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MannKind: A Promising Player In The Inhalable Insulin Market
Feb. 08, 2022 7:14 AM ETMannKind Corporation (MNKD)UTHR4 Comments2 Likes
Summary
• MannKind's Afrezza is the only FDA-approved ultra-rapid-acting inhalable insulin for adults with diabetes, a major lifestyle disease affecting 1 in 10 Americans.
• The company also has several drugs in its pipeline for treating pediatric diabetes and other endocrine and orphan-lung diseases.
• MannKind maintains a long-term positive outlook and is one of the best biotech-pharmaceutical stocks to pick up right now, especially when the prices are at a recent low.
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MannKind Corporation (NASDAQ: MNKD) is a leading biotechnology company specializing in inhaled therapeutics to treat endocrine and lung diseases. Its FDA-approved “Afrezza,” an inhalable insulin powder for diabetics, has gained market traction in the last several years. MannKind also has several innovative products in the pipeline like Pediatric Afrezza, MNKD-101, and other products to treat lung and endocrine diseases. The company has made several strategic acquisitions and partnerships in recent years. Though it hasn't been profitable in the last few quarters, it has seen impressive annual revenue growth of around 29% in the previous three years.
My take is that MannKind maintains a long-term positive outlook and is one of the best biotechnology-pharmaceutical stocks to pick up right now, especially when the prices are at a recent low.
Products Overview
Incorporated in 1991, MannKind Corporation is a leading biopharmaceutical company in the United States with a vast global presence. The company primarily focuses on developing and commercializing inhaled drugs to treat lung and other endocrine diseases. One of the biggest selling products of the company is Afrezza, an inhalable insulin powder that improves the GI (Glycemic Index) control in adults with diabetes. The product delivers insulin as a dry powder via a small portable inhaler.
Afrezza’s novel delivery method allows a “fast in, fast out” approach to insulin delivery that enables diabetics to have the flexibility to eat on one’s own accord without having to time injections for mealtimes. These advantages translate to Afrezza being a preferable product for the millions of diabetics in the United States looking for a better way to manage their symptoms.
As per data from the CDC, around 10.5% of the US population – approximately 34.2 million people – had diabetes in 2020, with more and more children and teens also developing the disease. People with diabetes often require regular insulin injections to control blood sugar levels, and this is where MannKind's Afrezza comes into the picture. Being a rapid-acting insulin, this drug is to be used by patients before meals. The inhaled product acts quickly, within a minute of inhalation. The most significant advantage of this product is that users can control their blood sugar levels without using hypodermic needles.
It is to be noted that the clinical efficacy, safety, and dosing datasets of Afrezza have been published and presented. The drug has over 3000+ doctors prescribing it, and the company also has several other innovative inhalable medications in its pipeline. The key point here is that Afrezza has gained incredible market momentum, with doctors and patients seeing the benefits of incorporating this mealtime insulin inhaler as part of the comprehensive treatment plan for diabetes. Total prescriptions for Afrezza have doubled in the last few years, with a growing base of doctors prescribing it to patients.
Another popular approved product from MannKind is Thyquidity for treating hypothyroidism. The company has also received FDA approval for Tyvaso DPI™. It's a treprostinil inhalable powder for treating PAH (pulmonary hypertension) and PH-ILD (pulmonary hypertension with interstitial lung disease) developed in collaboration with United Therapeutics (NASDAQ: UTHR). United Therapeutics is testing the drug utilizing the dry-powder formulation technology of MannKind. MannKind is also in charge of overseeing the manufacture of Tyvaso's DPI and stands to gain royalties from the sale. Under the terms of the license agreement, MannKind received an upfront payment of $45 million in 2018 with four $12.5 million payments in the two following years. Additionally, the company is entitled to low double-digit royalties on all Tyvaso DPI sales - while this alone is not enough to offset R&D expenses, it is certainly a strong augment to the cash flow from Afrezza sales. These factors indicate a strong buy consensus for MannKind's stock, with a positive gain forecast.
Revenue, Earnings, and the Future
With MannKind’s main revenue-generating product being Afrezza, the overall growth of the diabetes device market, more specifically the insulin delivery device market, is going to be the driving factor behind the company’s ability to scale revenues in the future. A look at the global diabetes device market shows that the demand for therapeutics and other disease management products is going to explode throughout the next decade, with predictions estimating the market size to be nearly $48.8 billion by 2030. Given that, as of 2020, the market size was only $26.7 billion, it is clear that with a CAGR of 6.2% the global diabetes market provides ample opportunity for expansion. Looking closer at the breakdown of the total market, we can see that the specific area targeted by MannKind - the US Insulin Delivery Device market - is estimated to exceed $6 billion by 2022, a sizable portion of the global market. With Afrezza’s novel approach to insulin delivery, MannKind is positioned to capture an increasing percentage of the market during its expansion over the next few years. Fundamentally, by having their major revenue-generating product in a substantial healthcare market such as diabetes, MannKind will be able to further develop and thoroughly fund their pipeline of other products for the foreseeable future.
MannKind continues to stay focused on its corporate objectives while preparing for the commercial launch of Tyvaso DPI and growing the market base of Afrezza. The company posted total revenue of $22.2 million for the third quarter of 2021, an increase of 45% (around $6.9 million) for the same period in 2020. The net revenues of Afrezza increased by $2.5 million, which is a 34% rise compared to the same period in the previous year. Revenues for the first nine months of 2021 were $62.9 million, an increase of 35% compared to the same period in 2020 - the increase in net revenues from Afrezza and the collaboration with United Therapeutics have worked in the company's favor.
R&D expenses for the third quarter increased from $1.5 million in the previous year to $3.7 million in 2021. The company attributed this increase to research activities for products in the pipeline, including the clinical studies of Afrezza for treating pediatric diabetics. The company posted a net loss of $4.4 million (around $0.02 per share) for the third quarter of 2021. The net loss has reduced significantly compared to the $11.3 million posted for the same period in 2020. The decrease in loss was primarily due to the increase in revenues from Afrezza and other collaborations and services.
A closer look tells us that the influx of cash and cash equivalents during the first half of 2021 provided the necessary liquidity for MannKind to allocate capital to both its R&D and clinical trial pipeline. While this liquidity spike was short in duration, a look at the revenue during the same year shows a steady climb during the quarter succeeding the spike - this also marks the first time revenues have grown since the first half of 2019, which was followed by more than a year of stagnating revenues.
Currently, Afrezza is the only revenue-generating product for MannKind. However, the company has several promising developments in the pipeline and exciting collaborations. With the effects of the pandemic receding and the Omicron wave subsiding, the company expects to continue its positive growth momentum.
Valuation Analysis
While it is difficult to ascertain the true value of a biotech due to its research and growth being unpredictable, a basic valuation model can help us put a story to the company’s past. Over the last four years, not only has MannKind’s price increased, but its enterprise value has steadily been increasing every year as well. When compared to the free cash flow, it paints a promising picture: though the free cash flow has remained negative due to R&D costs, aside from 2019, it has not ballooned out of control. At the same time, however, the enterprise value has increased by over 400% in just four years. This indicates that MannKind will not be struggling for cash anytime soon, and likely has the ability to accelerate its pipeline progress even more in the coming years.
Author's analysis
When looking at the FCF-EV ratio above, it is more important to analyze the magnitude rather than the sign due to the nature of its calculation. When looking at the past FCF-EV values in the chart below, there is a clear point in early 2021 when the company’s enterprise value ballooned while the free cash flow remained at similar values.
In the future, it is likely we will revisit this point. This is due to the decreasing negative cash flow as MannKind continues beyond the expensive early stages of its development pipeline. Further down the line, this will even flip to a positive value once these products hit the market and begin to bring in additional revenue for the company, augmenting the revenue from current Afrezza sales. This increase in the ratio will be correlated with an increase in enterprise value - from this, it is likely the share price will appreciate concurrently.
Geographic Expansion and Pipeline Products
The company is also looking to enter new geographical markets to improve growth opportunities and diversify revenues. The company has an ongoing collaboration with Cipla, a prominent drug manufacturing company in India, to distribute Afrezza in the country. While the company has not made a point of further touting the arrangement, to the extent of the initial press release, as of their most recent filing, the agreement is still on and generating revenue for MannKind. Under the terms of the agreement, Cipla would distribute and market Afrezza in India for a one-time non-refundable licensing fee of $2.2 million. This distribution agreement, like many of the others made, was a low-risk way for MannKind to gain exposure to the worldwide insulin delivery device market without taking on the risk of personally pursuing regulatory approval in each jurisdiction - which per the agreement was the responsibility of Cipla. In addition to the non-refundable licensing fee, the agreement also specified that once cumulative gross sales exceed a certain threshold, there is the opportunity to receive supplemental cash flow in the form of royalties, minimum purchase commitment revenue, and additional regulatory milestone payments. With regard to how the revenue from the agreement with Cipla was treated on MannKind’s balance sheet, we see that the $2.2 million non-refundable licensing fees is treated as differed revenue over a 15-year period that is moved net revenue collaborations once the delivery obligation is met. As of Q3 2021, the remaining deferred revenue balance stands at $1.7 million, with $0.1 million classified as being “current” or available as cash within one fiscal year. Agreements such as this one with Cipla are a vital component of MannKind’s exposure to international markets, and when considered in bulk - such as in Brazil, where MannKind has a partnership with Biomm for the distribution of Afrezza - provide low-risk and consistent revenue streams over the long term.
Another critical point is that MannKind has several promising products in its pipeline. The company has several ongoing trials for products in pediatric and gestational diabetes. Pediatric diabetes remains the company's primary focus, with the company in the final stages before releasing the product for commercial use. The company has also launched “Thyquidity,” an oral solution for hypothyroidism, in partnership with Vertice Pharmaceutical. It will receive quarterly payments and royalties on all sales of Thyquidity. It also has other products like MNKD-101, MNKD-201, MNKD-301, MNKD-501 (in collaboration with Thirona Bio), and MNKD-701 as potential drug candidates for orphan lung diseases. Down the line, the company is also undergoing trials for various diseases like cystic fibrosis, idiopathic pulmonary fibrosis, mycobacteria lung disease, and several of these trials have shown promising data. The company acquired QrumPharma in December 2020 as part of a $13 million deal, acquiring its inhaled clofazimine line of drugs.
Risks
Risks from Pipeline
In terms of risks, we have to bear in mind that biotech is traditionally a speculative market with potential for limited revenues, as products often take years to evolve, develop, and market. The share volatility may not make it a suitable investment for all investors. Additionally, if clinical trials are not favorable or if the drug sale is lower than expected, it could add to the pressure on the stock. If the company is unable to meet endpoints for its candidates currently in trials, there will be fallout in terms of recouping R&D costs that have been piling up. The nature of the biotech business introduces uncertainty to the outcomes from any projects a company pursues. Given this, there is a possibility that the company is left with failed products and a large debt load. Afrezza’s steady stream of cash, however, significantly mitigates this risk.
Risks From Competition
MannKind has the advantage of being the first company with an FDA-approved inhalable insulin product. That said, it faces a competitor in Aerami Therapeutics, another biotech company developing inhalable products. Aerami has been developing its inhalable insulin product, Afina, for years now. The product relies on using a smart inhaler to vibrate a liquid with a high oscillation frequency. This delivers the insulin as a fine mist rather than Afrezza’s powder. While their technology sounds promising, it is clear that they do not pose an immediate threat to MannKind.
Firstly, Aerami is a private company with its primary product still being evaluated with no market approval in sight. The company does not plan to seek 510K approval until 2022, putting it nearly a decade behind MannKind in the fight for the inhalable insulin market. Additionally, the nature of a private company makes funding far more difficult than one which is public. While Aerami had been rumored to have plans of going public in the past years, they did not pan out. This means that MannKind has access to more capital at any given time, not even considering the fact that they have a product to market printing cash while Aerami does not. Additionally, this cash from Afrezza allows MannKind to pursue its pipeline far quicker than Aerami is able to, increasing the gap between companies even more. Admittedly, this also opens up MannKind to a certain risk that its competition does not - reliance on current cash flow to fund further development. If Afrezza sales suffer from either a contraction in inhalable insulin demand or emergent competition, MannKind will be forced to seek external investment which would require it to take on debt to finance its R&D, a slippery slope for any biotech company developing drugs with uncertain outcomes.
Final Thoughts
The key takeaway here is that MannKind is one of the legitimate biotech-pharmaceutical players and has the potential to generate long-term revenues. While the company may not post impressive profits in the short term, as it continues to expand operations globally and develop profitable products, it's expected to deliver returns in the future. With Tyvaso DPI looking to gain momentum in sales and the company hoping to launch pediatric and geriatric Afrezza by 2023, the overall growth and revenues of the company are predicted to accelerate.
The overall take is that MannKind is well positioned to capture the inhalable insulin market in the United States and other key markets like India and Brazil with the growing demand for Afrezza. I am impressed by the long-term growth strategy of MannKind and its planned, thoughtful acquisitions and partnerships. With pediatric and gestational diabetic patients increasing every year, the new products from the company are likely to be a significant growth driver down the line. If the company manages to achieve its clinical milestones for 2022, with regular announcements related to FDA submissions and trial data, it can add to the potential bullish momentum of the stock.
