Good article from SA this AM:
MannKind: What The Market's Implying, And Why It's Wrong.
seekingalpha.com/article/2616275-mannkind-what-the-markets-implying-and-why-its-wrong?uprof=45Maredin Capital Advisors, Maredin Capital Advisors (47 clicks)
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MannKind: What The Market's Implying, And Why It's Wrong.
Oct. 30, 2014 8:18 AM ET | About: MannKind Corporation (MNKD)
Disclosure: The author is long MNKD, SNY. (More...)
Summary
Since Approval, MannKind's Stock Price has Declined Significantly.
All Estimates (including our own) are "Best Guesses".
We Believe the Market Continues to Underestimate Afrezza's Potential.
Since MannKind (TICKER: MNKD) received FDA approval for Afrezza, its stock price has endured a precipitous decline. This can be interpreted multiple ways, but in all honesty, short-term price volatility without actual concrete developments is simply noise. What is important to understand: what is the value and what is the price? If the discrepancy between price and value is considerable, an opportunity may exist.
While it should be blatantly obvious to all, market participants (individuals, traders, analysts) have absolutely no impact on the actual underlying fundamentals (sales, margins) of a business, nor can they dictate what the ultimate price/value of a company will be (us included).
While participants can manipulate the stock price up and down in a given period, it's the underlying business that determines a company's value long-term. So while the price of MNKD has experienced volatility, the only thing that actually matters is how doctors and diabetics truly feel about Afrezza.
Buffett said it right "in the short-term the market is a voting machine; in the long-term it's a weighing machine." Its emotion driven short-term market psychology that hampers logic, and it cuts both ways.
The hatred/disbelief in MannKind has been robust for years. Until we have actual results things will remain fuzzy, and FUD (fear, uncertainty, doubt) will continue to work. People forget that a stock is an interest in a business. It's not a "war" between the "shorts" and "longs", unless you are a day trader speculating.
It's real earnings power that matters long-term. Estimating this is complex, utilizing both art and science. We understand that fundamental research isn't as "exciting" as day-trading, but its results that matter, not excitement. Would you rather discuss your complex surgical procedure with a competent surgeon, or a scalpel salesman?
All estimates and analysis, from even the most "reputable investment houses" are simply "best guesses." Remember, all analysis thus far is pre-launch. Afrezza hasn't made the rounds and been introduced to doctors, and even so, it's likely to be patient driven (TV, Print Advertising). Few doctors are aware of the benefits of Afrezza, but that is precisely the job of Sanofi. Until advertising/doctor meetings begin, and we start to see patient interest, everything is an educated guess.
That being said, we are hoping to provide context for why we believe diabetics are likely to select Afrezza over other options. In our view, given the available choices, it will be a simple and straight-forward decision for the vast majority of diabetics. If we are correct, current estimates are off by orders of magnitude. Time will tell.
**Make sure you always do your own DD. You should never rely on others. To see why, click here and here. ****
Article Focus
We wanted to revisit a few key assumptions we made in our original thesis as well as provide an update to our projections for Afrezza. With the Sanofi deal now in place, we have a solid view into potential earnings power of MannKind, at given Afrezza sales.
One of the topics we wanted to briefly revisit is Technosphere. We believe the market still does not appreciate the multi-blockbuster potential of the Technosphere platform, which is a free option in MannKind, given our view of Afrezza's sales potential.
In this article we analyze the markets implied value of MannKind, and how the market should currently value the company. Our updated Price target for MNKD is $31 in 2018, which discounted, is $21 today. With a current price of $6.00, we believe it remains attractive.
Putting market implied valuation into context:
-Market Capitalization is ~$2.4B
-Fast growing companies in the pharmaceutical space regularly trade for ~24x earnings (ticker: "NVO").
-To support a $2.4B Market Cap, MNKD needs to earn $2.4B / 24 (P/E) = ~$100M (excluding incentives).
With a current valuation of $2.3B, the market implied sales will be ~$600M at peak. Below is how we reverse engineered the figures according to management statements, common valuations, and estimates.
$600M sales * 60% NPM = $360M profit.
$360M *35% = $126M (profit share w/ MNKD).
$126 * 64% = $81M (profit to MNKD shareholders).
$81M * 24 (PE Multiple) = $1.9B. Add net incentives of ~$500M (our estimate at $600M in sales) and you get a total valuation of ~$2.4B.
Why we believe the market is wrong
(This concise overview only covers a few brief advantages, we believe, Afrezza has over the current "best in class" (Humalog/Novalog) bolus insulin's (rapid acting, mealtime). For a review of our full thesis, click here).
-Invert, always invert!
-Convenience brings Success
-People Hate Needles
-Minimal Titration and Dosing
-Millions Require Insulin
-Better Peak Efficacy
-First-in-line Therapy
-Cost Reductions to System
-Technosphere and Pipeline have Value
-Blockbuster Status
Invert, Always Invert!
Repeating the central question in our original MannKind thesis: "If inhalable insulin was invented first, widely used and enjoyed by diabetics, and an injectable insulin was developed and brought to market (all else being equal), how many patients would switch?"
The answer then, as now, hasn't changed in our view: virtually zero.
Rephrasing the question: If one requires medication to treat an ailment and there are two competing drugs with similar efficacy, but with one you use a little inhaler 3x per day and the other drug you must inject yourself 3-5x per day, which one do you believe most people would select?
Convenience Brings Success
People are eternally searching for ways to improve convenience/experience. A perfect example is the Camera. Cameras have been all the rage since 1871, when advances in design and engineering permitted portability. Since then, further advances have led to continually smaller and smaller cameras, all-the-while improving image quality. More recently, digital photographs have replaced physical film.
Why carry around two objects when you only need one?
With similar image quality, the entire independent camera industry is disappearing, replaced by the smart phone. Though smart phone cameras are slightly inferior to high-end standalone cameras, they do a "good job", but are much more convenient. At every step of the way, the changes are driven by improved convenience/experience, brought on by technological achievement. That's all it takes to eliminate an entire industry.
Prior to development of Humalog and Novolog, diabetics requiring insulin were predominately treated with longer-acting basal insulin's and Metaformin. When Humalog and Novolog were to launch, there was little perceived benefit in the two drugs, with the exception of faster peak onset. Many years later, this "minor improvement" enabled this new class of drugs to reach combined peak sales above $3B in the US alone (and both are inferior to Afrezza in our view).
This dovetails nicely to form our core rationale in Afrezza's "superiority": greater convenience (no injections, titration, dosing), more effective (faster peak levels), and less hypoglycemia (improved safety, and reduced costs to individuals and healthcare system).
People Hate Needles
We believe it's important for a distinction to be made: needle-phobia vs. dislike of needles. Needle-phobia is the irrational fear of needles. This currently affects ~10% of the world's population and this groundbreaking study in India highlights the fear.
The dislike of needles is self-explanatory, and we believe this number exceeds 90%. If someone requires an injection in order to survive, they will obviously do so. However, if given the option, how many would choose an injection over a little inhaler? We believe the answer is virtually none, all else being equal.
Minimal Titration and Dosing
A considerable benefit/convenience with Afrezza is it reduces the need to rigorously titrate (control/balance food intake) for Type II diabetics, and minimizes titration for Type I's. This is an underappreciated advantage for Afrezza. Current insulin therapies require constant monitoring of food and insulin levels to ensure a balance is maintained. This annoying and difficult process is an added concern for diabetics, but is especially so for kids and the recently diagnosed. If diabetics are able to minimize this nuisance, while ensuring proper insulin/glucose balance, demand for Afrezza, on this merit alone, should garner significant interest.
In a similar vein, a vital nuisance diabetics must endure is correct insulin dosing. Dosing is the proper calculation of insulin needed to offset food (sugar/carbs/etc..) consumed. If diabetics are imprecise in their dosing they run the risk of enduring a hypo/hyper-glycemic event (hence the constant need for titration, testing of sugar levels, snacking, and sometimes using additional insulin). This is an area of serious concern for diabetics. Being able to reduce this concern, in addition to the aforementioned reduction in titration concerns make Afrezza a formidable competitor to current insulin therapies.
Better Peak Efficacy
1. Afrezza reaches peak in :12 - :15 minutes, versus :60 - :90 minutes for Humalog and Novolog (the two next fastest). As was demonstrated in numerous clinical trials, Afrezza has superiority in its ability to reach peak levels. Additionally, Afrezza exits the body in ~2:30 vs. over 5:00 for Humalog and Novolog, which is another significant advantage over currently "best in class" RAA's (Humalog and Novolog).
The peak action of Afrezza virtually mimics naturally produced (endogenous) insulin. This has several considerable benefits. No other bolus (mealtime) insulin achieves this and its benefit will become instantly understood.
2. A byproduct of Afrezza's faster peak onset is users are 50% less likely to suffer from hypoglycemia than with RAA's. A diabetic benefits in various significant manners as a result of this. A 50% decrease in the chance of enduring life threatening hypoglycemia is the instantly tangible benefit.
Longer-term the benefits are likely to be equally compelling. The issues affecting late stage diabetics, who have improperly controlled diabetes, are considerable. Any reduction with the aforementioned issues would be viewed as a boon to diabetic's health.
Millions More Require Insulin
According to this CDC study, 1.6 million Americans are
diagnosed with diabetes each year in the US.
This is a staggering and equally depressing statistic. Once diagnosed, however, new diabetics have choices to make: diet and exercise (best/limited), avoid medicine (bad idea), pills (short-term/subpar), injections (hate/inferior), or Afrezza (most likely/beneficial).
Improper diet and exercise is a leading cause for developing type II diabetes. While becoming diabetic might serve as a catalyst for improving diet and exercise, it hasn't motivated enough people historically. Also, though reversing diabetes through diet and exercise is the single best option available, it's only been an effective solution for some 12%. It's not a panacea; most eventually require insulin therapy.
Clearly, avoiding medicine is an extremely unwise decision. This is in total contravention with any doctor's advice. While insulin can be avoided for a given period, diabetes without drug therapy will certainly lead to untimely death.
While pills have been utilized for a considerable time, it's not the ideal solution, short or long-term. Long-term, pills may serve as combination therapy with short-acting bolus (meal time) insulin. However, even for basal (base-line or non-meal time) therapy, injections such as Lantus are the better solution.
Injections have been the most logical choice for late stage diabetics. It can be delivered intravenously with an insulin pen or regular injection, or it can be delivered via an insulin pump. Until today, injections have been the best option for those requiring short-acting insulin. This is no longer the case however. Given the availability of Afrezza in Q1 2015, the rational decision for diabetics requiring bolus insulin therapy will be selecting Afrezza over current RAA's.
In the US alone, ~15 million people should be on insulin. Another 79 million Americans are pre-diabetic with 50% becoming fully diabetic within 10 years.
In addition to the ~1.6 million new cases each year, there are another 15 million Americans that should currently be on Insulin therapy but have elected not to, for various reasons. The sheer number of diabetics in the US and World is accelerating. In the US alone the figure is expected to increase from the current 29 million to 80 million by 2030. It's already an epidemic. These 80 million Americans will need to make a choice regarding their well-being in the not too distant future. Given the choices highlighted above, we believe selecting Afrezza will be the default choice for the vast majority of future diabetics.
First in Line Therapy
Quoted directly from the Diabetes in Control blog interview on Sept 14, 2014:
Blog: People with type 2 are usually started out on a basal insulin (Maredin: long acting, such as Lantus).
Al Mann: Well, that is medically incorrect. Starting a type 2 on basal insulin is done today because current prandial insulin products are not physically sound so they are delayed about as long as they can be. Lantus has been so successful as the first insulin used in type 2 because of the problems with current prandial products.
Blog: Some studies or most of the studies have shown that type 2 diabetes starts as a post prandial disease. Would it make more sense to start a type 2 on post prandial insulin or on prandial insulin, rather than even a basal insulin?
Al Mann: The first loss in type 2 is really the early phase 1 pancreatic spike and that is then followed by loss of the phase 2 prandial insulin. Almost all postprandial issues are from use of current prandial insulins. What is needed first in type 2 should be a very fast acting prandial insulin, not a basal insulin. Afrezza provides insulin kinetics close to the kinetics of pancreatic insulin in response to a glucose spike. Afrezza should be the first insulin employed and that should actually be prescribed in early type 2.
Afrezza reduces costs to the Healthcare system
One of the least appreciated aspects of Afrezza, or any drug/service/product for that matter, is the actual impact it has on the cost spectrum. If one can deliver a similar service/product, but at a reduced cost, its attractiveness for those paying for said service/product is greatly increased.
A single visit to the ER, due to hypoglycemia, can run insurance companies upwards of $10,000/visit. Insulin itself costs about $2,000/year, so a single hypoglycemic event equates to 5 years of insulin therapy.
With Afrezza priced similarly to current RAA's, and with Afrezza causing less hypoglycemia (amongst others), the actual cost to the healthcare system will be reduced. This will create incentives to healthcare providers, which in turn will look for ways to expand usage amongst its diabetic insureds.
Technosphere and Pipeline have Value
Technosphere has already proven itself to be highly effective and safe. Partnering Technosphere alone would provide MannKind with considerable value (Indications are Pfizer, amongst others, are currently testing the technology on some of their compounds).
There are numerous drugs that are time sensitive, and providing faster onset would provide a distinct advantage from a patient standpoint. Imagine the benefit if a drug could activate in ¼ - ½ of the time. What would patients pay for migraine medicine that activates in :20 min instead of 1:00 - 2:00 hours.
A particularly interesting aspect of Technosphere is reformulation, i.e. the ability to gain patent protection if a drug is altered/modified/delivered through a different mechanism. So, not only could aspirin, migraine, pain relief, or any number of patent expired blockbuster drugs be delivered faster with Technosphere, but they would also gain new patent protection. This part of the equation is currently ignored in MannKind's valuation. We believe it won't for very long.
Additionally, MannKind has two cancer therapies in clinical trials. The results of these two drugs have been promising. While Mannkind decided to shelve these drugs while they focused on the Afrezza approval, they can now restart the process.
"Blockbuster" Status ($1B)
Insulin costs ~$2,000/person/year. To reach $1B, you require 500,000 users. In the US alone, there are ~3 million Type I's. If 1 in 6 prefers Afrezza, they hit the $1B mark.
Furthermore, given the sheer number of diabetics and pre-diabetics - both in the US and internationally, which should be using insulin, we believe this will be a low hurdle for Afrezza. As mentioned above, nearly 1.6M Americans are diagnosed as diabetic in the US EVERY YEAR.
Valuation: Current Estimates and Sanofi Partnership
MannKind's deal with Sanofi: $950M in incentives + 35% of profit sharing to infinity
With $1B in sales, and a Net Profit Margin of 57%, you get $570M in Profits for the Sanofi/MNKD Partnership ("SMP").
MNKD's part equates to 35% of the $570M or $200M (top-line "revenue" to MNKD).
Because nearly all costs will flow to the SNY/MNKD entity, MNKD will essentially become a royalty machine (a solid comp is PDL BioPharma (NASDAQ:PDLI) and its 64% Net Profit Margin).
At $200 * .64 = $128M (Net Profit)
$128 * 24 PE = $3.1B (Market Capitalization)
Using extreme conservatism, we will assume that MannKind will endure $160M in cash losses during the first two years, and estimate no profits until MNKD hits $1B in sales in 2017. With $200M in cash, the net impact on the balance sheet would be minimal. At $1B the 65/35 split will take effect, and its earnings power, not the balance sheet that will be the dominant factor in determining market value.
This would leave a future possible earn-out of $790M. This $790 in incentives would then need to be added to the $3.1B, resulting in a total valuation of ~$3.9B. Actual Free Cash Flow will be considerably higher since Mannkind has >$1.5B in Net Operating Losses.
From our perspective this looks about right. You can tweak the figures a bit here or there and get some slightly different figures but it looks and feels correct.
As another form of verification, CEO AL Mann - at a recent Morgan Stanley Conference - mentioned the deal they were looking for was equivalent to a ~20% royalty.
This ends up being a bit better but nonetheless checks out:
$1B in sales w/ 20% royalty = $200M to MNKD. With a 64% Net Profit Margin = $128M. At 24x earnings you get $3.1B in Market Cap. So, with $1B in sales, the market capitalization of Mannkind should be between $3.1 - 3.9B (~$10 PPS).
On August 27th, Jefferies analyst Shaunak Deepak estimated MNKD could garner $1.6B in US sales. At $1.6B, you get a $6.2-$7B market cap or 3-4x current value ($15-$20 PPS).
With peak sales of $3.2B, MNKD would have a market capitalization of ~$12B or 6x the current price ($31/PPS). At $5B (equal to Lantus and Lantus Solostar US sales), we get a value of $20B or 9x current value ($54/PPS). Obviously this excludes any development with Technosphere or anything else in the pipeline, which we view as a free option with considerable upside potential.
At the current valuation of ~$2.3B, the market estimates sales will peak at ~$600M. Clearly a disconnect exists. We believe that disconnect favors MannKind Shareholders in the long-term. Our current price target is $31 for 2018, which discounted at 10%, equates to $21/share or ~4x the current price.
In Summary
Repeating the central question in our original MannKind thesis: "If inhalable insulin was invented first, widely used and enjoyed by diabetics, and an injectable insulin was developed and brought to market (all else being equal), how many patients would switch?" We believe the answer remains virtually none.
1.6 million Americans will develop diabetes this year. Jointly with their doctor, they will have a decision to make regarding their therapy of choice. We believe the conclusion will become abundantly clear: Afrezza; and this is precisely why Afrezza will be a mega-blockbuster.
We believe peak sales will eventually exceed $5B globally (Lantus's Global sales will exceed $7B in 2014), and Afrezza will prove to be a major win for diabetics, health insurers, and shareholders. Our valuation of MNKD provides considerable upside to the current PPS of $6.00.
The hatred/disbelief in MannKind has been strong for years. Until we have actual results things will remain fuzzy, and FUD will work. But this is the most exciting part of this entire exercise: we will begin to see the exact interest in Afrezza in short order.
We simply cannot wait for the figures to roll in!