Raising MannKind to Hold

MNKD: Upgraded to Hold from Sell

We upgrade MannKind Corp. (MNKD - Analyst Report) to Hold from Sell based on some positive developments during the last few months and potential catalysts in the coming months.

Afresa is finally under the FDA review now

After several years of extensive pre-clinical and clinical trials and spending millions of dollars, MannKind finally submitted its new drug application (NDA) for its lead drug candidate Afresa in March 2009. The FDA officially accepted the NDA filing in May 2009.

This is positive news to the company. Although still facing rigorous review by the FDA, especially after the report of lung cancer in patients treated with Pfizer's (PFE - Analyst Report) Exubera, Afresa will finally get a nod from the FDA, in our view.

As a background, Afresa is inhaled insulin for the treatment of diabetes. It is dry-powder inhaled deep into the lungs via the company's MedTone inhaler. MedTone is a small, easy-to-use pulmonary delivery system. Once inside the lungs, the insulin is absorbed into the bloodstream in rapid fashion.

We believe that Afresa offers distinct advantages over traditional needle-based insulin therapy. The key advantage is the convenience of an inhaled delivery. Diabetes patients using Afresa will no longer have to worry about a needle injection. Along with convenience, Afresa offers rapid uptake into the bloodstream. MannKind has developed Afresa to produce a profile of insulin levels in the bloodstream that approximates the first-phase insulin spike normally seen in healthy individuals following the beginning of a meal.

Elimination of competition may help Afresa's sales ramp

The diabetes market is perhaps one of the largest opportunities in pharmaceuticals. At present, traditional needle-based insulin therapy dominates the market.    

Competition in the inhaled insulin field, which was crowded with late-stage drugs under development at large-cap pharmaceutical companies one year ago, is virtually nil now.

The change in the competitive landscape began with the withdrawal of Exubera from the market by Pfizer in October 2007. This was followed by the discontinuation of the AER-X program by Novo Nordisk (NVO - Snapshot Report) in January 2008 and then the announcement by Eli Lilly (LLY - Analyst Report) in March 2008 to discontinue the development of the AIR Insulin (co-developed with Alkermes Pharmaceuticals [ALKS - Analyst Report]). While Pfizer blamed the pullout on poor sales of the drug (only $12 million in the first three quarters of 2007), others cited the lack of confidence in the regulatory environment and market prospect for an inhaled insulin product.

The elimination of competition in the inhaled insulin market is positive for Afresa, in our view. If MannKind can convince doctors about Afresa's advantages over Exubera or traditional insulin therapy, initial sales ramp of Afresa may be better than that for Exubera.

MannKind shares may get boosted by near-term catalysts which include announcement of a partnership for Afresa in 3Q09 and potential approval of Afresa in 1H10.

We are still concerned of weak pipeline and cash position

Afresa is MannKind's only late-stage drug candidate under development. Besides Afresa, the company has only two early stage candidates in phase I trials.

As of March 31, 2009, MannKind had $30.2 million in cash, cash equivalents and marketable securities. Also, the company entered into a new loan agreement with Al Mann, which provides the company with a credit facility of $350 million out of which $260 million was unused at the end of the first quarter. Current cash reserve can only last for one quarter.

In order to solve its liquidity issue, MannKind is actively seeking partners for Afresa. However, we are still not convinced of the market prospect for Afresa at this point regardless of the successful approval of or partnership. Actually, with many big players like Pfizer and Eli Lilly having abandoned their own inhaled insulin programs, we doubt if MannKind can find a potential partner with a favorable terms.

Even with a potential partner, we don't think Afresa can do better than Exubera. Afresa is not going to make much of a market penetration and end-sales potential will be small, in our view.

Therefore, our opinion is neutral for MannKind and our price target is $8 per share.