MannKind (NASDAQ:MNKD): Color on quarter

While technically MannKind (NASDAQ:MNKD) released its 2Q09 financial results last night, the focus of course was on Afresa, co's version of inhaled insulin. We have several firms commenting today:

- Natixis Bleichroeder notes MannKind announced that it plans to possibly switch to a new inhaler, called “Dream Boat,” even though the NDA for Afresa inhaled insulin is half way to its PDUFA date at the FDA. We find this a bit odd since the FDA will likely require a bio-equivalency study and, in our view, a new inhaler would delay the PDUFA date by at least three to six months from the current January 16, 2010. MannKind stated that it will let a potential partner decide whether or not to switch the inhaler, but we find the concept of switching at the last minute a bit confusing. The company stated that new inhaler is more efficient (20 units gives the plasma levels of 30 units from the previous inhaler), but we consider cost of goods for Afresa to be the least of its major obstacles. MannKind still would like to get a partnership deal signed by the end of 3Q09, but we remain unconvinced that a major pharmaceutical company would want to tread into waters abandoned by all other players. Aside from the possibility that a partner emerges, which could prove a long and painful wait, we see no compelling catalyst to provide upside potential to MannKind shares, and we would expect the company to eventually do a secondary offering on the recent share price strength, which could pressure the shares. We still do not believe that there will be a major market for Afresa, do not yet model a launch for the product, and reiterate our SELL rating on MannKind shares.

- Baird notes that there were no new news yet on partnership front. Management continues to characterize negotiations as advanced. We are not entirely sure what benefit MNKD sees inpublicly maintaining two separate goals for completing this -- with its "corporate" goal of end-09 and its "internal" goal of Q3-09 -- but find investors generally prefer clear expectations setting. In our view, if a deal slips into Q4-09, the stock could begin to suffer, and the longer this goes, the less likely it seems a partner would step right in front of the Jan-10 PDUFA date. New news included that the decision to launch Afresa with the new "Dreamboat" inhaler device or with the current MedTone device will be driven largely by the potential partner. The new device is about one-third more efficient in Afresa powder delivery and could lower COGS, but what regulators will require for its approval remains an important open item.

- Piper Jaffray notes the company reiterated its internal timeline to complete a pharma partnership agreement for Afresa by the end of 3Q09, though its stated corporate objective is to complete adeal by year-end. Although management continued to comment positively on the status of partnership negotiations, we remain cautious on a potential deal forAfresa, as we believe that major pharmaceutical companies may view the commercial risk for pulmonary insulin as high.

Management reminded investors of its efforts to develop a next-generationin halation device, known internally as "Dream Boat." The company has completed two Phase 1 studies with the device, which have demonstrated the device'simproved ease of use and efficiency (20 units produce an effect equivalent to 30units with the previous inhaler). The company is currently in talks with the FDA and prospective partners about the regulatory and commercialization pathways for this device. Though the device may improve patient compliance and product margins, we think it is unlikely to substantially improve partnership terms orpotential Afresa uptake. Moreover, a decision to launch Afresa after the approval of this new inhalation device may delay the company's anticipated revenue stream.

Action: So basically the results & conference call were non-event, with the exeption of introduction of Dream Boat.. or were they? I got a feeling that lack of partnership announcement may be taken as a negative sign or at least as an excuse for profit taking by some of the market participants.

My gut says MannKind wants a partnering deal to have meaningful upfront payment (Leerink Swann is modelling $100M upfront) to improve the cash balance and reduce cash burn out of Al Mann's personal pockets while the potential partners would rather see the deal based on meeting the sales targets. The miserable failure of Exubera is not too good of an advertisement for the sales prospects..

To make things even more complicated, it looks like MannKind is pushing its new Dream Boat devide that, while looking more sexy on the first sight with lesser device size and lower dose reducing COGS, is hardly a game-changer. It might create some confusion with the potential partners, delay the PDUFA date, but it won't make a difference where it matters the most - acceptance among doctors and manager care.

It is interesting to note how the analyst community is uncommonly scewed to the downside: plenty of negative ratings with targets such as $1 (by Natixis Bleichroeder) and $2 (by Piper Jaffray). The only positive firm seems to be Rodman & Renshaw, unfortunately I haven't seen their note yet. Don't want to put too much emphasis on price targets, but given how the analyst community is usually giving everybody a benefit of doubt.. it does raise some alarm bells.

Not a high conviction call, but would expect to see some profit taking in the stock all day long. Difficult to give any targets, but 5-10% of downside from yesterday's close would be my best guess.