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We are maintaining our Neutral stance on MannKind Corporation (MNKD - Analyst Report) with a target price of $3.00.

Valencia, California-based MannKind is a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diabetes, cancer and inflammatory and autoimmune diseases. The company’s lead pipeline candidate Afrezza is an inhaled insulin for the treatment of type I or type II diabetes.

In January 2011, MannKind suffered a setback when the US Food and Drug Administration (FDA) issued a second complete response letter (CRL) for Afrezza. While issuing the latest CRL, the FDA asked the company to conduct two phase III trials with Afrezza.

While the trial (study 171) on type I diabetes patients is underway, the study (study 174) in type II diabetes patients will be initiated shortly. The company intends to complete them by the end of 2012 and subsequently seek approval from the FDA.

The requirement of additional trials means further cash outflow for Mankind. Currently management estimates its current cash balance will last only till the first quarter of 2012. Consequently, it will have to tap the capital market to raise additional resources. Inability to raise sufficient funds could jeopardize Afrezza’s future development.

Following the receipt of the second CRL, MannKind trimmed its work force by approximately 41% and cancelled its insulin supply deal with Merck’s (MRK - Analyst Report) subsidiary, Organon. MannKind paid Organon $16 million in two equal installments after receiving certain quantities of the recombinant human insulin. The headcount reduction coupled with the termination of the deal is expected to bring down operating costs at MannKind.

The magnitude of the setback regarding Afrezza is significant as all other candidates at MannKind are in early stages of development. The setback causes us to believe that there is limited scope for upside from current levels at MannKind. We prefer to remain on the sidelines until we have more visibility on the approval process for Afrezza and retain our ‘Neutral’ stance on the stock.

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