MannKind Corp.: Will Afrezza’s FDA Approval Shake Up Big Pharma?

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After having the U.S. Food and Drug Administration deny Afrezza twice, third time was the charm for MannKind (NASDAQ:MNKD). The company’s stock has doubled in 2014 alone, now carrying a market capitalization of nearly $4 billion, but as we look at MannKind’s financial position and Afrezza’s outlook, is there more upside in the stock, and should you buy now?

Afrezza is a form of insulin that does not require patients to inhale prior to a meal or at a particular time prior to a meal. The product is highly controversial, with longs believing that Afrezza could create billions in annual sales due to its convenience. However, bears argue that its safety concerns, including the risk of acute bronchospasm and a highly competitive market, could make Afrezza a commercial dud.

While the latter dire-outlook argument remains unknown, Afrezza does have a Boxed Warning for the former argument, requiring that the company communicate with physicians the risks of developing acute bronchospasm. Further, MannKind must complete four Phase 4 safety-related trials following the drug’s approval.

Indirectly, Afrezza’s questionable safety profile adds to commercial doubts expressed by bears. Afrezza will be competing in an insulin market owned by big pharma, competing against companies that spend hundreds of millions of dollars in marketing to remain relevant in a crowded market. With that said, there’s nothing special about MannKind’s insulin — it’s as good as any insulin. The key advantage is its delivery, and it’ll be interesting to see if the post-meal advantage will be enough to overshadow safety concerns and major competitors.

The biggest concern investors should have right now before investing in MannKind is its financial position. This is a company with cash of only $35.7 million and debt of nearly $175 million. In other words, now that Afrezza is FDA approved, MannKind needs capital.

MannKind has more than $200 million of warrants, derivatives, and other debt facilities, much of which can now be converted to stock following the FDA approval of Afrezza. Not only will this dilute MannKind’s stock, but the company is also expected to raise money via an offering. With a $4 billion market capitalization MannKind can definitely squeeze cash from its stock. Furthermore, investors must realize that the company not only has to manufacture and sell Afrezza but also has R&D and administrative costs, and must compete with big pharma in marketing Afrezza.

Overall, it looks like MannKind will be forced into aggressive financing in the immediate future, which could dilute its stock to a great deal. Seeing as how its valuation is fast approaching $4 billion and not one script has been filled, MannKind definitely looks like a wait-and-see investment. With that said, when does “wait and see” become “buy”? You could wait a year to see how Afrezza performs in the open market, or you can gauge the partnership.

MannKind has made no secret about it seeking a partner to market Afrezza. So far there have been no takers, or at least anything that has resulted in a partnership. Therefore, if MannKind fails to find a partner, then it’s a good sign that big pharma is not confident in the product or its competitive advantage. If MannKind sells a large stake in future sales of Afrezza for $100 million, then it’s a good sign that management doesn’t have faith in Afrezza. However, if MannKind gets a Pharmacyclicslike deal, one with $1 billion in cash and half of future revenue, then it’s a good indication to get long MannKind.

Unfortunately, each scenario is as likely as the other, which all but supports the amount of controversy that surrounds this company. And with a $4 billion market capitalization, the uncertainty surrounding this three-way scenario combined with the need for cash and dilution poses as too much of a threat for investors right now.

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