Buy Montpelier Re Pre-Earnings

Montpelier Re (MRH) intends to release its 1Q08 results after the market close on April 29, 2008, with a conference call scheduled for the next day. The company remains focused on the future; as such, revenues should grow from additional acquisitions, office expansions and recent initiatives during the ensuing years. Thus, we continue to rate the shares a Buy.

The company is willing to invest in its future growth by incurring up-front costs in order to build out revenue generating initiatives. These undoubtedly will impact financial results over the near-term. Also, reduced risk exposure should decrease risk of outsized losses. After losing 75% of its equity in the hurricanes, Montpelier Re adjusted its risk profile to meet the more stringent capital requirements of the rating agencies and reduce its exposure to extremely large losses per dollar of capital.

Underwriting profits are poised to increase. Many industry participants are expecting catastrophe reinsurance prices to harden further in the upcoming renewal season as increasing capital requirements insisted upon by the rating agencies is restricting supply. Many reinsurers need to diversify their risks while demand remains strong. With more than 70% of its business in property catastrophe and specialty property, Montpelier Re is poised to benefit.

Finally, the company reported a significant improvement in the fully converted book value. This was up 5.4% for the quarter and 17.6% for the year.

Waddell & Reed a Near-Term Hold

We are initiating coverage on the shares of Waddell & Reed Financial Inc. (WDR) with a Hold rating and a six-month target price of $34.00 per share. WDR is one of the oldest mutual fund and asset management companies in the U.S., with almost $65 billion assets under management. WDR's assets have grown by more than 175% from $23 billion during the last 10 years.

The company reported impressive results for fourth quarter and fiscal year 2007. During the quarter, WDR reached record sales levels in all of its operating channels, despite adverse market conditions. Though the company's fundamentals call for a higher than Hold rating; given the current uncertainties related to the financial sector, we will look for a more opportune time to upgrade the recommendation.

WDR is currently trading at 17.5 times the consensus estimate for FY 2008, a 26% premium to 14.0 times for the peer group median. On a price-to-book basis, the shares trade at 7.04 times, which is a 205% premium to 2.31 times for the peer group median. The valuation on a price-to-book basis looks a bit expensive, given a ROE [return on equity] of 139% above the peer median.

Our six-month target price of $34.00 per share equates to about 18.6 times our forward estimate for 2008. Combined with the $0.76 per share annual dividend, this target price implies a 6.8% expected total return over that period, which is consistent with our Hold rating.

Inhaled Insulin News Hurts MNKD

MannKind Corporation's (MNKD) lead drug, Technosphere Insulin (TI), is an inhaled insulin product and is in large phase III trials for the treatment of diabetes. The inhaled insulin market has witnessed a major upheaval in recent times with Pfizer (PFE), Eli Lilly (LLY) and Novo-Nordisk (NVO) withdrawing their late-stage candidates citing lack of market prospectus for this class of drugs. Occurrence of lung cancer in diabetic patients treated with Exubera has further cast a shadow over the future of TI.

The company's cash burn is a matter of grave concern, and the lack of any late-stage or approved product adds to the company's woes. While we view the carcinogenicity profile of TI as being safer and better than the rest of the compounds in this class of drugs, we believe the FDA will decide to err on the side of caution and request the company for additional clinical information in a larger sub-group of the diabetic population. This will make the regulatory process longer and costlier for the company, with a high risk of TI suffering the same fate as the other drugs.

Even if TI makes it through the approval process, we do not expect the drug to reach the market before 2011, considering the $1.1 billion in cash burn incurred so far, not to mention the high SG&A costs necessitated to strategically position and distinguish the drug from other therapies. We do not expect the company to achieve profitability without TI achieving blockbuster status -- which is seemingly out of reach in the current market scenario.

MannKind's hopes of bringing a revolutionary technology to the market have been dealt a major blow, and unless some damage limiting and confidence boosting efforts are not undertaken immediately, the shares of the company may sink without a trace. Hence, we maintain our Sell rating on the stock with a target price of $1.

Blockbuster Potential for DNA

We are reiterating our Buy rating on Genentech, Inc. (DNA) and keeping our target price at $86 per share. We remind investors that we upgraded the name in February based on the accelerated approval of Avastin for first-line metastatic breast cancer.