Mannkind Corporation (MNKD): Hedge Fund Now Believes It is a Zero — Too Harsh?

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Tourbillon Capital Partners LP recently made the bold statement that Mannkind Corporation (NASDAQ:MNKD) would soon reach a level of worthlessness. The hedge fund is increasingly negative on the company’s diabetes drug, Afrezza and struggles to envision a turn to profitability for the company. The news came on the back of the not-too-impressive performance of the much talked about inhale insulin for the treatment of diabetes compared to the normal injection of the insulin.

Fall Out Of Product

Tourbillon Capital Partners, which manages $2.5 billion in investments, headed by Jason Karp, wrote a letter to its investors recently about Mannkind Corporation (NASDAQ:MNKD). In his letter, he said that following the 14 weeks of an unsuccessful launch of the drug, Afrezza, based on “data and research”, he has come to the belief that the company’s stock would reach the zero level. The hedge fund manager has already made a killing shorting the stock. He was particularly disappointed at the performance of the signature diabetes treatment product, Afrezza.

Interestingly, Mannkind Corporation (NASDAQ:MNKD) has a licensing pact with Sanofi SA (ADR) (NYSE:SNY), a pharmaceutical giant. The company was in the initial stages of the commercial launch. It was believed that innovative inhale insulin would generate a favorable response compared to the injection. Tourbillion Capital Partners believed that there were low levels of prescriptions as far as Afrezza was concerned compared to the rival’s Exubera. This apart, increased spending towards operational costs and additional sales expenditures were expected to impact the results of the company.

The hedge fund said that it could not visualize Mannkind Corporation (NASDAQ:MNKD) turning to profitability. Its letter indicated that its earlier price objective of $1 was based on the notion that the diabetes drug would perform better than break even in a couple of years. Karp believes that this notion has now become increasingly far-fetched.

Earlier Target

In July last year, Tourbillion projected a price objective of $1 on the then $10 face value per share of the company. At that time, Karp wrote that only a superficial and retail-driven market could expect a valuation of $4.3 billion. He did not see any prospects of revenue at that time. Since then, the stock has plummeted over 57%.

The stock peaked to $24 in September 2004 and since then it has been falling. This invited the arguments in favor and against the stock in the last probably a decade.

Company’s Response

In a situation like the one that Mannkind Corporation (NASDAQ:MNKD) faces, the company does not come out with a point-by-point rebuttal. However, they preferred to restrict themselves to contesting the claims made by hedge fund managers or others. Therefore, it was not a surprise when the company’s CFO, Matthew Pfeffer, contested the thesis of the hedge fund strongly. He told CNBC in July last that that the recent diabetes product was a much improved and next generation product.

In February, Mannkind Corporation (NASDAQ:MNKD)’s President and CEO, Hakan Edstrom, said that the product was starting to hit the market. He said during the 2014 financial results announcement that the company was excited about the fresh phase since the stage was set for the commercial launch of Afrezza in the United States. He said that the flagship product was in the early stages only.

Potential For Diabetes Drug

Interestingly, there appears to a big potential waiting for the drug, Afrezza. According to the estimation of the Centers for Diseases Control and Prevention, about 29.1 million citizens in the United States are suffering from diabetes. Throughout the world, the number of diabetes affected persons is estimated at 387 million. This is expected to grow at an accelerated pace. The organization estimates about 592 million patients to be examined for diabetes by 2035 globally.

Last year, Mannkind Corporation (NASDAQ:MNKD) disclosed an international licensing deal with Sanofi SA (ADR) (NYSE:SNY) for both the development, as well as, commercialization of Afrezza. The agreement provided Mannkind with the much-needed fund of $150 million as up-front payment. This apart, it has possible milestone payments of a maximum of $775 million upon meeting some regulatory and sales milestone targets. The deal envisages Sanofi with 65% of sales profit from Afrezza while the rest would go to Mannkind.

The American company’s Afrezza was designed to treat the two types of diabetes. The drug employs proprietary Technosphere formulation knowhow based on organic molecules class. Mannkind Corporation (NASDAQ:MNKD) believes that Afrezza has number of benefits compared to the available treatment options currently. The insulin market is currently dominated the Novo Nordisk A/S (NYSE:NVO) and Eli Lilly and Co (NYSE:LLY).

Analyst Views

Following the first quarter results announcement of Mannkind, two brokerages, JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS) have downgraded the stock of Mannkind. While JPMorgan downgraded to Neutral from Underweight, Goldman downgraded the shares of the company to Neutral from Sell rating. However, Jefferies maintained its rating of Buy and a price target of $9 on Mannkind Corporation (NASDAQ:MNKD) shares.

Goldman believes that the pharmaceutical company was facing low profitability resulting in delayed profits. This was primarily due to a slow ramp up of Afrezza and the challenging agreement with Sanofi SA (ADR) (NYSE:SNY). The company might be forced to spend more on SG&A due to the patient-driven market dynamics.

Conclusion

Mannkind Corporation (NASDAQ:MNKD) will likely continue to face downside pressures in the near term. However, the company’s diabetes drug has immense potential to tap a big market worldwide. To say that the stock would be worthless might be too harsh as the company deserves a  chance to improve its performance on Afrezza.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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