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Investor Group Calls Itself ‘Hope for MannKind’

An activist shareholder group aptly named Hope for MannKind has gone public with a campaign to reform the marketing strategy for Afrezza, an inhalable form of insulin and the only commercial product of MannKind Corp. in Westlake Village. Dr. Bill McCullough, MannKind shareholder and chief executive at Vdex Diabetes, founded the group. Vdex operates a chain of clinics in California and New Mexico to help diabetic patients maintain low blood glucose levels and safely manage the disease. The clinics feature Afrezza as one of their primary drugs to achieve their goal. “After I launched the movement and sort of went public with it, and then we created this website, I asked shareholders who agreed with this to respond via the website, identify how many shares they held, and we made some basic level of assessment to make sure these people were likely shareholders,” McCullough told the Business Journal. “To date, we have about 32 million shares pledged in support of this.” That would constitute 17 percent of outstanding MannKind shares, but Dr. Michael Castagna, chief executive of MannKind, was unsure if it was an accurate number. “We offered to validate his list against our list of beneficial owners (i.e., the actual owners of shares). He said that was a good idea, but to date he has not sent us his list,” Castagna explained in a statement in a Seeking Alpha article. The MannKind chief executive spoke with the Business Journal about marketing efforts for Afrezza, but preferred to limit comments about the shareholder group to the Seeking Alpha statement. Marketing questions Afrezza was the brainchild of late entrepreneur Al Mann, who founded the predecessor to MannKind in 2001. The Federal Drug Administration approved Afrezza in 2014. At first, MannKind licensed Afrezza to Sanofi, the large French company, which took responsibility for marketing the fledging drug. But Sanofi’s strategy of educating doctors about the drug failed to translate into sales, so Sanofi terminated the agreement in 2016, the same year of Mann’s death. Since then, MannKind has worked on sales force training, getting Afrezza covered by insurance carriers and on research to show benefits of the drug. The company has also tried direct-to-consumer advertising. Hope for MannKind’s main complaint about MannKind management is its marketing strategy. According to McCullough, the direct-to-consumer method won’t work for a complex product such as Afrezza. “It would seem, if you were the CEO of a drug company, and you wanted to get that drug to sell, you should run advertising for it,” he said. “At a basic level, that seems to make sense. I can tell you that if you really understood the product and the problem that the product was facing in the marketplace, you would have known that was not a good way to spend money.” MannKind spent $14 million to $16 million per year on sales force alone, Castagna said. Instead, McCullough would have liked management to develop specialized centers around the country, staffed by physicians who understood the product. “I would have assisted those doctors in developing what I’ll call ‘seeding the marketplace,’ rather than trying to sell to all doctors. You find 20, let’s say, across the country, who really understand it, and you help them practice and become a success,” McCullough explained. Essentially, McCullough created what he would have liked management to do through Vdex. He doesn’t believe that his involvement at Vdex and as an activist shareholder constitutes a conflict of interest, since in both roles he’s working to sell Afrezza. “I can’t advocate something that benefits Vdex above and beyond shareholder interest. I have a moral obligation and I’ve stated so publicly. What I’m advocating is what’s best for shareholders,” he said. On June 7, Vdex sent a proposal to MannKind Corp., seeking to purchase Afrezza through the Hope for MannKind group, which the proposal characterized as “a new company formed for this purpose.” The proposal also featured Hope for MannKind as the exclusive distributor to Vdex, allowing Vdex to open diabetes treatment facilities across the country and on an international level, while not interfering with distribution rights held by other distributors of Afrezza. MannKind would continue to manufacture Afrezza, the proposal said. The Westlake Village company did not respond to the proposal, as it was not considered a formal proposal with financials shared between companies, Castagna said. The proposal expired June 20. Mixed campaign “Yes and no,” Castagna responded when asked if he considered Afrezza marketing efforts a success. “It’s not due to a lack of effort, but at the same time, what we’ve done over the last two years was bring clinical data out that should have been done three to five years ago. We never set people up for success, meaning we didn’t teach them how to use the drug.” Castagna pointed to an overstaffed sales force at the beginning of the campaign, and the number of insurance companies not covering drugs in their first year, as other factors leading to Afrezza’s mixed reviews. MannKind also cut the number of territories for Afrezza sales this year by 25 percent to “focus on states and geographies that have a more favorable combination of active writers, payer coverage and energized sales people,” Castagna added in his statement. McCullough did not mince words with his view of the marketing campaign: “We don’t want the company to be spending $40 million in an ineffective sales model,” he said, speaking on behalf of the shareholder group. “The sales gains, if you want to talk about that, have come at a very high price, and we would have been better off doing nothing in the last two years and pocketed the $90 million that they’ve spent.” Although only willing to reveal a sales force cost of $14 million to $16 million per year, Castagna told the Business Journal that McCullough’s $40 million is inaccurate. Board responsibility Hope for MannKind believes the board at MannKind is not listening to shareholders and keeping their best interest in mind. “We’re doing the job the board of directors should be doing,” McCullough added. If the group truly has backers representing 17 percent of outstanding shares, that puts significant weight behind its words. “Depending upon how fragmented the company’s ownership is, 17 percent could be very significant,” said Robert Lamm, chairman of the securities and corporate governance practice at Gunster, a Florida law firm. “Some of the larger activist groups start with 5 percent or less. This group really seems to have some skin in the game. In the middle or toward the end of an activist campaign, they may amass a lot more support than what they started with, but here when you start out with 17 percent, that’s pretty respectable.” Lamm counseled that “if you’re on a board, you need to think like an activist,” meaning directors should understand a company’s weaknesses. Castagna addressed this concern in his statement, arguing that MannKind board members don’t hesitate to challenge management or hold back if executives aren’t delivering. “The average bonus payout over the last four years has been 50 percent of target and has been as low as 0 percent. Salary increases have fallen behind the rate of inflation,” said Castagna. Hope for MannKind met with MannKind’s David Thompson, general counsel, and Courtney Barton, chief compliance officer, soon after MannKind’s second quarter earnings call on Aug. 7, but neither exec is involved in operations, McCullough said. A meeting with top brass, including Castagna, was also planned, but cancelled toward the end of August by MannKind, according to the activist group’s website. Moving forward, Hope for MannKind may decide to call a special meeting of shareholders, or mount a shareholder initiative to demand changes, McCullough said.

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