg (p=0.069) that was significant among those with mild Huntington disease (p=0.038).

· No other significant differences were observed at 26 weeks on the other cognitive measures

Here is the key figure reported by Prana outlining this result:

(click to enlarge)


Put simply, PBT2 was only marginally significant at 26 weeks for a single efficacy measure. When you correct for multiple comparisons, however, it does not appear to be significant. Because the FDA tends to require more conservative p-values corrected for multiple comparisons for regulatory filings, PBT2 thus appears to fail each and every efficacy measure in this trial.

Summer Street had a similar criticism of the Alzheimer's data that has yet to be released. Although Prana plans on rolling out a Phase 3 trial, I don't believe this is cause to celebrate. The company has nowhere near enough on its balance sheet to pay for such a trial, and these data won't convince a partner to come on board.

In short, reality is going to eventually catch up to Prana and its shares are probably heading back to the $2 range.

MannKind is a relentless spin machine

After listening to MannKind's call last night, I felt almost bad for shorting this stock. The company's management, in my opinion, has little interest in their investors' welfare, and no interest in telling the true story of Afrezza.

What do I mean?

I'll give two brief examples.

First off, MannKind has been resoundingly criticized for not releasing the full analysis of the clinical data being used to support Afrezza's current NDA. In fact, I previously suggested that this leaves investors vulnerable to a Black Swan event when the briefing documents are released.

Management addressed this concern on yesterday's call by stating the following:

"That ADA session will be the first scientific meeting at which we will publicly present the full data from our recent Phase III studies, MKC-171 and 175. I know some investors had wanted earlier disclosure of the complete results of those pivotal trials, but in order to reserve the opportunity to present novel results at a major scientific meeting and to publish the studies in a peer reviewed journal, it is necessary that we comply with the editorial policies of those organizations, which do not accept for presentation or publication any previously disclosed research findings."

It's important to note that the ADA meeting takes place after Afrezza's scheduled PDUFA date.

Sounds professional, right?

To the ears of non-scientists and newbie biotech investors, this statement may sound reasonable. However, it's total malarkey.

As a professional scientist, I can say this: Peer-reviewed publications trump conference presentations any day of the week. Everyone in the field knows this is true.

Secondly, MannKind has a duty to disclose material information to their investors prior to the upcoming regulatory meeting for Afrezza. To do so, the full dataset should have been submitted for publication by now, allowing investors to understand what they are investing in exactly. A conference presentation is no excuse to force investors to go into an AdCom flying blind.

But, as we all know, if those briefing documents do contain a Black Swan, the same retail investors that are defending the "conference excuse" today will be the first ones to file a class action lawsuit for securities fraud after the fact. So, there's that.

Oh, and did I mention that the full dataset will be on display for the public in the briefing documents prior to any conference presentation? Put simply, the full dataset is going to be publicly available before a conference presentation regardless, showing that this is little more than an excuse.

Being the realist I am, I interpreted this statement to mean something along these lines, "we don't want investors to see the problems in the dataset that could prevent approval, so it's better to keep them in the dark".

Frankly, if you have an impressive dataset, you don't hide it from your investor base until it's too late for them to make a decision on their own. That's non-sensical.

Next up is MannKind's 180 on the need for an AdCom. As most investors are aware, MannKind didn't think an AdComm would be called by the FDA, or that one was necessary.

And their answers about this issue yesterday shed even more light into management's ways of thinking.

Specifically, Al Mann suggested that the FDA is now requiring an AdCom because they are asking the FDA to "approve a new class of product". Sounds fair enough, right?

After a fruitless back and forth with an analyst from Cowen & Company about this issue, JP Morgan's Cory Kasimov came right out and asked MannKind this:

"Has the FDA specifically told you that they consider AFREZZA a new class, when they said they did not in the past?"

MannKind's COO picked up the question and basically admitted this wasn't really true. Specifically he said, "They didn't say they did, not in the past, we just never focused on that subject."

So, there you have it my friends, MannKind can't even be straightforward about why an AdCom was called, suggesting it was something as benign as guidance for a new class of product.

When asked directly about this issue, MannKind's COO was forced to admit that Afrezza hasn't been classified as such from the FDA.

On a final note Ladies and Gentleman, I'd like to point out that the FDA didn't call an AdCom to play patty cake with MannKind and rubber stamp Afrezza, as many appear to believe. By contrast, they called it to vet controversial issues regarding the drug's application, per usual.

There is a very good reason why the short interest in MannKind has been steadily climbing going into Afrezza's regulatory review. So, as always, trade accordingly.