Friday, November 5, 2010

CRT research update Nov 5th


(I’ve only given portions of the report. )

We continue to anticipate that MannKind Corporation’s AFREZZA™ will be approved within the next three months, that MNKD will successfully partner the inhaled insulin product by Spring 2011 and launch it by late 2011.  AFREZZA™’s official PDUFA date is December 29, 2010. As we discuss in our report, we believe that yesterday’s current price pressure was unwarranted and represents opportunity in the shares and convertible note tiers.  Our new $13.75 one-year price target is based on a four times multiple of five-year forward sales discounted back four years at 30% to November 2011, assumes that the Founder Loan is fully drawn, and further assumes that all future milestone and royalty payments are redeployed into the business and repay the 2013 convertible notes at maturity.  And, while we believe that there exists option value in the company’s non-diabetes products, our price target does not reflect any contribution from the pipeline.

Market Over-reaction to Alleged Whistle-Blower Retaliation. MNKD shares closed down ($0.68) or (11%) yesterday following a competitor’s highlighting of an on-going civil lawsuit between a terminated employee and alleged whistle blowing activities. MannKind disclosed in its 3Q Form 10Q that an independent firm had reviewed the potential fraud allegations and had found them to be without merit. MNKD and Mr. John Arditi remain in litigation which prudently limits commentary that MNKD may make publicly. We have reason to believe that the Russian site mentioned by the Artidi lawsuit was the only Phase III trial location at which fraud has been alleged (those claims involve blood pressure readings). Further, we believe that the FDA has previously audited that site, quelling our concern. It is curious to us that Mr. Arditi references a November 13, 2009 meeting wherein he raised questions surrounding Phase III and earlier trial activities when such trials had been concluded months previous to that date, and their data had been studied and included
in the NDA filing package submitted in early 2009 (original PDUFA date was January 16, 2010).

Key Investment Points
● AFREZZA™ has the fastest onset of any insulin product of which we are aware. This is important and is the
primary reason, in our view, that AFREZZA™ data continually demonstrate lower risks of hypoglycemia
and weight neutral effects. Data have continued to support this thesis, first published by us more than four years ago – that the faster onset of AFREZZA™ compared to any other insulin formulation allows better control of meal-time glucose excursions, fewer hypoglycemic episodes, and less weight gain. Early findings were at first dismissed by the Street as just “variability in clinical trial data”. Now, they seem increasingly conclusive. These findings may prove superior to even short-acting injectable insulin. While it may take time for physicians to process post marketing data, we believe that such a difference could make a dramatic difference among treating physicians views.

● AFREZZA™’s safety profile is solid, and the Company has gone to great lengths to provide data, yes, data – the only way to truly persuade the FDA. We believe AFREZZA™’s data demonstrates a profile that is safe for
short and long-term use, both regarding risk of lung cancer, as well as risk of worsening underlying lung
function. Based on these data, we anticipate FDA approval. With the “right” partner and the “right” launch, we believe that AFREZZA™ could generate sales in excess of $1.6 billion in five years (800,000 patients at an average of $2,000 per year per patient). We acknowledge that public perception is just as important for AFREZZA™’s success, as is its clinical trial data. Ultimately, albeit with a slow initial ramp in sales, we believe that AFREZZA™ will prove to be a readily adopted treatment option for diabetics.

At the end of the day, we again focus on the data, not the hype – as will the FDA. While we acknowledge the Street’s anxieties and scrutiny of AFREZZA™, we continue to believe that the level of data provided in the Company’s NDA is impressive – and speak to AFREZZA™’s efficacy and safety (with data from more than five years of study).

Risks to achieving our price targets:
Delay in FDA December 29, 2010 decision.
Failure to receive FDA approval.
Inability to partner the program for commercial launch.