Sentiment Drives MannKind To Fresh Highs Ahead Of Vital Catalyst

An enormous amount of hype in the last couple of weeks has sent the diabetes and cancer drug developer MannKind Corporation (MNKD) soaring, particularly after the company’s first quarter financial results for fiscal year 2013 on May 9th. After yesterday’s rally, MNKD is up 56% since the most recent earnings release.

The company’s financials did not change much, with the cash burn rate remaining at a $36M in Q1 2013 versus $34M for Q1 2012 and with the company’s cash position dropping to a total of $28M. Stockholder’s deficit moved further into negative territory, now at -$146M. The implication is that the company will need more cash in the near future, so a public offering seems especially likely in the next few months due to the recent rise in MNKD common stock and the company’s need for financing for the second half of 2013 and beyond.

Still, what has ultimately been driving MNKD to fresh 52-week highs has been a big surge in coverage on the stock in the media and on Wall Street, and hype over the upcoming Phase III data releases for the AFFINITY 1 and AFFINITY 2 trials for the company’s insulin inhaler Afrezza. Much of the hype is actually coming from MannKind CEO and creator Alfred Mann himself, who seems to believe that Afrezza will become one of the biggest success stories in the pharmaceutical industry ever.

There’s no question that the diabetes indication is enormous, although a lot of parallels have been drawn between an insulin inhaler introduced to the market in 2006 called Exubera and Afrezza. There are distinct differences between the two devices, although there is still major skepticism over the commercial prospects of Afrezza, even if it does succeed in Phase III trials and reaches the market after FDA approval.

Still, traders and investors who are following MNKD for the time being are very focused on the upcoming top line results of the two nearly completed Phase III trials Affinity 1 and Affinity 2, which should be unveiled at some point in August 2013. The release of the trial data should be a very potent mover of MannKind stock. If the trials are successful, investors will generally assume that Afrezza will see FDA approval after an NDA resubmission and will be a success story once it hits the market.

Based on this, I think investors may put MannKind closer to a $3B valuation (or roughly $10/share) implying that there is something in the ballpark of 60-70% upside after good trial results. If, on the other hand, we see poor outcomes in the upcoming clinical trials we are likely to see a return to the $1-2 per share range based on the notion that Afrezza cannot pass Phase III development. Investors should note that the product was issued a CRL after an NDA submission a few years ago, although the company believes that the adjustment of a few parameters in the current clinical trials will alter the outcome.

The Takeaway
It’s difficult to tell how the stock will trade as we get closer to the expected data releases for Affinity 1 and Affinity 2, although it’s clear that the stock becomes much riskier when bullish sentiment alone drives the stock up 56% in a matter of weeks (as mentioned earlier). The trade regarding the upcoming catalyst (the Phase III data release) has become increasingly lopsided as a result.

Investors who believe in the story still have the chance to see substantial returns as we approach a potential approval for Afrezza, although an unexpected bearish outcome in either clinical trials or in Afrezza sales down the road could be particularly devastating after the hype that this stock has seen.