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Insider Transactions and Delayed Disclosure: How a Diabetes "Blockbuster" Blew Up

The timeline of MannKind's recent failure to get its inhaled insulin product approved is a primer in how not to release bad news about your company. It involves an insider stock transaction coupled with the suspicious movement of the share price, both of which transpired while the company sat on news of the FDA's negative decision.

The product in question is Afrezza, which MannKind (MKND) CEO Al Mann believes could be a "super blockbuster" because it would free diabetics from painful injections.

The following dates were taken from a new class action lawsuit filed on behalf of MannKind investors who saw the price of their holdings drop from $9.83 to $5 and change, MannKind's own statements and SEC disclosures, and previous BNET coverage:

  • January 2010: FDA delays initial approval of Afrezza. MannKind says it was due to a mistake in an inspection of the European facility that makes Afrezza's insulin.
  • June 9, 2010: CFO Matthew Pfeffer, speaking at a conference, says, "We don't have safety issues. ... Happily, our studies were large enough that we could show essentially no risk whatsoever."
  • Oct. 29, 2010: CEO Al Mann, on his Q3 2010 conference call, tells analysts: "We've not identified any safety signal."
  • Jan. 12, 2011: Mann tells another conference: "We think it's a blockbuster or even super blockbuster potential."
  • Jan. 18, 2011: FDA tells MannKind it has rejected Afrezza. MannKind does not release the information. That evening, MKND closes at $9.83. On the same day, Pfeffer sells 6,300 shares for $10/share in an "automatic sale," then exercises an option to buy 6,300 shares at $2.86. After the cost of the options, he made $44,982.
  • Jan. 19, 2011: between 10:36 and 10:39 a.m. the price of MNKD fell from $9.35 to $6.05. By 10:41, the shares were trading above $9.00 again. Later that day, MannKind publishes a statement saying the FDA rejected Afrezza:
The principal issue raised by the FDA concerned the usage of in vitro performance data and clinical pharmacology data to bridge MannKind's next-generation inhaler to the phase 3 trials conducted using its MedTone(R) inhaler.
The FDA has also requested additional information concerning the performance characteristics, usage, handling, shipment and storage of the next-generation device, an update of safety information related to AFREZZA..."
None of it looks very good for MannKind, but investors weren't entirely ignorant of the company's problems as the firm's stock built toward its $10 high in January. MannKind's own former chief regulatory affairs officer alleged the company was trading on "unlawful" clinical trial data in November,

The company has also declined to release certain efficacy results for its products, and as I've said repeatedly, it seems really strange that not a single Big Pharma company wants to do a joint marketing venture with MannKind if Afrezza is indeed a "super blockbuster," even though many have kicked MannKind's tires.

On that basis, it's a surprise any investor thought it was likely Afrezza would get the FDA's thumbs up.

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