Buy or Hold Mannkind
Mannkind (NASDAQ: MNKD) is an inhalable drug company developing a fast acting, inhalable insulin (branded Afrezza) that is superior to any other insulin in the market today and a likely blockbuster drug. They have completed phase III clinical trials and received no drug efficacy related pushback from the FDA, but have received two CRLs recently. They are currently conducting two clinical trials to prove that the inhaler they intend to go to market with is equivalent to the inhaler with which they used for most of their clinical trials.
Afrezza is inhalable (through a whistle like inhaler) as compared to Eli Lilly’s (NYSE: LLY) and Novo Nordisk’s (NYSE: NVO) injectible insulins. Inhaling is simply easier to take than sticking yourself with a needle, no matter how advanced today’s insulin pens have become. Inhaling is also likely to improve patient compliance (ie. people will be more likely to take their insulin on time). Further, it is much more forgiving (take it at the beginning of your meal, no calorie counting, etc) compared to the injectibles. Afrezza is also likely to be the only inhalable option for Type I & II diabetics if approved. The only other one that has been approved is Exubera by Pfizer (NYSE: PFE) and Nektar Therapeutics(NASDAQ: NKTR) which was a mega-flop in 2006 and subsequently withdrawn from the market. Afrezza and Exubera couldn’t be more different. Exubera’s inhaler was the size of a bong and quite complicated to use and Exubera didn’t provide any incremental benefits as compared to injectibles unlike Afrezza which could actually help prevent weight gain.
Mannkind’s founder is a multi-billionaire who has invested about $1 billion of his own money into the company and maintains approximately a 31.3% stake (no other Insulin company has a funder with such a large equity stake).
The current trials are delayed and still enrolling patients. Mannkind expects to submit the results to the FDA in Q3, 2013 and thus will not get an approval before Q2-2014! They currently only have approximately $59 million in funding ($32 million in cash and $27 in available debt financing) which will fund them through most of Q4 (they used $57 million of cash in the first half of 2012 but expect increased expenses related to the clinical trials in the remaining part of the year). Taking a very pessimistic view, they would require at least an infusion of $171 million ($57 / 6 months for 1.5 years) to get through approval.
While Mannkind has been in very long-running negotiations with partners, no agreement seems to be close to final (despite management’s statements to the contrary on several occasions). They have not been successful in their raising additional debt financing and are hoping to raise non-dilutive financing as promised by the management team for the last two quarters. While delivering on this promise will be a positive surprise (given their history of making optimistic statements which they have yet to deliver on), it is more likely that shareholders are going to get diluted once again and soon.
While I believe that there is a likelihood of further dilution, we also know that Al Mann is trying very hard to not get diluted himself—at the last offering, he converted some of Mannkind’s debt to him into equity simply so that he could maintain his ownership position in Mannkind. In the off-chance that management is able to deliver on their promise (either through partnership or raising funding through a non-dilutive means), the stock price could easily go above $10 per share.
Thus, I recommend that current share holders grit their teeth and sit on their shares. For those looking to build a position, I would recommend taking small bite-sized positions and growing them over time.
