MANNKIND CORPORATION (NASDAQGM: MNKD)

Transcription

1 UPDATE REPORT Pharmaceutical Industry February 15, 2013 KEITH A. MARKEY, PH.D., M.B.A MANNKIND CORPORATION (NASDAQGM: MNKD) CLINICAL TRIALS ON SCHEDULE & FINANCES IN PLACE The timeline for Afrezza s path to the FDA is well defined. The recent conference call has ended uncertainty over the timing of events in the development of Mannkind s novel insulin: o Affinity 1 & 2 clinical studies are on target for completion in the June quarter. The number of patients enrolled in the type 1 and type 2 diabetes trials, respectively, reached 74.4% and 67.9% as of last week. This means the two trials should end in May and June. o Top-line results should be announced in August. o An NDA will likely be submitted by early October. The Company has ample funds. The balance sheet included $62 million of cash as of December 31 st, not including $120 million available on a line of credit from Mannkind s CEO Alfred Mann. This capital should cover the corporate needs for now, based on an estimated cash burn rate of $10 million - $12 million per month. Exercise of warrants that will expire in October could provide an additional $92 million. We reiterate our recommendation with a target price of $10.25 per share. Share Price (2/14/2013) $ Week Price Low / High $ $3.11 Mkt. Capitalization (issued) $704 million Shares Outstanding (issued) million 12-month Target Price $10.25 Average Daily Volume (3 mos.) 2,660,510 Website Actual 2012 (Loss)/shr ($0.94) Est d 2013 Earn s (Loss)/shr ($) Source: BigCharts.com Mannkind Corporation (NasdaqGM: MNKD) is a pharmaceutical company with two drug development programs. The primary focus currently is on Afrezza, an inhalable insulin that is delivered via Technosphere particles into the lungs. There, the inert material comprising the particles dissolves rapidly and facilitates the uptake of insulin across the alveolar surface. The self-forming Technosphere particles also perform one other important task they stabilize the insulin molecule in its native, monomeric form. As a result, Afrezza is the only drug that delivers insulin in a manner mimicking the normal pancreas. This has translated into less hypoglycemia; weight loss, rather than the weight gain seen with other drugs; and high patient compliance, while providing effective protection against postprandial hyperglycemia. The final clinical trials should support its launch in 2014 for most type 1 and 2 diabetics. Mannkind s second program is centered on oncology therapies. Though they have appeal, Afrezza is key to investing in MNKD shares presently. Griffin Securities, Inc., 17 State Street, New York, NY, Please Review Disclosures on Page 5 of this Research Report

2 INVESTMENT CONSIDERATION RISKS IN DECLINE Financing Risk: We believe the risk associated with Mannkind shares has declined since the Company now has sufficient cash to complete the clinical trials of its inhalable insulin, Afrezza. Historically, the potential need for external financing has posed a threat of dilution to existing investors. While we cannot rule out the possibility that additional capital will not be sought in the future, there appears to be no need to raise capital before the initial results of the Affinity 1 and 2 trials are announced in August. Favorable data from those studies should have a meaningful impact on the share price, since the Affinity 1 results will determine whether the drug is approved by the FDA and the Affinity 2 data may position the drug for use by the vast majority of diabetics, those with type 2 disease. Clinical Trial Risk: The Affinity 1 trial must demonstrate that Afrezza is not inferior to the short-acting insulin analogs that are commercially available today and that the two inhalers used in clinical trials are equally able to deliver the drug into the lungs. We do not believe these hurdles are very high. For one, the two inhalers were compared in a bioequivalence study that showed they perform in a virtually identical manner. In addition, the comparison between Afrezza and Novo Nordisk s Novolog, which is the shortacting insulin analogue being used in the study, has been conducted previously to good results. Just as important, the Affinity 1 trial is better designed than previous studies in that it takes advantage of a novel property of Afrezza, which is a low risk of hypoglycemic events. Specifically, patients in the study are having their fasting glucose lowered closer to normal physiological levels. With this baseline, the Company believes Afrezza will prove superior to Novolog in its ability to control glucose levels and with fewer episodes of hypoglycemia. The risk associated with the Affinity 2 trial also appears to be relatively low, since the study is designed to determine whether the addition of insulin to a type 2 diabetic s oral drug regimen results in better glucose control. In other words, the study is evaluating the efficacy of the natural hormone insulin against a placebo. The only way this trial could fail in our opinion is if the patients who receive the placebo suddenly respond well to the oral medication(s) that have been unable to adequately control their glucose levels prior to participation in the study. That seems unlikely. The Company is blinded to the results that have been recorded to date, but management did announce that 74.4% of patients (297 of the 399 required) in Affinity 1 and 67.9% of the subjects (167 of the 246 required) in Affinity 2 had completed Afrezza therapy last week. The trials should be finished in May and June, respectively, with more than enough patients to ensure adequate statistical power. Hence, the studies should yield statistically meaningful results. Mannkind plans to announce the initial results in August. Regulatory Risk: Completing the data collection and analysis and preparation of the NDA for submission will take about three months, which means the filing will likely be made in late September or early October. A six month review by the FDA is expected, although the agency does not have a perfect track record for performing within the designated timeframe. We are somewhat encouraged nonetheless by the fact that the FDA should be familiar with Afrezza by now and that the ongoing trials were designed with the regulators approval to satisfy concerns raised in a complete response letter issued in early Another item to consider is that the FDA has already asked Mannkind to perform a Phase 4 (postapproval) study of Afrezza in children as young as 4 years old. This suggests that the agency has few concerns over the drug s safety profile and recognizes that it will probably gain wide acceptance by the pediatric population. In sum, we believe the risks associated with Mannkind stock have begun to diminish and that those that remain are mitigated as discussed above. We are maintaining our recommendation with a 12-month price target of $10.25 per share. GRIFFIN SECURITIES EQUITIES RESEARCH 2

3 DECEMBER QUARTER REVIEW Excluding a $13.3 million nonrecurring, noncash charge related to the settlement of a futures contract, Mannkind posted a loss of $38.5 million, or $0.17 per share, for the fourth quarter of 2012, versus a loss of $36.4 million or $0.30 a share a year earlier. R&D expense increased 25%, to $25.3 million, because of the ongoing Affinity 1 and 2 studies. General and administrative costs dropped 20%, from $10.3 million in the fourth quarter of 2012 to $8.2 million since the year-ago figure included a litigation settlement accrual. The cash burn in the fourth quarter totaled $25.9 million, which was below the budgeted range of $30 million to $36 million. As the Affinity studies come to a close and work begins on preparing documents for submission to regulatory agencies in 2013, the cash burn may increase to a rate of $10 million to $12 million per month. Mannkind closed 2012 with $61.8 million of cash on the balance sheet and $120 million available under the line of credit provided by Alfred Mann, the Company s CEO. Other sources of capital may become available as the year progresses, depending on the outcome of the clinical trials. Notably, the exercise of warrants that were issued in last fall s equity financing could generate up to $92 million. There is also a possibility that a partnering agreement could include a sizable upfront fee, although we have not included such a possibility in our estimates, as shown below. Finally, we note that convertible notes in the amount of $114.3 million will become due on December 15 th and are convertible at $22.47 per share. In the event that Mannkind s share price exceeds the conversion price, that debt may be converted rather than retired. QUARTERLY INCOME STATEMENTS (Fiscal year ends December 31 st ) All data are in thousands, except for per-share figures. Estimates are in italics Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total Revenues $ 50 $ $ $ $ $ $ 35 $ $ $ $ $ Operating expenses R&D expense $ 26,289 $ 30,296 $ 23,132 $ 20,242 $ 24,156 $ 26,638 $ 25,453 $ 25,275 $ 26,000 $ 24,000 $ 20,000 $ 17,000 G&A expense 11,762 8,890 9,641 10,337 9,777 17,416 10,069 8,211 9,000 9,000 9,700 9,800 Other Total operating costs 38,051 39,186 32,773 30,579 33,933 44,054 35,522 33,486 35,000 33,000 29,700 26,800 Operating profit/(loss) $ (38,001) $ (39,186) $ (32,773) $ (30,579) $ (33,933) $ (44,054) $ (35,487) $ (33,486) $ (35,000) $ (33,000) $ (29,700) $ (26,800) Other income (expense) 1, ,382 13,345 (2,651) (13,269) Interest expense (4,889) (5,343) (5,708) (5,884) (5,623) (5,872) (5,104) (5,031) 5,100 5,100 5,100 5,000 Interest income Pretax profit/(loss) $ (41,525) $ (44,480) $ (38,402) $ (36,397) $ (38,173) $ (36,580) $ (43,242) $ (51,781) $ (29,850) $ (27,850) $ (24,550) $ (21,750) Income taxes 408 Net profit/(loss) $ (41,525) $ (44,480) $ (38,402) $ (36,397) $ (38,173) $ (36,580) $ (42,834) $ (51,781) $ (29,850) $ (27,850) $ (24,550) $ (21,750) Earnings/(loss) per share $ (0.34) $ (0.37) $ (0.31) $ (0.30) $ (0.27) $ (0.23) $ (0.22) $ (0.23) $ (0.10) $ (0.10) $ (0.07) $ (0.06) Shares outstanding 121, , , , , , , , , , , ,000 ANNUAL INCOME STATEMENTS (Fiscal year ends December 31 st ) All data are in thousands, except for per-share figures. Estimates are in italics. 2011(A) 2012(A) Sales $ 50 $ 35 $ $ 98,536 $ 381,974 $ 929,693 $ 2,124,147 Cost of products sold 13,549 53, , ,494 Gross Profit $ 50 $ 35 $ $ 84,988 $ 328,906 $ 798,656 $ 1,828,654 Operating expenses R&D expense $ 99,959 $ 101,522 $ 87,000 $ 50,000 $ 100,000 $ 176,642 $ 403,588 G&A expense 40,630 45,473 $ 37,500 45,000 50,000 74, ,932 Total operating costs 140, , ,500 95, , , ,520 Operating profit/(loss) $ (140,539) $ (146,960) $ (124,500) $ (10,012) $ 178,906 $ 547,638 $ 1,255,134 Other income (expense) 1,542 (1,193) ,000 1,250 Interest expense (21,824) (21,630) 20,300 (22,000) (20,000) (20,000) Interest income ,000 1,000 Pretax profit/(loss) $ (160,804) $ (169,776) $ (104,000) $ (31,512) $ 160,406 $ 529,888 $ 1,256,134 Income taxes 11,975 (60,954) (201,358) (477,331) Net profit/(loss) $ (160,804) $ (169,776) $ (104,000) $ (19,538) $ 99,452 $ 328,531 $ 778,803 Earnings/(loss) per share $ (1.32) $ (0.94) $ (0.32) $ (0.06) $ 0.28 $ 0.93 $ 3.00 Shares outstanding 121, , , , , , ,000 GRIFFIN SECURITIES EQUITIES RESEARCH 3

4 BALANCE SHEET (Fiscal year ends December 31 st ) All data are in thousands. Estimates are in italics. ASSETS 12/31/ /31/2011 Current Assets Cash & equivalents 61,840 3,196 Accounts Receivable - - Inventory - - Other 4,970 2,625 Total Current Assets $ 66,810 $ 5,821 Property & equipment $ 183,961 $ 193,029 Other Total Assets $ 251,314 $ 199,553 LIABILITIES Current Liabilities Accounts payable $ 3,000 $ 4,624 Debt due 114,300 - Accrued expense & other 27,475 20,736 Total Current Liabilities $ 144,775 $ 25,360 Long-term debt $ 217,218 $ 487,845 Other - - Total Long-Term Liabilities $ 217,218 $ 487,845 Shareholders Equity Common Stock, par value $ 2,843 $ 1,315 Additional Paid-In Capital 1,991,398 1,620,535 Accumulated Deficit (2,104,920) (1,935,502) Treasury Stock - - Total Shareholders Equity $ (110,679) $ (313,652) Total liabilities & equity $ 251,314 $ 199,553 Note that current liabilities as of December 31, 2012 include $114.3 million related to convertible debt due on December 15, This debt is convertible into common at a price of $22.47 per share. VALUATION OF MANNKIND We have calculated our 12-month target price from the estimated share profit in 2015, the first year in which we expect operations will be profitable for a full 12-month accounting cycle. (Note that we have not included upfront licensing fees in our estimates.) Our price target was calculated by applying a priceearnings multiple of 54 to the 2014 estimated share earnings of $0.28 to arrive at a future value of $15.12 and discounted that back 1.5 years at an annual rate of 26%. The result of that calculation is a share price of $ GRIFFIN SECURITIES EQUITIES RESEARCH 4

5 INVESTMENT RISKS AND CONCERNS For a complete description of risks and uncertainties related to Mannkind s business, see the Risk Factors section in Mannkind s SEC filings, which can be accessed directly from the SEC Edgar filings at Potential risks include: Stock risk and market risk: There can be no assurance that an active and liquid trading will be sustained in Mannkind s stock, which could limit one s ability to buy or sell the Company s common stock at a desired price. Investors should also consider technical risks common to stock investments, such as float, risk of dilution, dependence upon key personnel, and the strength of competitors that may be larger and better capitalized. New and rapidly changing field: The pharmaceutical and biotechnology markets are rapidly evolving, and research and development are expected to continue at a rapid pace. Other companies are actively engaged in the development of therapies to directly or indirectly treat those disorders being pursued by Mannkind. These companies may have substantially greater research and development capabilities, as well as significantly greater marketing, financial, and human resources than Mannkind. Products still in development phases: Although the Company is preparing to commercialize its inhalable insulin, Afrezza, it intends to continue to develop drugs with its inhalation technology and to invest further in its oncology program. Successful commercialization of Afrezza and development of other products is uncertain. R&D costs and timelines can vary significantly for each product candidate and are difficult to accurately predict. In addition, products in development that appear to be promising may not reach commercialization for various reasons, including failure to achieve regulatory approvals, safety concerns, and/or the inability to be manufactured at a reasonable cost. And even once a drug has rolled out, there is no assurance that it will be accepted by consumers or the medical community. Funding requirements: It is difficult to predict the Company s future capital requirements. Mannkind will probably need additional financing to continue funding the research and development of its products and to expand its business. There is no guarantee that it can secure the desired future capital or, if sufficient capital is secured, that current shareholders will not suffer significant dilution. Regulatory risk: Various statutes and regulations govern or influence the manufacturing, safety, labeling, storage, recordkeeping and marketing of each product. The lengthy process of seeking approval and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect Mannkind s business. There is no guarantee that the Company s products will be approved by the U.S. Food and Drug Administration (FDA) or international regulatory bodies for marketing in the U.S. or abroad. Competitive risk: The pharmaceutical industry is extremely competitive, mainly due to its large market potential. Many companies are developing products for the same therapeutic indications targeted by Mannkind. These companies may have substantially more resources than Mannkind and any potential partners, which could adversely affect the Company s position in the marketplace. GRIFFIN SECURITIES EQUITIES RESEARCH 5

6 DISCLOSURES ANALYST(s) CERTIFICATION: The analyst(s) responsible for covering the securities in this report certify that the views expressed in this research report accurately reflect their personal views about Mannkind Corporation (the Company ) and its securities. The analyst(s) responsible for covering the securities in this report certify that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation or view contained in this research report. MEANINGS OF RATINGS: Our rating system is based upon 12 to 36 month price targets. describes stocks that we expect to appreciate by more than 20%. HOLD describes stocks that we expect to change plus or minus 20%. SELL describes stocks that we expect to decline by more than 20%. SC describes stocks that Griffin Securities has Suspended Coverage of this Company and price target, if any, for this stock, because it does not currently have a sufficient basis for determining a rating or target and/or Griffin Securities is redirecting its research resources. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NR describes stocks that are Not Rated, indicating that Griffin Securities does not cover or rate this Company. DISTRIBUTION OF RATINGS: Currently Griffin Securities has assigned ratings on 85% of companies it covers, HOLD/NEUTRAL ratings on 12%, and SELL ratings on 3%. Griffin Securities has provided investment banking services for 12% of companies in which it has had ratings in the past 12 months and 0% for companies in which it has had HOLD/NEUTRAL, NR, or no coverage in the past 12 months or has suspended coverage (SC) in the past 12 months. MARKET MAKING: Griffin Securities does not maintain a market in the shares of this Company or any other Company mentioned in the report. COMPENSATION OR SECURITIES OWNERSHIP: The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Griffin Securities, including profits derived from investment banking revenue. The analyst(s) that prepared the research report did not receive any compensation from the Company or any other companies mentioned in this report in connection with the preparation of this report. Keith A. Markey, the analyst responsible for covering the securities in this report, currently owns common stock in the Company, and in the future the analyst(s) may from time to time engage in transactions with respect to the Company or other companies mentioned in the report. Griffin Securities has received compensation from the Company in the past 12 months for investment banking services. Griffin Securities from time to time in the future may request expenses to be paid for copying, printing, mailing and distribution of the report by the Company and other companies mentioned in this report. Griffin Securities expects to receive, or intends to seek, compensation for investment banking services from the Company in the next three months. FORWARD-LOOKING STATEMENTS: This Report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the Risk Factors section in the SEC filings available in electronic format through SEC Edgar filings at on the Internet. DISCLOSURES FOR OTHER COMPANIES MENTIONED IN THIS REPORT: To obtain applicable current disclosures in electronic format for the subject companies in this report, please refer to SEC Edgar filings at In particular, for a description of risks and uncertainties related to subject companies businesses in this report, see the Risk Factors section in the SEC filings. GRIFFIN SECURITIES EQUITIES RESEARCH 6

7 2-YEAR PRICE CHART Source: BigCharts.com 10/21/2009 Initiating Coverage: share price: $5.08; rating: ; 12-month price target: $ /4/10 Updating Coverage: share price: $9.41; rating: ; 12-month price target: $26.00; 3/18/10 Updating Coverage: share price: $7.49; rating: ; 12-month price target: $26.00; 5/4/10 Updating Coverage: share price: $6.95; rating: ; 12- month price target: $26.00; 7/20/10 Updating Coverage: share price $6.21; rating: ; 12-month price target: $26.00; 1/20/11 Updating Coverage: share price $9.11; rating: Hold; 12-month price target: under review; 2/11/11 Updating Coverage: share price: $4.02; rating: Hold; 12-month price target under review; 5/10/11 Updating Coverage: share price: $3.85; rating: ; 12-month price target: $ /15/11 Updating Coverage: share price: $2.79; rating: ; 12-month price target: $10.00; 11/7/2011 Updating Coverage: share price: $3.05; rating: ; 12-month price target: $5.50; 2/24/2012 Updating Coverage: share price: $2.35; rating: ; 12-month price target: $14.00; 5/1/2012 Updating Coverage: share price: $2.24; rating: ; 12-month price target: $14.00; 5/10/2012 Updating coverage: share price: $2.06; rating: ; 12-month price target: $14.00; 8/8/2012 Updating coverage: share price: $2.08; rating: ; 12-month price target: $14.00; 9/4/2012 Updating coverage: share price: $2.70; rating: ; 12-month price target: $14.00; 2/15/2013 Updating Coverage: share price: $2.47; rating: ; 12- month price target: $ GENERAL: Griffin Securities, Inc. ( Griffin Securities ) a FINRA (formerly known as the NASD) member firm with its principal office in New York, New York, USA is an investment banking firm providing corporate finance, merger and acquisitions, brokerage, and investment opportunities for institutional, corporate, and private clients. The analyst(s) are employed by Griffin Securities. Our research professionals provide important input into our investment banking and other business selection processes. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Griffin Securities may from time to time perform corporate finance or other services for some companies described herein and may occasionally possess material, nonpublic information regarding such companies. This information is not used in preparation of the opinions and estimates herein. While the information contained in this report and the opinions contained herein are based on sources believed to be reliable, Griffin Securities has not independently verified the facts, assumptions and estimates contained in this report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. The information contained herein is not a complete analysis of every material fact in respect to any company, industry or security. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Griffin Securities. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Certain transactions - including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information contained in this report is subject to change without notice and Griffin Securities assumes no responsibility to update the report. In addition, regulatory, compliance, or other reasons may prevent us from providing updates. GRIFFIN SECURITIES EQUITIES RESEARCH 7