Wells Fargo Q3/2011 update

 

MannKind Corporation (MNKD-NASDAQ)--Market Perform (2) / V
Sector Rating: Specialty Drugs, Market Weight

Keypoints
* Summary: Afrezza NDA resubmission expected for early 2013. Q3 loss per share of $0.31 was favorable to consensus loss of $0.32 per share and our $0.33 loss estimate. We are increasing our 2011 and 2012 loss per share estimates to $1.32 and $1.34 from previous estimates of $1.30 and $1.00, respectively, although we note near-term financial results are not a relevant gauge for MNKD's prospects, in our view. Maintain Market Perform on lack of meaningful near-term catalysts. Valuation: $4-$5 (7-9x 2016E adjusted EPS of $1.67) from $3-$5. Risks: delays to Afrezza approval and failure to secure NT capital.

* MNKD expects NDA submission for Afrezza in early 2013. Trial design for Ph-III trials (MKC-171 and MKC-174) to address January 2011 CRL issues has been settled. MNKD began screening patients for MKC-171, the type I trial, in September 2011 and plans to begin patient screening for MKC-174, the type II trial, in November 2011.

* Maintain Market Perform. We continue to see potential in Afrezza but think an approval decision is at least two years away. In the meantime, we think MNKD's private placement bond offering could offer a non-dilutive option to meet capital needs. Despite our positive outlook on Afrezza approval, given the lack of near-term catalysts, we remain neutral.

* We are increasing our 2011 and 2012 loss per share estimates to $1.32 and $1.34 from previous estimates of $1.30 and $1.00, respectively. Our 2011E revisions are primarily the result of an adjustment to Q2 2011 R&D expense in our model. Our 2012E revisions were driven by the removal of a previously modeled equity offering and the reduction of share count.

* Q3 loss per share of $0.31 was favorable to consensus loss of $0.32 per share and our $0.33 loss estimate. R&D expenses totaled $23.1MM which was below our $25.1MM estimate and SG&A of $9.6MM was modestly higher than our $9.0MM estimate. As a result, the operating loss (and net loss) of $32.8MM was less than our $34.1MM estimate. Diluted shares outstanding were 130.6MM, slightly unfavorable to our 130.4MM estimate.

* Key Takeaways: 1) MNKD plans to raise ~$370MM through private placement senior discount notes (due 2017), 2) Q3 cash burn rate was $37MM, 3) MNKD began patient screening for Afrezza study MKC-171 in Sept 2011 and plans to begin patient screening for study MKC-174 in Nov 2011.

MannKind Corporation (MNKD-NASDAQ)--Market Perform (2) / V
Price as of 11/4/2011: $3.10
FY 11 EPS: $-1.32
FY 12 EPS: $-1.34
Shares Out.: 130.6 MM
Market Cap.: $404.86 MM

Rodman & Renshaw comments

MannKind

MNKD: Price: $3.12; Market Cap (MM): $408.6  Market Perform; 

 
We believe MNKD shares are not fundamentally driven by earnings, therefore any EPS “beat” or “miss” is largely irrelevant. As a reminder, we are expecting EPS of ($0.29) per share on revenue of $0mm. Please see Table 1 on Page 2 of this note for details regarding our estimates. However, instead of current earnings, investors should look to the company’s event calendar for the best measure of its progress.
 
Because the MannKind/Afrezza story is not an earnings-driven story, a “beat” or “miss” should make no difference to investors. We believe the remainder of the MannKind/Afrezza saga will play out as an event-driven story tied to upcoming milestones for Afrezza (see below). The most recent company updates came at the 18th Annual Newsmakers in the BioTech Industry Conference on October 21, 2011 where investors heard the type 1 diabetes trial (Study 171) had begun enrolment and the types 2 diabetes trial (Study 175) is expected to begin enrolment shortly. This Thursday, we may here that Study 175 has begun enrolment. Also at the Newsmakers Conference, MNKD stated that it anticipates completion of both trials by YE2012, that the respective NDAs will be filed shortly afterwards, leading to FDA approval of Afrezza in 2013 if all goes according to plan. The 171 and 175 trials are not being undertaken to prove Afrezza’s efficacy and safety, as we believe these questions have already been answered successfully. Rather, and as per MNKD’s statements, their purpose is to address issues of clinical utility and labeling of Afrezza.
 
Key Event  Timing
Completion of pivotal Phase III trials 
(Study 171 and Study 17  - YE2012
NDA filing for Afrezza - 1H2013
FDA approval of Afrezza - 2013
 

What else is happening, what do we know and what do we expect to hear? Also at the Newsmakers Conference, we heard from MNKD that the company has met with undisclosed potential partners for MNKD’s platform inhaled drug delivery technology. MNKD also stated its cash burn has been reduced to less than $10mm a month, its head count was down to 250 employees and other pipeline programs were on hold in order to focus on Afrezza’s approval. Further, the company reported cash and cash equivalents of approximately $25mm (as of 06/31/2011). We previously noted that MNKD announced a proposed offering of Senior Secured Discount Notes due in 2017 on September 23rd, 2011. To date, the offer has not been consummated and we believe the likelihood of consummating a transaction diminishes with the passage of time, in our view. On Thursday’s call, we expect to hear a reiteration of the above and that management believes Afrezza is on track to final approval. The only event we could see moving the shares in an appreciable manner will be commentary on fund-raising options; otherwise, we believe shares will remain range-bound for the foreseeable future.