Wednesday, February 16, 2011

Weeden update Feb 16, 2011

We are reiterating our Buy rating on MannKind (MNKD) and 12-month price target of $8 following clarification from management at an investor conference regarding financing options and our meeting with management yesterday. Our 12-month price target of $8 is based on a 12x price/sales multiple applied to our 2014 Afrezza sales estimate of $141m, discounted at 20% for two years. Our estimates reflect a 1Q13 US Afrezza launch.

During an investor presentation yesterday, Mr. Hakan Edstrom, MannKind's President & COO, addressed CEO Al Mann's "misinterpreted" comments during the 4Q10 earnings call last Thursday regarding Mr. Mann's commitment to Afrezza and willingness to provide financing, if needed. Mr. Edstrom read the following statement on behalf of Mr. Mann: My response to a question about financing during last Thursday's conference call was misquoted and misinterpreted. I remain absolutely committed to Afrezza and confident that it will become a major weapon in the battle against the global diabetes epidemic. I continue to believe that Afrezza will lead to change in diabetes therapy and will become one of the most significant pharmaceutical products of all time. Mr. Edstrom also reiterated that the company is considering different financing options, most being non/minimally-dilutive.

Two additional clarification points from our meeting with Mr. Edstrom and Mr. Matt Pfeffer, CFO, yesterday:

1) Management confirmed press reports that 131 of the 179 employees cut as part of the announced 41% workforce reduction were located at MannKind's Danbury, CT, manufacturing plant (according to filings with the Connecticut Department of Labor), had been required to support the pending US Afrezza launch, and post the January complete response letter were eliminated as MannKind does not need this manufacturing capacity following the delayed regulatory and launch timelines.

2) Management's discussion of a mid-2012 new drug application (NDA) resubmission for Afrezza was conservatively based on the scenario in which FDA requests new clinical trials with the Afrezza Gen2 inhaler (versus MannKind modifying the existing Affinity 2 trial). We continue to view the new regulatory path for Afrezza post the Jan. 18 complete response letter (CRL) as less risky.

Key catalysts through 2011: 1) an update from the Afrezza CRL follow-up meeting with FDA in April/May (the meeting request was submitted Feb. 11), 2) initiation of Afrezza Gen2 clinical trials (patient enrollment) in 2Q11, 3) balance sheet / financing update by mid-2011, 4) completion of Gen2 clinical trial patient enrollment in 4Q11, and 5) a potential development partnership update in 2H11. Management has also changed its partnering strategy, and will consider a development partnership prior to FDA approval versus previously pursuing only a post-approval marketing partnership.