MannKind Corporation (MNKD) has been facing liquidity concerns, with investors fearing the company would not survive to even benefit from mid-2013 clinical results of Afrezza. With a recent equity offering and its cost control, MNKD has removed any such concerns. The company is burning cash at the rate of $29 million per quarter and has approximately $88 million in cash. MNKD now also enjoys the option to borrow $120 million for Mr. MannKind after his recent investment. Therefore I believe it has enough cash to fund operations until the 1H2014 i.e. expected approval of Afrezza.
MNKD is extremely cheap right now because it's trading at a discount to even the lowest sell-side target price. I believe the company is all set to receive approval for Afreeza and it will have a larger target market because:
- Afrezza is much cheaper than the failed Exubera
- Afrezza has a less adverse effect on the lungs
- Exubera's adverse effects on lungs have proven to be reversible and not permanent
I recommend investors to buy MNKD due to the following reasons:
- MNKD is trading below even the lowest sell side estimate and is therefore extremely cheap
- The efficacy of Afrezza is much better than Exubera, the drug is even being considered more effective than injected insulin
- The market has been discounting MNKD due to its Balance Sheet fragility but the company has improved its financial health
Company Description
MannKind Corporation is a biopharmaceutical company based in the U.S. that engages in the development and commercialization of biopharmaceutical products. The focus on Mannkind is on developing treatments for diabetes and cancer. AFREZZA is the company's leading candidate. The drug is in the last stages of clinical investigation for the treatment of adults with type 1 or type 2 diabetes for the control of hyperglycemia.
Pipeline
Afrezza claims to be a revolutionary treatment for type 1 and type 2 diabetes. As compared to existing treatment of Dibaetest, Afrezza is administered through an inhaler. The drug is an ultra-rapid insulin and peaks after 12-15 minutes of inhaling. Therefore as compared to injection alternatives, after a few hours Afrezza is mostly gone from the system. This is the real "star quality" of this drug as it mimics the kinetic synchronization of the liver system i.e. reducing gluconeogenesis and restoring natural hepatic function. The evidence presented by MNKD showed significant improvement in overall glucose control (decrease in glycosylated hemoglobin (A1C).
MannKind's oncology drug candidate, MKC1106-PP and MKC1106-MT are currently in Phase II clinical trials. MKC1106-MT/PP is being developed by MNKD to target melanoma and prostate. These drugs use the body's immune system to target PRAME (melanoma antigen) and PSMA (Prostate Specific Membrane).
Thesis and Catalyst
The company initially filed an application with the FDA for the approval of Afrezza. The application was reject on the basis of insufficient data. MNKD is currently progressing with two studies to fulfill FDA requirements. The initial preparations for the study have been completed and the company expects to complete these studies by mid-2013. The completion of these studies can be a major catalyst for MNKD and can move the stock price. I believe there is a high chance that AFrezza will get the FDA approval in 2014. The data shown by previous Phase III results has been positive and with FDA adding a second Phase III study for early stage type 2 diabetes; it seems likely that patience of long term shareholders of MNKD will be rewarded. The investors should keep a look out for the following MNKD catalysts approaching:
- Announcement of Phase III results: Mid-2013
- Submission of FDA application: Summer 2013
- FDA decision on Afrezza: 1H2014
Valuations
The mean analyst estimate for MNKD is $5.8 i.e. more than 25% upside at current levels. The target price varies in the range of $3 to $14. Therefore we can say that the stock is currently giving a 36% return on the lowest sell side target price. If we look at the graph below, the numbers of analysts are increasingly showing their optimism on MNKD. Three are no analysts with a sell or underperform rating on MNKD in the last two months.
Figure 1: Analyst Opinion from Yahoo finance
Variant View
The biggest concern of most investors should be the past failure of Pfizer's (PFE) Exubera. Exubera was PFE's attempt at creating an insulin product, administered through an inhaler. Pfizer spent more than $2.8 billion dollars on developing & launching Exubera but cancelled the drug after registering annual sales of $12 million. The company launched Exubera in 2006 with the hopes of a $2 billion sales target.
The reason behind Exubera's failure was its high deployment of insulin to the lungs (approx. 90%), giving it a 'not to be used by smokers or asthmatics' label. These negative effects of Exubera on lungs led to fewer prescriptions by doctors and thus lower sales. There is still no complete information if Afrezza can cause lung cancer but the dreamboat delivery (as compared to Medtone) has a lesser impact on lungs. Another primary concern of Exubera was its high prescription price. Afreeza will only be 10-15% more expensive than current insulin treatments; therefore it can potentially target a much larger market.
I am also bullish on Pfizer and have a buy rating on it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
