Mann Group to Buy MNKD's Shares

MannKind Corporation ( MNKD - Analyst Report ) recently announced the pricing of its public offering of 40 million shares along with warrants to purchase around 30 million shares of its common stock.

Apart from the pricing of its public offering, the company also announced that it has entered into a purchase agreement with The Mann Group LLC. The Mann Group is controlled by MannKind’s chief executive officer and principal shareholder, Alfred E. Mann. The company stated in its press release that the Mann Group has assured to purchase all the offered shares and warrants to purchase shares of MannKind’s common stock.

MannKind is offering each share together with a warrant for a combined purchase price of $2.00. With the purchase of each warrant the holder is entitled to purchase 0.75 of a share of common stock. MannKind expects to raise around $80.0 million from the public offering excluding any future proceedings from the exercise of the warrants.

The aggregate purchase price is expected to be adjusted against the principal indebtedness under MannKind’s existing loan arrangement with The Mann Group. We note that, as of October 05, 2012, outstanding debt was $224.6 million. As per the agreement, another $20.4 million is left to borrow.

Each warrant is expected to be exercisable at $2.60 per share and will be expiring at the end of the 53^rd week from the date of issuance. The shares purchased by Mann Group are expected to be sold at $2.59 per share. Both the warrants and common stock are separable and will be issued separately as well. MannKind expects to close the offering on or about October 23, 2012 depending on customary closing conditions.

MannKind is also offering underwriters a 30-day option for the purchase of an additional 6 million shares and/or warrants to purchase up to 4.5 million shares of common stock. The company intends to utilize the fund to meet the expenses of the ongoing late stage clinical trials of Afrezza.

We note that the company’s principal pipeline candidate is Afrezza, which received a second complete response letter (CRL) from the US Food and Drug Administration (FDA) in January 2011. While issuing the CRL, the US regulatory authority had asked MannKind to conduct two additional trials, one for patients with type I diabetes (MKC-171 study) and the other for type II diabetes patients (MKC-175).

The requirement of additional trials has pushed up MannKind’s research and development expenses. Following the receipt of the second CRL, MannKind already trimmed its workforce by approximately 41% and cancelled its insulin supply deal with N.V. Organon, a subsidiary of Merck & Co. Inc. ( MRK - Analyst Report ) .

We remind investors that the company recently completed the enrollment process for both the trials. The trials are expected to complete in the second quarter of 2013 and the company expects to submit a new drug application by the third quarter of 2013.

As of the second quarter of 2012, the company’s debt was approximately $429.3 million. MannKind’s cash balance at the end of the same period was $31.6 million. The company reported a sequentially low cash burn of $24.7 million in the second quarter. But the company forewarned that the expenses will increase towards the end of 2012. MannKind expects cash burn of about $10-$12 million per month in 2012.

Our Recommendation

Currently, we have a Neutral recommendation on MannKind, which carries a Zacks #3 Rank (short-term Hold rating). MannKind is primarily dependent on the successful development of Afrezza. The company’s decision to raise fund was expected given the cash burn. We believe an inability to raise funds will affect Afrezza’s future.