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We believe development-stage biopharmaceutical company MannKind (NASDAQ:MNKD) is a firm with great prospects, and at current levels we think this stock is drastically undervalued.

Over the long term we think MannKind is a decuple, maybe more. Let's have Alfred Mann help us understand why (all quotes are from Alfred Mann on the conference call unless otherwise noted):

1) AFREZZA Is So Very Nice

A lot rides on MannKind's flagship product AFREZZA, its late stage insulin inhalation system that should come up for FDA approval next year.

With the obesity epidemic giving way to a diabetes epidemic, MannKind is moving into the right market at the right time. Currently the global market for diabetes management is upward of $50 billion annually and will surpass $100 billion in the next few years.

If a company can bring a superior way to deliver insulin to market then they'd take a huge chunk of that $100 billion.

Let's do some back of the envelope math: if AFREZZA can capture a modest 5% of the market, and can convert a tenth of that revenue to earnings, then MNKD would have $500 million in annual earnings. If its stock was valued with a modest price to earnings ratio of 10, that makes MNKD a $5 billion company.

Current market cap: $367 million.

So can AFREZZA deliver?

MannKind founder and CEO Alfred E. Mann describes AFREZZA's qualities on the second quarter conference call (you can listen to him here):

With resubmission of the AFREZZA NDA in sight, we are moving forward with plans for commercializing this product. Surely, you are aware that I believe AFREZZA will become a major weapon in the battle against the diabetes pandemic. AFREZZA is very significant because it addresses the glycemic problem in the most natural way, providing the very same needed regular human insulin with the PK/PD profile that mimics natural physiology...

...AFREZZA will be the first ultra-fast acting prandial insulin. It is a kinetic dynamic profile of AFREZZA that is so unique and so important. It is a powder and thus we've elected to deliver it by inhalation and we do it with our Dreamboat inhaler, which is so very small, so very convenient, so very discrete and so very easy for the patients. But the delivery mode is truly not the most significant feature. Our patients do love the inhalation delivery that eliminates prandial injection.

So with AFREZZA people don't have to stick themselves with needles - file that under no-brainer. Also AFREZZA is superior to other insulin delivery for being both fast-acting and mimicking regular human physiology (separating it from other insulin inhalation methods).

And as Dr. Mann said "but the delivery mode is truly not the most significant feature."

2) The most significant thing about AFREZZA

We saw that even taking a little market share with AFREZZA would be enough to send MNKD skyward, but there's more:

What will be most significant about AFREZZA as a commercial product is that it's not just a prandial insulin for basal/bolus therapy and Type 1 and late Type 2 patients. I am convinced that it will become an effective tool throughout the entire diabetes spectrum. The separate diabetes segments are not precisely quantified, but in the U.S. Type 1 patients comprise only about 5% to 6% of the total number of diabetics, gestational patients another couple of percent and the Type 2 market about 92% or so of the total.

In the dominant Type 2 market only about 30% today use any insulin at all, and those usually start with a basal insulin. Soon after most of those late Type 2 do progress and need to use prandial insulin as well. Thus there in indeed a huge number of diabetes patients using prandial insulin's today.

However, the major opportunity would be even much greater if we were treating the 70% of Type 2 that today do not use any insulin at all...Indeed, the American Diabetes Association recently changed its recommendation for Type 2 diabetes, proposing an insulin be started in early stage disease as second line therapy just after metformin.

The FDA approves to be in agreement with the ADA in guiding MannKind regarding the MKC175 trial. That study is evaluating AFREZZA in pre-insulin using Type 2 disease. This trial is designed to demonstrate superiority with the addition of AFREZZA.

The most important thing about AFREZZA is not that it may replace injectable insulin, it is that it could be used by the huge body (pun!) of diabetics who currently use no insulin at all!

Almost all diabetics are type II diabetics, and most of these do not take insulin. The American Diabetes Association is now recommending that they do and AFREZZA could be at the right place at the right time with this.

3) You Can Call Me Al

The 390th richest man in the world smiles a lot, wouldn't you?

Dr. Mann is an innovator and a visionary. He has been founding and running companies with wild success for decades starting with space based solar power and semi-conductors(!) in the 50s and 60s. One of his most successful companies is now a subsidiary of Boeing Satellite Systems.

People like Alfred Mann do not get where they are by wasting time, accepting defeat, or making excuses. Dr. Mann founded and funded the company and named it after himself. You better believe he has plans to have another wild success.

Which is good, because one problem this company has is that it burns cash. It is currently funding studies for AFREZZA's possible approval and along with R&D on its diabetes and cancer pipeline they are going through about $10 million a month.

They need money soon, but they gave every indication that they have it lined up in a way that will be palatable to shareholders (Dr. Mann is of course the largest shareholder), and that is your luxury when you have a billionaire at the helm of his own company:

the remainder of my $350 million credit lines with the Company will not carry us through the end of this year. We are therefore considering several financing arrangements to provide the needed additional funding going forward.

Partnership and financing discussions are moving along with some very interesting developments.

...Key opinion leaders are even suggesting that by reducing pancreatic stress, AFREZZA may slow and perhaps even stop progression of this disease. Wouldn't that be great? Indeed, I believe so and that is why I have already personally provided about $900 million of the funding for MannKind and AFREZZA.

This is the culmination of a life's work for Dr. Mann, and he is not taking it lightly: "AFREZZA may slow and perhaps even stop progression of this disease. Wouldn't that be great? Indeed, I believe so and that is why I have already personally provided about $900 million."

Sell the Kids and Buy the Stock?

MannKind has mammoth possibilities selling into one of the biggest and fastest-growing healthcare markets in the world. In addition to that it has been beaten down severely and we are getting a great chance to buy right here. Is this a sure thing?

It's a great situation. A CEO as dynamic and resourceful as any ever was, a market second to none, a product with many reasons to succeed.

BUT, this company could very easily dilute shares again to raise money. That would not necessarily drive the price down but it might.

The greater danger is that AFREZZA trials drag on and do not satisfy the FDA. Then more trials will be needed, draining money and allowing competitors time to develop.

And, as Praveen Jayarajan notes, the competition is coming:

risks to Afrezza include potential competition from other inhaled insulin products. MannKind notes in its 2011 Annual Report that Dance Pharmaceuticals, founded by John S. Patton who was the former co-founder of Inhale Therapeutics (now Nektar Therapeutics) and helped lead the development and FDA approval of Exubera, is in the early stages of developing another inhaled insulin product.

This company is a pure speculation, as mouth-watering and responsible as a speculation gets, but they lose money, not make money. No speculation is without risk and the most reasonable risk with MNKD is that AFREZZA will not deliver and this company will go broke.

The caveats, friends, have been emptored.

Conclusion

Biopharmaceutical companies were up across the board on Thursday with Pacira Pharmaceuticals (NASDAQ:PCRX), Peregrine Pharmaceuticals (NASDAQ:PPHM), Amarin Corporation (NASDAQ:AMRN), pSivida (NASDAQ:PSDV), MediciNova (NASDAQ:MNOV), and Savient Pharmaceuticals (NASDAQ:SVNT) all joining MNKD with gains greater than 4%. The nature of bio-pharma is that some of the big winners today will come right back down tomorrow, but MNKD has the look of a real long term winner.

The possibility of replacing existing insulin by itself is a huge market, add to that an even bigger market that currently uses no insulin at all and MannKind has huge potential with AFREZZA. With Dr. Mann supporting this company a tenfold leap could be in the cards, and if things were to really go MNKD's way, another tenfold gain after that is not out of the question.

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