Why Mannkind Has Long-Term Value

 |  About: MannKind Corporation (MNKD)
by: Spencer Knight

Buying a beat down biotech stock, such as Mannkind (NASDAQ:MNKD), requires patience more than anything else; except for the obvious due diligence. Mannkind is most well known for the firm's development of Afrezza and Technosphere. Technosphere allows for particular treatments to be inhaled as powders as opposed to intravenously injected.

Afrezza is a powdered form of insulin for diabetic patients. The delivery platform for Afrezza is the Dreamboat inhaler. Dreamboat is the second generation inhaler and MedTone was the first. Afrezza has received two CRLs (first and second) and both CRLs are due to the same flaws, which, by the way, are not related to the safety or efficacy of Afrezza.

The first CRL cited that Mannkind needed to prove the comparability between the MedTone inhaler used in clinical trials and, at the time, a new version of MedTone that would have been marketed. Similarly, the second CRL cited that a comparability test of the MedTone inhaler and Dreamboat inhaler was needed, as well as new clinical trials for the Dreamboat inhaler. This, as you can imagine, was a tremendous setback for a company without a continuous revenue source.

As you can see, the problem with Mannkind is a lack of focus during clinical trials. It appears Mannkind is developing new, safer and more efficient inhalers without taking into account the current clinical trials. For instance, the second CRL was mainly because Mannkind switched from the MedTone inhaler to Dreamboat mid clinical trial. In my mind that is simply inexcusable because switching from one inhaler to another indicates that there may have been a lack of results; thus they switched to a better delivery platform.

This may not have been the case for Mannkind, but it is a possibility. Nevertheless, the continuous dip in the stock price has turned Mannkind's stock into a long term (1-2 years) buying opportunity. The reason for this is because Mannkind does not expect the current trials to be finished until sometime in early-mid 2013; thus if we are optimistic we are looking at a very late 2013-early-mid 2014 PDUFA for Afrezza.

With that in mind, Mannkind's share price has slid under the $2 range recently. The only news regarding the Afrezza trials came from Mannkind's first quarter earnings conference call in which the firm stated the current trials have been delayed three months due to a difficult time finding candidates that fit the protocol. The delay is a big negative, but I am happy to see Mannkind putting some thought and patience into these trials.

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This presents long term investors with possibilities. First off, Mannkind's share price will continue to trend lower. A slight pop in the share price will occur when the clinical trials begin, but that gap will close quickly and the share price will subsequently trickle lower. However one target traders and investors should key on is the fourth quarter of 2012. Since Mannkind is expected to run out of funding prior to 2013, I am expecting someone or some company to step up and fund the firm through an FDA decision. Any funding will cause a surge in the share price because investors and traders will be confident that Afrezza will make it back to the FDA's desk.

Unfortunately until these events come to fruition the stock will head lower. I do not expect any sort of full buyout of Mannkind because, unless the clinical trials turn out to be extraordinarily strong, Mannkind is simply a fish flopping around waiting to run out of air. Although as Mannkind's share price slips lower Afrezza and Technosphere will be strong acquisitions for a number of major healthcare firms. But I do not expect this to happen.

In Mannkind's case the best time to buy this beat down biotech stock is in 6-8 weeks. As you can see, the share price has dwindled over time and this will continue. However once the current phase three trials enrollment is complete and the trials begin we will see traders and investors become more interested in Mannkind. This will cause the stock to be more volatile as well as provide returns to long term investors.

With that said, the biggest drawback is the possibility of pulmonary and respiratory side effects in the new trials. There have not been any overtly serious adverse effects in the past, but these are new trials with new patients and new adverse effects may pop up. The most common adverse effect in the past has been slight irritation of the upper respiratory tract, which should be expected because inhaling a powder will result in irritation. Therefore the debate rests at whether injecting insulin via a needle or Mannkind's much faster system.

The bottom line with Mannkind is that the stock has plenty of upside, if and only if, the current trials are successful and the company can exist through the completion of the trials. The easiest way to get funds is via a public offering. In February Mannkind did this and another will send the share price substantially lower. However if you are willing to wait for an FDA decision, the share price has plenty of room to run back to the 8-10 range because Afrezza has been shown to be safe and efficacious despite the choppy trials. The problem has always been due to human and managerial errors.

An important note to make regarding this note is that I am not discussing what will happen if Afrezza is approved. In fact I have decided not to mention whether Afrezza will be approved or rejected because that is for a different day. But what is certain is that Mannkind's share price will go higher over the next two years as a third NDA is prepared and Afrezza gets a third decision from the FDA.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.