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Sept 28, 2013 19:26:46 GMT -5
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www.3dimensionalresearch.com/news/detail/Three-Relatively-Low-Hurdles-Left-for-MannKind
Three Relatively Low Hurdles Left for MannKind
Sep 28 2013
MannKind Corporation (NASDAQ: MNKD), which is shepherding an innovative inhaled insulin product towards regulatory approval and commercial launch, has come a long way since receiving a Food & Drug Administration-issued Complete Response Letter (CRL) in early 2011 that triggered an 84% slide in the stock price that bottomed at $1.57 on May 18, 2012. Indeed, against difficult odds and in the face of a horde of skeptics, it streamlined operations, returned to the capital markets multiple times, and conducted the two additional Phase 3 clinical trials that were required by the CRL. Significantly, the company is now poised to return – scheduled for early October – to the FDA with an amendment to the New Drug Application (NDA) that it filed several years ago to get approval for Afrezza to treat both diabetes type 1 and type 2. Thereafter, stockholders in the developmental stage biopharmaceutical concern will need the following three things to be well rewarded for their patience: Receive FDA approval for the NDA; Secure a marketing partner to sell Afrezza; and achieve commercial success; the partner is important but not critical. In this article, we discuss in some detail our thoughts on the chances of each of the three things happening.
FDA Approval
MannKind is expected to submit an amendment to the NDA application that was filed several years ago in early October. This should set the clock ticking and have the FDA issuing a decision on whether Afrezza can be marketed sometime in the second quarter of 2014, probably around mid-April. As widely reported, the two Phase 3 trials – Affinity 1 and Affinity 2 – achieved their respective primary endpoints. While this is important in of itself, the fact that the trial design and endpoints were determined in very close consultation with the Food & Drug Administration makes a favorable outcome even more likely. In response to a question on whether the recently announced results would be enough to satisfy the FDA based on its most recent CRL, management said: “The recently completed Affinity trials were designed specifically to address the issues raised by the FDA in their complete response letters. In designing the Affinity trials we had multiple meetings with the agency to get their input and clarification on the protocols and endpoints of the trials. Based on those interactions and the trial results we believe that these studies have indeed met their primary endpoints and that the results will support approval of the product.”
Management also noted the following: “Although it is not relevant for purposes of predicting FDA action, Deerfield evaluated the two Affinity trials, including through an independent regulatory consultant with access to all the key data, and determined that the results met the primary efficacy endpoints and did not show any adverse safety issue that would reasonably be expected to prevent approval of Afrezza®. Such validation was required for Deerfield to provide the second $40 million tranche of the $160 million financing.” Significantly, too, in an August 22nd Forbes Magazine article written by John LaMattina on August 22nd, the president of Pfizer Global Research and Development at the time it launched Exubera, an inhaled insulin product that was approved for marketing in early 2006, stated: “In all likelihood, the Afrezza NDA will be approved by the FDA.” And in noting Exubera’s approval, it should also be noted that there is virtually no disagreement that Afrezza is far superior to Exubera, in terms of efficacy, safety, ease of use, and price.
Moreover, in a September 10, 2013 video that can be viewed on Youtube, Dr. Jay Skylar, a world renowned expert on diabetes, who was the lead investigator in one of Pfizer’s clinical trials for Exubera, also expressed his expectation that MannKind’s product would be approved. All of these expectations are probably underscored by a market capitalization that now approximates $2.4 billion (on a fully diluted basis).
The Partnership Dynamics
Pfizer, Eli Lilly, and Novo Nordisk all clearly thought there was a sufficiently large need for inhaled insulin to justify investing billions of dollars and years of effort to develop their products, as did their smaller respective partners, Nektar Therapeutics, Alkermes, and Aradigm. The three large drugmakers ultimately abandoned their programs not because the need disappeared but because they came to the realization that their products were woefully inadequate, in terms of both efficacy and patient convenience. Indeed, the need has only grown since then. MannKind, which has limited resources and no sales infrastructure, will most likely need a large drug, biopharmaceutical, or medical device company to help maximize the commercial potential of Afrezza and perhaps also its technosphere technology.
Although the company has “held extensive discussions with a number of pharmaceutical companies concerning potential strategic business collaborations for AFREZZA” for some time, it has yet to secure a partner. The expensive failures discussed above were undoubtedly an inhibiting factor. It’s also likely that the demands of Mr. Mann, who has invested almost $1 billion of his own money in developing the product and thinks it could be the most significant medical product ever, may have deterred some suitors. With the Phase 3 results now in hand, however, plus both Afrezza’s enormous potential and the recent formalizing of the search process, a deal will probably be struck pretty quickly: During a conference call with the investment community on August 14th that was conducted to discuss the Phase 3 results, management disclosed it had retained a world-class investment bank, Greenhill & Co., to help review and negotiate with prospective marketing partners. The company had indicated previously, and reiterated during last week's call, that multiple parties have been conducting due diligence for some time and others have expressed their intentions to do the same following the release of data from Affinity 1 and 2. Greenhill is a leading independent investment bank that focuses on providing financial advice on mergers, acquisitions, restructuring, and raising capital. It has been involved in many of the largest transactions in the healthcare sector, facilitated by a global network of clients and offices.
There are certainly a large number of potential partners. Pfizer, which indicated several years ago that it would continue to monitor developments in the inhaled insulin space, would clearly be a good fit, given its deep pockets, a massive sales force, and a need to fill the revenue cliff stemming from the recent loss of patent protection for Lipitor. Novo Nordisk and Eli Lilly are possibilities, too, since they would have the most to lose from the introduction of Afrezza. Also representing potential strategic partners are Merck and Sanofi, both of which could use there diabetes care sales force to detail a product that would complement their oral medicines and long-acting insulin, respectively. Indeed, considering the huge cost (and uncertainty) of developing new drugs, widespread patent expirations, and inexpensive money, a deal to market Afrezza might appeal to a whole host of companies. That said, MannKind could decide to secure more than one partner, perhaps one in the United States, one in Europe, and a third to cover Asia.
It has only been six weeks since the company announced the retaining of Greenfield, but some stockholders are clearly getting antsy. Considering the large number of potential suitors, however, the due diligence each will have to conduct, including marketing research that would help determine contract terms, plus the need to dot every “I” and cross every “t” before announcing a deal, it could prove to be a lengthier process than some might like. All in all, though, we fully expect a transaction, whether it’s a marketing partnership, or the outright sale of the company, to be concluded well before the FDA issues its decision on Afrezza.
Commercial Prospects
There are an estimated 26 million diabetics in the United States, 32 million in Europe, and 91 million in China. Japan and Korea also have a relatively large proportion of their populations suffering from the disease, with a combined total of 14 million people. According to the International Diabetes Federation, the number of people around the world with diabetes approximates 371 million, and that figure is expected to reach 550 million by 2030. The global market for diabetes care products is correspondingly large, aggregating approximately $40 billion in 2012, and growing at a roughly double-digit rate annually. It’s also important to note that each of the top-10 sellers in the therapeutic category is a blockbuster, with sales exceeding $1 billion a year. As such, one would be extremely hard-pressed to imagine a realistic scenario in which MannKind’s inhaled insulin is not a huge commercial success when one considers both the above statistics and the following:
1. Afrezza is ultra-rapid acting, reducing the risk of hyperglycemia, vis-à-vis all alternatives.
2. Afrezza clears out of the system faster than the alternatives, thus reducing the risk of hypoglycemia.
3. Afrezza is at least as effective as the leading prandial insulin, Novolog, in helping patients reach A1c target levels.
4. Afrezza allows diabetics who need insulin to take three fewer injections a day.
5. In clinical trials, Afrezza showed significant weight advantages in type 1 diabetics.
6. All patient surveys show a strong preference for inhaled insulin over injected insulin.
7. Afrezza allows diabetics who need insulin to take some 1,095 fewer injections a year, 1,098 in leap years, to be annoyingly accurate.
8. Afrezza has been tested in over 6,000 patients and for a decade or so, without a single safety incident.
9. Afrezza is vastly superior to Exubera by any measure, including efficacy, safety, and convenience of use; the delivery device, Dreamboat, is about the size of a thumb, while Exubera was almost as large as a woman’s forearm and looked like a bong.
10. At the risk of being even more annoying, but speaking as one who had trouble with the self-administered pin prick necessary in high school biology, Afrezza is inhaled, while all other insulin products are injected.
11. Dr. Jay Skylar, who was a member of Pfizer’s Inhaled Insulin Advisory Board, indicated in the September 10 video that, if approved, he would be willing to prescribe Afrezza to any diabetic who needs insulin.
Revenue Possibilities
It’s always very difficult to forecast sales of paradigm shifting new products. Eli Lilly’s sepsis drug Xigris, for example, was considered a potential huge-seller when launched in 2001. It never became more than a marginal top-line contributor before being pulled from the market a few years ago. Expectations for prostate cancer drug Provenge helped its maker Dendreon Corporation achieve a market capitalization of roughly $8 billion in 2010, but demand never really materialized and the company now has a market value of just $455 million. On the flip side, Pfizer’s cholesterol-lowering drug Lipitor became the biggest-selling medicine, with peak sales of $13 billion, far exceeding what had been very modest expectations.
In predicting Afrezza sales, some Wall Street analysts have developed very elaborate revenue and earnings models. This includes estimating penetration rates of type 1 diabetics and type 2 diabetics, in their various stages of disease progression. A Merrill Lynch analyst, for example, caused quite a stir earlier this month among MNKD stockholders by slashing in half (from 4% to 2%) his forecast of the product’s penetration of diabetics on oral medications. Interestingly, he also slashed his price target for the stock by 37.5%, all of this based on a survey of 75 physicians, only 14 of whom were even familiar with Afrezza. Our model is far cruder, as we’ll discuss in greater detail below, but the size of the market opportunity strongly suggests the hurdle to becoming a blockbuster is quite low. Priced at around $2,000 per patient per year, serving just 250,000 patients in the United States and another quarter million in the rest of the world would generate revenues of $1 billion. The 250,000 in the U.S. would represent less than 1% of all the diabetics in the country. Put another way, patient totals of just one million each in both the U.S. and abroad would equate to annual revenues of $4 billion.
**Revenue/Earnings model available upon request**
An Earnings Surge Likely in a Few Years
The large number of moving parts makes it impossible to project MannKind’s revenues and earnings with any degree of precision. The securing of a marketing partner, along with its timing, will obviously influence the velocity and breadth of the product launch, pre-supposing FDA approval. The rapidity in which the FDA takes action on the company’s NDA will be a factor as well. For our projection purposes, as reflected in our earnings model below, we assume the following: 1) MannKind partners with one global player by year’s end, with the agreement calling for both royalties of 20% on revenues and a supply agreement that’s booked at 30% of retail sales. 2) The partner rapidly files marketing applications for Afrezza in the EU and the other key markets in Asia. 3) The Afrezza NDA is approved next April, allowing for U.S. commercialization by about mid-year, following by introductions into the European market in the first half of 2015 and some parts of Asia in the year’s second half. 4) MannKind will enjoy healthy gross and operating margins in at least the first three years since the first roughly $10 billion in revenues will be supported by an inventory of insulin that’s already been expensed. 5) The biotech’s earnings will be tax-advantaged for many years since it has accumulated a total deficit of $2.2 billion in its history. 6) MannKind is gearing up production capacity to meet the needs of two million patients, and our figures assume the capacity is exhausted in 2018, meaning product revenues of $4 billion that year. 7) Roughly 10% of revenues are allocated to research and development activities. 8) About 25% of all diagnosed diabetics currently use insulin as part of their treatment and a slowly increasing number of the nearly 60% who only take oral antiglycemic drugs start using inhaled insulin. 9) The partner will pay a $500 million up-front licensing fee and $500 million each for achieving FDA and EMA approval; these payments are excluded from our earnings estimates because of their nonrecurring nature.
Based on the above (some clearly arbitrary) assumptions, we look for MannKind’s bottom line to make its initial foray into positive territory in 2014’s second half and then to move decidedly upward in the subsequent years of our five-year projection horizon. As noted earlier, our projections are far cruder than those of some Wall Street analysts, but the existence of the many moving parts probably precludes a more precise (or meaningful) earnings model. All things considered, we think the main value of our model may be to serve as a framework or template for investors to conduct their own scenario analysis. It probably also shows that the sales threshold (or number of diabetics using Afrezza) required to make MNKD stock a rewarding investment isn’t very high.
Conclusion
MannKind stock has been incredibly volatile for many years, and this isn’t likely to change anytime soon given both the many interest groups that probably don’t want the company to succeed and their ability to disseminate misinformation and disinformation: A large number of news outlets carried the news that Merrill Lynch had slashed its price target for MNKD but not one that we saw mentioned the fact that the action was based on a tiny survey of physicians who were mostly ignorant of Afrezza; Two weeks prior to that, the stock was rocked by a plethora of web-based media outlets that flashed headlines noting that an analyst at a firm named Summer Street had questioned the veracity of MannKind’s reported Phase 3 results, stating that the level of disclosure was “suspicious” and “unprecedented.” Again, not one pointed out that none of the supposedly missing information was even relevant, had been discussed in a conference call, and the analyst hadn’t bother to first call the company to discuss her concerns prior to using the alarmist language.
We think it’s important for stockholders to keep their focus on the company’s fundamentals and to stop reacting to the noise and distraction. The small biotech has cleared the steepest fundamental hurdles and the biggest unknown now is probably the level of Afrezza’s commercial success. And on this count, our view is that the size of the target market, along with Afrezza’s myriad competitive advantages, virtually assures substantial prosperity for MannKind in the years ahead. All in all, we expect MNKD shares to appreciate manifold over the next three to five years. An 18 multiple to our $2.05 earnings estimate for 2018 has the stock reaching $36.90 in that time frame. As well, given the facts that Mr. Mann is 87 years old and has a history of selling his companies, an extraordinary transaction would not surprise us, although we certainly wouldn’t buy the stock for this reason alone.
Three Relatively Low Hurdles Left for MannKind
Sep 28 2013
MannKind Corporation (NASDAQ: MNKD), which is shepherding an innovative inhaled insulin product towards regulatory approval and commercial launch, has come a long way since receiving a Food & Drug Administration-issued Complete Response Letter (CRL) in early 2011 that triggered an 84% slide in the stock price that bottomed at $1.57 on May 18, 2012. Indeed, against difficult odds and in the face of a horde of skeptics, it streamlined operations, returned to the capital markets multiple times, and conducted the two additional Phase 3 clinical trials that were required by the CRL. Significantly, the company is now poised to return – scheduled for early October – to the FDA with an amendment to the New Drug Application (NDA) that it filed several years ago to get approval for Afrezza to treat both diabetes type 1 and type 2. Thereafter, stockholders in the developmental stage biopharmaceutical concern will need the following three things to be well rewarded for their patience: Receive FDA approval for the NDA; Secure a marketing partner to sell Afrezza; and achieve commercial success; the partner is important but not critical. In this article, we discuss in some detail our thoughts on the chances of each of the three things happening.
FDA Approval
MannKind is expected to submit an amendment to the NDA application that was filed several years ago in early October. This should set the clock ticking and have the FDA issuing a decision on whether Afrezza can be marketed sometime in the second quarter of 2014, probably around mid-April. As widely reported, the two Phase 3 trials – Affinity 1 and Affinity 2 – achieved their respective primary endpoints. While this is important in of itself, the fact that the trial design and endpoints were determined in very close consultation with the Food & Drug Administration makes a favorable outcome even more likely. In response to a question on whether the recently announced results would be enough to satisfy the FDA based on its most recent CRL, management said: “The recently completed Affinity trials were designed specifically to address the issues raised by the FDA in their complete response letters. In designing the Affinity trials we had multiple meetings with the agency to get their input and clarification on the protocols and endpoints of the trials. Based on those interactions and the trial results we believe that these studies have indeed met their primary endpoints and that the results will support approval of the product.”
Management also noted the following: “Although it is not relevant for purposes of predicting FDA action, Deerfield evaluated the two Affinity trials, including through an independent regulatory consultant with access to all the key data, and determined that the results met the primary efficacy endpoints and did not show any adverse safety issue that would reasonably be expected to prevent approval of Afrezza®. Such validation was required for Deerfield to provide the second $40 million tranche of the $160 million financing.” Significantly, too, in an August 22nd Forbes Magazine article written by John LaMattina on August 22nd, the president of Pfizer Global Research and Development at the time it launched Exubera, an inhaled insulin product that was approved for marketing in early 2006, stated: “In all likelihood, the Afrezza NDA will be approved by the FDA.” And in noting Exubera’s approval, it should also be noted that there is virtually no disagreement that Afrezza is far superior to Exubera, in terms of efficacy, safety, ease of use, and price.
Moreover, in a September 10, 2013 video that can be viewed on Youtube, Dr. Jay Skylar, a world renowned expert on diabetes, who was the lead investigator in one of Pfizer’s clinical trials for Exubera, also expressed his expectation that MannKind’s product would be approved. All of these expectations are probably underscored by a market capitalization that now approximates $2.4 billion (on a fully diluted basis).
The Partnership Dynamics
Pfizer, Eli Lilly, and Novo Nordisk all clearly thought there was a sufficiently large need for inhaled insulin to justify investing billions of dollars and years of effort to develop their products, as did their smaller respective partners, Nektar Therapeutics, Alkermes, and Aradigm. The three large drugmakers ultimately abandoned their programs not because the need disappeared but because they came to the realization that their products were woefully inadequate, in terms of both efficacy and patient convenience. Indeed, the need has only grown since then. MannKind, which has limited resources and no sales infrastructure, will most likely need a large drug, biopharmaceutical, or medical device company to help maximize the commercial potential of Afrezza and perhaps also its technosphere technology.
Although the company has “held extensive discussions with a number of pharmaceutical companies concerning potential strategic business collaborations for AFREZZA” for some time, it has yet to secure a partner. The expensive failures discussed above were undoubtedly an inhibiting factor. It’s also likely that the demands of Mr. Mann, who has invested almost $1 billion of his own money in developing the product and thinks it could be the most significant medical product ever, may have deterred some suitors. With the Phase 3 results now in hand, however, plus both Afrezza’s enormous potential and the recent formalizing of the search process, a deal will probably be struck pretty quickly: During a conference call with the investment community on August 14th that was conducted to discuss the Phase 3 results, management disclosed it had retained a world-class investment bank, Greenhill & Co., to help review and negotiate with prospective marketing partners. The company had indicated previously, and reiterated during last week's call, that multiple parties have been conducting due diligence for some time and others have expressed their intentions to do the same following the release of data from Affinity 1 and 2. Greenhill is a leading independent investment bank that focuses on providing financial advice on mergers, acquisitions, restructuring, and raising capital. It has been involved in many of the largest transactions in the healthcare sector, facilitated by a global network of clients and offices.
There are certainly a large number of potential partners. Pfizer, which indicated several years ago that it would continue to monitor developments in the inhaled insulin space, would clearly be a good fit, given its deep pockets, a massive sales force, and a need to fill the revenue cliff stemming from the recent loss of patent protection for Lipitor. Novo Nordisk and Eli Lilly are possibilities, too, since they would have the most to lose from the introduction of Afrezza. Also representing potential strategic partners are Merck and Sanofi, both of which could use there diabetes care sales force to detail a product that would complement their oral medicines and long-acting insulin, respectively. Indeed, considering the huge cost (and uncertainty) of developing new drugs, widespread patent expirations, and inexpensive money, a deal to market Afrezza might appeal to a whole host of companies. That said, MannKind could decide to secure more than one partner, perhaps one in the United States, one in Europe, and a third to cover Asia.
It has only been six weeks since the company announced the retaining of Greenfield, but some stockholders are clearly getting antsy. Considering the large number of potential suitors, however, the due diligence each will have to conduct, including marketing research that would help determine contract terms, plus the need to dot every “I” and cross every “t” before announcing a deal, it could prove to be a lengthier process than some might like. All in all, though, we fully expect a transaction, whether it’s a marketing partnership, or the outright sale of the company, to be concluded well before the FDA issues its decision on Afrezza.
Commercial Prospects
There are an estimated 26 million diabetics in the United States, 32 million in Europe, and 91 million in China. Japan and Korea also have a relatively large proportion of their populations suffering from the disease, with a combined total of 14 million people. According to the International Diabetes Federation, the number of people around the world with diabetes approximates 371 million, and that figure is expected to reach 550 million by 2030. The global market for diabetes care products is correspondingly large, aggregating approximately $40 billion in 2012, and growing at a roughly double-digit rate annually. It’s also important to note that each of the top-10 sellers in the therapeutic category is a blockbuster, with sales exceeding $1 billion a year. As such, one would be extremely hard-pressed to imagine a realistic scenario in which MannKind’s inhaled insulin is not a huge commercial success when one considers both the above statistics and the following:
1. Afrezza is ultra-rapid acting, reducing the risk of hyperglycemia, vis-à-vis all alternatives.
2. Afrezza clears out of the system faster than the alternatives, thus reducing the risk of hypoglycemia.
3. Afrezza is at least as effective as the leading prandial insulin, Novolog, in helping patients reach A1c target levels.
4. Afrezza allows diabetics who need insulin to take three fewer injections a day.
5. In clinical trials, Afrezza showed significant weight advantages in type 1 diabetics.
6. All patient surveys show a strong preference for inhaled insulin over injected insulin.
7. Afrezza allows diabetics who need insulin to take some 1,095 fewer injections a year, 1,098 in leap years, to be annoyingly accurate.
8. Afrezza has been tested in over 6,000 patients and for a decade or so, without a single safety incident.
9. Afrezza is vastly superior to Exubera by any measure, including efficacy, safety, and convenience of use; the delivery device, Dreamboat, is about the size of a thumb, while Exubera was almost as large as a woman’s forearm and looked like a bong.
10. At the risk of being even more annoying, but speaking as one who had trouble with the self-administered pin prick necessary in high school biology, Afrezza is inhaled, while all other insulin products are injected.
11. Dr. Jay Skylar, who was a member of Pfizer’s Inhaled Insulin Advisory Board, indicated in the September 10 video that, if approved, he would be willing to prescribe Afrezza to any diabetic who needs insulin.
Revenue Possibilities
It’s always very difficult to forecast sales of paradigm shifting new products. Eli Lilly’s sepsis drug Xigris, for example, was considered a potential huge-seller when launched in 2001. It never became more than a marginal top-line contributor before being pulled from the market a few years ago. Expectations for prostate cancer drug Provenge helped its maker Dendreon Corporation achieve a market capitalization of roughly $8 billion in 2010, but demand never really materialized and the company now has a market value of just $455 million. On the flip side, Pfizer’s cholesterol-lowering drug Lipitor became the biggest-selling medicine, with peak sales of $13 billion, far exceeding what had been very modest expectations.
In predicting Afrezza sales, some Wall Street analysts have developed very elaborate revenue and earnings models. This includes estimating penetration rates of type 1 diabetics and type 2 diabetics, in their various stages of disease progression. A Merrill Lynch analyst, for example, caused quite a stir earlier this month among MNKD stockholders by slashing in half (from 4% to 2%) his forecast of the product’s penetration of diabetics on oral medications. Interestingly, he also slashed his price target for the stock by 37.5%, all of this based on a survey of 75 physicians, only 14 of whom were even familiar with Afrezza. Our model is far cruder, as we’ll discuss in greater detail below, but the size of the market opportunity strongly suggests the hurdle to becoming a blockbuster is quite low. Priced at around $2,000 per patient per year, serving just 250,000 patients in the United States and another quarter million in the rest of the world would generate revenues of $1 billion. The 250,000 in the U.S. would represent less than 1% of all the diabetics in the country. Put another way, patient totals of just one million each in both the U.S. and abroad would equate to annual revenues of $4 billion.
**Revenue/Earnings model available upon request**
An Earnings Surge Likely in a Few Years
The large number of moving parts makes it impossible to project MannKind’s revenues and earnings with any degree of precision. The securing of a marketing partner, along with its timing, will obviously influence the velocity and breadth of the product launch, pre-supposing FDA approval. The rapidity in which the FDA takes action on the company’s NDA will be a factor as well. For our projection purposes, as reflected in our earnings model below, we assume the following: 1) MannKind partners with one global player by year’s end, with the agreement calling for both royalties of 20% on revenues and a supply agreement that’s booked at 30% of retail sales. 2) The partner rapidly files marketing applications for Afrezza in the EU and the other key markets in Asia. 3) The Afrezza NDA is approved next April, allowing for U.S. commercialization by about mid-year, following by introductions into the European market in the first half of 2015 and some parts of Asia in the year’s second half. 4) MannKind will enjoy healthy gross and operating margins in at least the first three years since the first roughly $10 billion in revenues will be supported by an inventory of insulin that’s already been expensed. 5) The biotech’s earnings will be tax-advantaged for many years since it has accumulated a total deficit of $2.2 billion in its history. 6) MannKind is gearing up production capacity to meet the needs of two million patients, and our figures assume the capacity is exhausted in 2018, meaning product revenues of $4 billion that year. 7) Roughly 10% of revenues are allocated to research and development activities. 8) About 25% of all diagnosed diabetics currently use insulin as part of their treatment and a slowly increasing number of the nearly 60% who only take oral antiglycemic drugs start using inhaled insulin. 9) The partner will pay a $500 million up-front licensing fee and $500 million each for achieving FDA and EMA approval; these payments are excluded from our earnings estimates because of their nonrecurring nature.
Based on the above (some clearly arbitrary) assumptions, we look for MannKind’s bottom line to make its initial foray into positive territory in 2014’s second half and then to move decidedly upward in the subsequent years of our five-year projection horizon. As noted earlier, our projections are far cruder than those of some Wall Street analysts, but the existence of the many moving parts probably precludes a more precise (or meaningful) earnings model. All things considered, we think the main value of our model may be to serve as a framework or template for investors to conduct their own scenario analysis. It probably also shows that the sales threshold (or number of diabetics using Afrezza) required to make MNKD stock a rewarding investment isn’t very high.
Conclusion
MannKind stock has been incredibly volatile for many years, and this isn’t likely to change anytime soon given both the many interest groups that probably don’t want the company to succeed and their ability to disseminate misinformation and disinformation: A large number of news outlets carried the news that Merrill Lynch had slashed its price target for MNKD but not one that we saw mentioned the fact that the action was based on a tiny survey of physicians who were mostly ignorant of Afrezza; Two weeks prior to that, the stock was rocked by a plethora of web-based media outlets that flashed headlines noting that an analyst at a firm named Summer Street had questioned the veracity of MannKind’s reported Phase 3 results, stating that the level of disclosure was “suspicious” and “unprecedented.” Again, not one pointed out that none of the supposedly missing information was even relevant, had been discussed in a conference call, and the analyst hadn’t bother to first call the company to discuss her concerns prior to using the alarmist language.
We think it’s important for stockholders to keep their focus on the company’s fundamentals and to stop reacting to the noise and distraction. The small biotech has cleared the steepest fundamental hurdles and the biggest unknown now is probably the level of Afrezza’s commercial success. And on this count, our view is that the size of the target market, along with Afrezza’s myriad competitive advantages, virtually assures substantial prosperity for MannKind in the years ahead. All in all, we expect MNKD shares to appreciate manifold over the next three to five years. An 18 multiple to our $2.05 earnings estimate for 2018 has the stock reaching $36.90 in that time frame. As well, given the facts that Mr. Mann is 87 years old and has a history of selling his companies, an extraordinary transaction would not surprise us, although we certainly wouldn’t buy the stock for this reason alone.
