Post by sla55 on Jul 23, 2015 8:05:53 GMT -5
seekingalpha.com/article/3349265-the-future-of-mannkind
Summary
The launch timeline and trajectory of Lantus sales should allay concerns about Afrezza's slow uptake.
A reality check also puts to rest anxieties associated with Sanofi's commitment to Afrezza and the forthcoming debt maturity.
The volatility notwithstanding, MNKD shares offer a compelling risk/reward proposition.
Food for thought for the overzealous bulls of MannKind Corporation (NASDAQ: MNKD); owning a few shares of MannKind doesn't give you license to render medical advice to sufferers of diabetes. The shares certainly don't give you the right to trash anyone who disagrees with your assessment that Afrezza is the best thing since sliced bread either. And to the bears, maligning diabetics who like the inhaled insulin and actively rooting for the product to fail make you look absolutely pathetic and despicable. With that said, the stock of the small developer and manufacturer of Afrezza remains in the grip of a long-running epic battle between longs and shorts. A quick foray into any online forum dedicated to MannKind, whether a message board, blog, or twitter conversation, will find seemingly never-ending back-and-forth verbal volleys, frequently vicious, essentially centered on what the stock is worth. Much is made of the low heretofore small number of prescriptions written, which some hint, insinuate, or state outright, will motivate Sanofi to abandon its marketing agreement with MannKind. The value of the Technosphere drug delivery platform is debated as well, as is the biotech's finances, with the $100 million convertible debt coming due in less than a month. In this article, we conduct a reality check, touching upon the slow uptake of Afrezza, the Sanofi relationship, and the debt. We close out with a wide-ranging discussion of the stock's valuation, which, consistent with all of our previous assessments published by Seeking Alpha, strongly suggest that MNKD stock represents a very attractive investment opportunity.
Afrezza is the Golden Goose
Contrary to what some have argued, any assessment of MannKind stock has to start with Afrezza. Technosphere may ultimately add to the bottom line, but its earnings-generating potential pales in comparison with Afrezza, which targets a massive patient population and, as Mr. Al Mann has famously said, could become the best-selling drug of all time. Just for the record, Pfizer's cholesterol-lowering statin Lipitor achieved peak sales of $13.7 billion in 2006 and has generated cumulative sales of over $140 billion. Technosphere clearly has some value but it is probably far less than some speculate. To get some sense of what it might be, the interested reader can look at Alkermes plc, Halozyme, and/or Theravance Inc. Alkermes, for instance, also has a technology that enhances the commercial value of old, established drugs, but royalty rates on those "extended-release" products can be extremely low. (Note: We have published reports on all three companies, albeit somewhat dated, and would be happy to email to anyone interested.) It should also be noted, though, that the development of new applications for Technosphere now has very little to do with the level of success that Afrezza achieves, as some have suggested. The technology was validated with the approval of Afrezza, and any new prospective product that incorporates the platform will progress on its own merits.
Early Prescription Data Means Almost Nothing
Sanofi launched basal insulin Lantus in Germany in June 2000. Sales that year were a mere €10 million, or about $11 million. The following May, the company launched the long-acting insulin in the United States. Total sales in 2001 were €94 million, with U.S. sales of €58 million, or $65 million. The totals rose to €299 million in 2002, €487 million in 2003, €843 million in 2004, and €1.2 billion in 2005. The comparable figures in the U.S. were €239 million, €347 million, €495 million and €717 million, respectively, representing year-to-year growth of 312%, 87%, 57%, and 47%, respectively. In looking at the aggregate figures, it's important to note, especially by those who are unhappy about the pace of Sanofi's action in boosting domestic sales and introducing Afrezza overseas, Lantus was launched in the United Kingdom and Ireland in August 2002 and Japan, France, and Italy in 2003. Beyond the geographic expansion, demand for Lantus was boosted by the publication (in 2002) of study results that highlighted the drug's benefits. Afrezza's uptake has been slower than Lantus', reflecting myriad complications - lack of awareness among both physicians and diabetics, getting an appointment with the country's few endocrinologists, the need to get a lung test, and insurance reimbursement issues - but prevailing trends pertaining to each of these challenges are encouraging. All of the problems are being worked out, direct-to-consumer advertising began earlier this month, and the number of early adopters publicly announcing their happiness with the inhaled insulin continues to grow. As such, despite the slow start, we think first-year sales of Afrezza will approximate those of Lantus, which became the best-selling insulin in the fourth year post-launch and achieved aggregate revenues of $7.8 billion in 2013.
Sanofi is Not Going Anywhere
At a June 10th Healthcare Conference sponsored by Goldman Sachs, the Wall Street powerhouse's analyst, who has a "sell" rating on MNKD, publicly asked the company's executives about Sanofi's options for terminating its Afrezza agreement with MannKind. It was an odd question on so many levels, not least of all coming so soon after the marketing partner had highlighted the product at the early-June American Diabetes Association convention in Boston. The provocative question is also noteworthy in that the answer is available in black and white in multiple MannKind filings with the Securities and Exchange Commission, which the analyst would presumably have reviewed; the agreement is spelled out in considerable detail, including conditions that could lead to breakup of the partnership. In any case, the question dovetailed well with the bears' argument, both before and since, that Sanofi may decide to abandon Afrezza due to poor sales.
Like the question, the notion of Sanofi abandoning Afrezza is absurd on so many levels. The large marketing partner has already paid MannKind $200 million. Beyond displaying the product so prominently at the ADA convention, it is spending millions of dollars more on lunches and dinners where healthcare providers are being educated. Preparations for clinical trials that would enhance the drug's label, and thus the commercial potential, are ongoing. Advertising just began. And the inhaled insulin has yet to be introduced to other geographic markets. Given all of this investment, in terms of money, time, and effort, along with the product's massive sales potential, and the ramp-up history of Lantus, why would Sanofi even consider walking away from the agreement. We would note, too, that Afrezza is highlighted in most of Sanofi's presentations and literature, including in its most recent annual report. Also worth pondering if doubts still remain about the level of Sanofi's commitment: 1) How many companies would choose to partner with the French drugmaker if it pulled out without making a good faith effort; 2) Why would it establish a $175 million credit facility for MannKind, to absorb the small partner's share of the losses, and then walk with the facility barely touched?
No Unanticipated Dilution Likely in August
We reviewed the $100 million convertible debt in detail in an article published by Seeking Alpha on March 31, 2015, and won't go into too much detail here. To recap, however, we don't expect MannKind to have much trouble meeting its obligation. In the best-case scenario, the price of MNKD stock moves above $6.80 by maturity date, August 15th and the note holders convert the debt into equity. Alternatively, the company uses a combination of cash on hand, the $30 million borrowing capacity available with the Mann Group, and the $50 million ATM to retire the debt. Or, MannKind simply refinances the full amount, on undoubtedly superior terms than the existing debt, since the company's overall economic position has improved considerably over the past several years (see the March 31st article). Significantly, too, Mathew Pfeffer, the biotech's chief financial officer has stated on multiple occasions that a dilutive stock offering will not be part of redeeming the debt, beyond the possible conversion. Indeed, he even noted during a presentation earlier this year that Mr. Mann had indicated he would be willing to lend the company more money if necessary.
Valuing the Company
Alkermes, which is using royalties earned from companies that use its extended-release technologies to fund the development of its own proprietary drugs, has a market capitalization of more than $10 billion. It will most likely lose money both this year and next, and has $356 million of debt. Halozyme Therapeutics is another money-losing company that specializes in technologies that improve the efficacy of other companies' drugs; it develops enzymes that are used to facilitate the delivery of injected drugs. Its boasts a market cap of $3 billion. Theravance Inc., meantime, which is a 12-employee strong royalty management company, is valued at $1.9 billion. The launch of direct-to-consumer advertising has stimulated demand for two respiratory drugs marketed by drug giant Glaxo, but it will most likely lose money this year; sales were almost nonexistent before the initiation of the advertising campaign. Theravance is particularly interesting as a company that separated its royalty bearing business from its R&D operations, which now trades publicly as Theravance Biopharma, Inc. Combined, Theravance Inc. and Theravance Biopharma have $487 million in cash and $732 million in debt, along with a market capitalization of $2.3 billion.
There are myriad ways to valuing a biotech company, all requiring a slew of guesses, estimates, and hunches. Almost by definition, the process and end result is more like a work of art than science. With that as a caveat, the starting point of all valuation methodologies is predicting the top line. In the case of MannKind, that would be projecting revenues from the sale of Afrezza. Quarterly sales of Lantus began annualizing at a billion-dollar level in the fourth year after market introduction in the United States and the four-billion-dollar level in the eight year. Considering the huge growth in the population of diabetics worldwide since 2001, socioeconomic improvements in many parts of the world, the higher prevailing drug prices, Sanofi's well-established distribution infrastructure, the powerful possibilities of social media, and the hugely favorable impact that Afrezza appears to having on the early adopters, we believe MannKind's inhaled insulin will reach the $1 billion and $4 billion thresholds far faster than Lantus. The following two twitter feeds show the unprecedented excitement that the drug is causing here at home: "I really want to shout this from the rooftops!#Afrezza is life changing for people with #diabetes." "My blood sugar is in perfect control. Checking my blood sugar is getting boring now. It's always perfect on #Afrezza. I feel like I just won a 22 year long race with #diabetes." The tweeter hasn't been identified for privacy concerns (although she is somewhat of a public figure with more than 20,000 followers on twitter), but close followers of MannKind are undoubtedly familiar with her. Significantly, too, the enthusiasm and tenor of the tweets are characteristic of most public comments about Afrezza. As well, there's substantial anecdotal evidence online that diabetics all over the world are wondering about Afrezza, suggesting that uptake abroad will be rapid once introduced elsewhere.
The aforementioned Mr. Pfeffer has indicated that the agreement with Sanofi translates into a mid-20s royalty rate. He didn't provide any guidance on what revenue levels would be required, though. As such, we're conservatively assuming a 20% royalty-equivalent rate kicking in at $1 billion in sales and 25% at $4 billion. So, assuming 450 million diluted shares, the two revenue estimates would equal about $0.44 and $2.22 a share in pre-tax profits, deriving from the Afrezza joint venture.
So, the starting point of this back-of-the-envelope valuation exercise has the Afrezza joint venture (JV) generating sales in year four or five - 2019 or 2020 - of $4 billion and operating earnings of $2.22 per share. The sales figure might seem aggressive, but really isn't considering the magnitude of the opportunity. Four billion dollars equates to just two million patients using Afrezza if one assumes annual per-patient revenues of $2,000 and 1.6 million patients if the revenue figure is $2,500, hardly outlandish assumptions in the context of some 400 million diabetics around the world; the number in just America will exceed 30 million by decade's end. The implied operating margin of 71.4%, meantime, may be on the high side, but not overly so. Expenditures on research and development activities is one of the biggest cost items for biopharmaceutical concerns, accounting for approximately 15% of an established company's revenues, but the Afrezza venture will be spending a modest amount on R&D in a few years. Sharing the resources of Sanofi proper should also yield substantial cost savings.
The natural next step would require the inclusion of the rest of MannKind, taking into consideration all of the revenues, expenses, and potential associated with Technosphere, along with the remaining organization. We have very little idea of how developments with the drug delivery platform are going to unfold, however, which is critical to being able to assign some value to the technology. As such, for the purposes of this exercise, we are going to go the Theravance route, whereby we will separate the JV, calling it MannKind Corporation (NYSE:MC), from the R&D operation, which we'll call MannKind Technologies (NYSE:MT). The MT spinoff, into a publicly traded entity, would take most of the cash on hand to fund ongoing developments. Management of that entity should also be able to access the capital markets, if necessary, just like most other development-stage biotechs. MC, meanwhile, would essentially be a "royalty management" enterprise, receiving the profit sharing proceeds from the JV. Operating expenses would be minimal. As well, much of its income would be sheltered from taxation for some time to come since the separation would leave all of the $2 billion-plus accumulated losses on its balance sheet. Note, too, that the manufacturing operation is essentially a non-factor on earnings since all costs are fully reimbursed and washes through the JV's P&L.
The scenario detailed above would have current MNKD investors holding stock in MC and MT in a few years. It's all but impossible to value MT at this juncture, but the company would most certainly be additive to the total. As for the MC component, readers are free to make all sorts of adjustments to our projections, including the time line, and assign their own multiples to sales and earnings. But almost any reasonable multiple would produce a stock price that's considerably above the current price. A Price/Earnings ratio of 20, for instance, which can clearly be characterized as reasonable for a company whose earnings are still rising strongly, would produce a price north of $40. A multiple of 10-times sales, which is the valuation being given Novo Nordisk, which is the closest thing to a pure play in the diabetes sector, would also suggest that MNKD stock offers considerable upside potential, even excluding MT.
The Bottom Line
Sanofi will not be abandoning Afrezza anytime soon, so investors should jettison this concern from their big portfolio of anxieties. The rapidly approaching debt maturity is probably of little concern, too, as the company has multiple relatively painless alternatives to meet its obligations. To go a little further, we think MNKD stockholders should stop obsessing about the weekly prescription data and every minute-to-minute tick of the stock price. Sanofi's game plan is undoubtedly measured in years, as evident in the data for Lantus, and it has an impressive history of marketing new products, unlike all of us armchair experts who are disappointed with every weekly scripts figure. With regards to the stock price, it's abundantly clear, from changes in the short interest, changes in the number of shares available for shorting on a daily basis, and changes in the interest rate being charged/paid to borrow shares, that the short sellers remain a major factor in the daily fluctuations. The day-to-day changes are of little consequence to investors, so letting the price changes affect your investment strategy (and blood pressure) makes very little sense.
As to our back-of-the-envelope calculation, it is clearly simplistic and subject to multiple adjustments. Moreover, like all of our other valuation exercises, detailed in previous articles, the scenario painted above is predicated on the opening assumption that sales of Afrezza will be robust. That said, the latest exercise is probably no less predictive than the sophisticated models put out by Wall Street analysts, who have been known to halve their projections at the proverbial drop of a hat. All in all, we continue to believe that MNKD shares offer a compelling risk/reward proposition.
Summary
The launch timeline and trajectory of Lantus sales should allay concerns about Afrezza's slow uptake.
A reality check also puts to rest anxieties associated with Sanofi's commitment to Afrezza and the forthcoming debt maturity.
The volatility notwithstanding, MNKD shares offer a compelling risk/reward proposition.
Food for thought for the overzealous bulls of MannKind Corporation (NASDAQ: MNKD); owning a few shares of MannKind doesn't give you license to render medical advice to sufferers of diabetes. The shares certainly don't give you the right to trash anyone who disagrees with your assessment that Afrezza is the best thing since sliced bread either. And to the bears, maligning diabetics who like the inhaled insulin and actively rooting for the product to fail make you look absolutely pathetic and despicable. With that said, the stock of the small developer and manufacturer of Afrezza remains in the grip of a long-running epic battle between longs and shorts. A quick foray into any online forum dedicated to MannKind, whether a message board, blog, or twitter conversation, will find seemingly never-ending back-and-forth verbal volleys, frequently vicious, essentially centered on what the stock is worth. Much is made of the low heretofore small number of prescriptions written, which some hint, insinuate, or state outright, will motivate Sanofi to abandon its marketing agreement with MannKind. The value of the Technosphere drug delivery platform is debated as well, as is the biotech's finances, with the $100 million convertible debt coming due in less than a month. In this article, we conduct a reality check, touching upon the slow uptake of Afrezza, the Sanofi relationship, and the debt. We close out with a wide-ranging discussion of the stock's valuation, which, consistent with all of our previous assessments published by Seeking Alpha, strongly suggest that MNKD stock represents a very attractive investment opportunity.
Afrezza is the Golden Goose
Contrary to what some have argued, any assessment of MannKind stock has to start with Afrezza. Technosphere may ultimately add to the bottom line, but its earnings-generating potential pales in comparison with Afrezza, which targets a massive patient population and, as Mr. Al Mann has famously said, could become the best-selling drug of all time. Just for the record, Pfizer's cholesterol-lowering statin Lipitor achieved peak sales of $13.7 billion in 2006 and has generated cumulative sales of over $140 billion. Technosphere clearly has some value but it is probably far less than some speculate. To get some sense of what it might be, the interested reader can look at Alkermes plc, Halozyme, and/or Theravance Inc. Alkermes, for instance, also has a technology that enhances the commercial value of old, established drugs, but royalty rates on those "extended-release" products can be extremely low. (Note: We have published reports on all three companies, albeit somewhat dated, and would be happy to email to anyone interested.) It should also be noted, though, that the development of new applications for Technosphere now has very little to do with the level of success that Afrezza achieves, as some have suggested. The technology was validated with the approval of Afrezza, and any new prospective product that incorporates the platform will progress on its own merits.
Early Prescription Data Means Almost Nothing
Sanofi launched basal insulin Lantus in Germany in June 2000. Sales that year were a mere €10 million, or about $11 million. The following May, the company launched the long-acting insulin in the United States. Total sales in 2001 were €94 million, with U.S. sales of €58 million, or $65 million. The totals rose to €299 million in 2002, €487 million in 2003, €843 million in 2004, and €1.2 billion in 2005. The comparable figures in the U.S. were €239 million, €347 million, €495 million and €717 million, respectively, representing year-to-year growth of 312%, 87%, 57%, and 47%, respectively. In looking at the aggregate figures, it's important to note, especially by those who are unhappy about the pace of Sanofi's action in boosting domestic sales and introducing Afrezza overseas, Lantus was launched in the United Kingdom and Ireland in August 2002 and Japan, France, and Italy in 2003. Beyond the geographic expansion, demand for Lantus was boosted by the publication (in 2002) of study results that highlighted the drug's benefits. Afrezza's uptake has been slower than Lantus', reflecting myriad complications - lack of awareness among both physicians and diabetics, getting an appointment with the country's few endocrinologists, the need to get a lung test, and insurance reimbursement issues - but prevailing trends pertaining to each of these challenges are encouraging. All of the problems are being worked out, direct-to-consumer advertising began earlier this month, and the number of early adopters publicly announcing their happiness with the inhaled insulin continues to grow. As such, despite the slow start, we think first-year sales of Afrezza will approximate those of Lantus, which became the best-selling insulin in the fourth year post-launch and achieved aggregate revenues of $7.8 billion in 2013.
Sanofi is Not Going Anywhere
At a June 10th Healthcare Conference sponsored by Goldman Sachs, the Wall Street powerhouse's analyst, who has a "sell" rating on MNKD, publicly asked the company's executives about Sanofi's options for terminating its Afrezza agreement with MannKind. It was an odd question on so many levels, not least of all coming so soon after the marketing partner had highlighted the product at the early-June American Diabetes Association convention in Boston. The provocative question is also noteworthy in that the answer is available in black and white in multiple MannKind filings with the Securities and Exchange Commission, which the analyst would presumably have reviewed; the agreement is spelled out in considerable detail, including conditions that could lead to breakup of the partnership. In any case, the question dovetailed well with the bears' argument, both before and since, that Sanofi may decide to abandon Afrezza due to poor sales.
Like the question, the notion of Sanofi abandoning Afrezza is absurd on so many levels. The large marketing partner has already paid MannKind $200 million. Beyond displaying the product so prominently at the ADA convention, it is spending millions of dollars more on lunches and dinners where healthcare providers are being educated. Preparations for clinical trials that would enhance the drug's label, and thus the commercial potential, are ongoing. Advertising just began. And the inhaled insulin has yet to be introduced to other geographic markets. Given all of this investment, in terms of money, time, and effort, along with the product's massive sales potential, and the ramp-up history of Lantus, why would Sanofi even consider walking away from the agreement. We would note, too, that Afrezza is highlighted in most of Sanofi's presentations and literature, including in its most recent annual report. Also worth pondering if doubts still remain about the level of Sanofi's commitment: 1) How many companies would choose to partner with the French drugmaker if it pulled out without making a good faith effort; 2) Why would it establish a $175 million credit facility for MannKind, to absorb the small partner's share of the losses, and then walk with the facility barely touched?
No Unanticipated Dilution Likely in August
We reviewed the $100 million convertible debt in detail in an article published by Seeking Alpha on March 31, 2015, and won't go into too much detail here. To recap, however, we don't expect MannKind to have much trouble meeting its obligation. In the best-case scenario, the price of MNKD stock moves above $6.80 by maturity date, August 15th and the note holders convert the debt into equity. Alternatively, the company uses a combination of cash on hand, the $30 million borrowing capacity available with the Mann Group, and the $50 million ATM to retire the debt. Or, MannKind simply refinances the full amount, on undoubtedly superior terms than the existing debt, since the company's overall economic position has improved considerably over the past several years (see the March 31st article). Significantly, too, Mathew Pfeffer, the biotech's chief financial officer has stated on multiple occasions that a dilutive stock offering will not be part of redeeming the debt, beyond the possible conversion. Indeed, he even noted during a presentation earlier this year that Mr. Mann had indicated he would be willing to lend the company more money if necessary.
Valuing the Company
Alkermes, which is using royalties earned from companies that use its extended-release technologies to fund the development of its own proprietary drugs, has a market capitalization of more than $10 billion. It will most likely lose money both this year and next, and has $356 million of debt. Halozyme Therapeutics is another money-losing company that specializes in technologies that improve the efficacy of other companies' drugs; it develops enzymes that are used to facilitate the delivery of injected drugs. Its boasts a market cap of $3 billion. Theravance Inc., meantime, which is a 12-employee strong royalty management company, is valued at $1.9 billion. The launch of direct-to-consumer advertising has stimulated demand for two respiratory drugs marketed by drug giant Glaxo, but it will most likely lose money this year; sales were almost nonexistent before the initiation of the advertising campaign. Theravance is particularly interesting as a company that separated its royalty bearing business from its R&D operations, which now trades publicly as Theravance Biopharma, Inc. Combined, Theravance Inc. and Theravance Biopharma have $487 million in cash and $732 million in debt, along with a market capitalization of $2.3 billion.
There are myriad ways to valuing a biotech company, all requiring a slew of guesses, estimates, and hunches. Almost by definition, the process and end result is more like a work of art than science. With that as a caveat, the starting point of all valuation methodologies is predicting the top line. In the case of MannKind, that would be projecting revenues from the sale of Afrezza. Quarterly sales of Lantus began annualizing at a billion-dollar level in the fourth year after market introduction in the United States and the four-billion-dollar level in the eight year. Considering the huge growth in the population of diabetics worldwide since 2001, socioeconomic improvements in many parts of the world, the higher prevailing drug prices, Sanofi's well-established distribution infrastructure, the powerful possibilities of social media, and the hugely favorable impact that Afrezza appears to having on the early adopters, we believe MannKind's inhaled insulin will reach the $1 billion and $4 billion thresholds far faster than Lantus. The following two twitter feeds show the unprecedented excitement that the drug is causing here at home: "I really want to shout this from the rooftops!#Afrezza is life changing for people with #diabetes." "My blood sugar is in perfect control. Checking my blood sugar is getting boring now. It's always perfect on #Afrezza. I feel like I just won a 22 year long race with #diabetes." The tweeter hasn't been identified for privacy concerns (although she is somewhat of a public figure with more than 20,000 followers on twitter), but close followers of MannKind are undoubtedly familiar with her. Significantly, too, the enthusiasm and tenor of the tweets are characteristic of most public comments about Afrezza. As well, there's substantial anecdotal evidence online that diabetics all over the world are wondering about Afrezza, suggesting that uptake abroad will be rapid once introduced elsewhere.
The aforementioned Mr. Pfeffer has indicated that the agreement with Sanofi translates into a mid-20s royalty rate. He didn't provide any guidance on what revenue levels would be required, though. As such, we're conservatively assuming a 20% royalty-equivalent rate kicking in at $1 billion in sales and 25% at $4 billion. So, assuming 450 million diluted shares, the two revenue estimates would equal about $0.44 and $2.22 a share in pre-tax profits, deriving from the Afrezza joint venture.
So, the starting point of this back-of-the-envelope valuation exercise has the Afrezza joint venture (JV) generating sales in year four or five - 2019 or 2020 - of $4 billion and operating earnings of $2.22 per share. The sales figure might seem aggressive, but really isn't considering the magnitude of the opportunity. Four billion dollars equates to just two million patients using Afrezza if one assumes annual per-patient revenues of $2,000 and 1.6 million patients if the revenue figure is $2,500, hardly outlandish assumptions in the context of some 400 million diabetics around the world; the number in just America will exceed 30 million by decade's end. The implied operating margin of 71.4%, meantime, may be on the high side, but not overly so. Expenditures on research and development activities is one of the biggest cost items for biopharmaceutical concerns, accounting for approximately 15% of an established company's revenues, but the Afrezza venture will be spending a modest amount on R&D in a few years. Sharing the resources of Sanofi proper should also yield substantial cost savings.
The natural next step would require the inclusion of the rest of MannKind, taking into consideration all of the revenues, expenses, and potential associated with Technosphere, along with the remaining organization. We have very little idea of how developments with the drug delivery platform are going to unfold, however, which is critical to being able to assign some value to the technology. As such, for the purposes of this exercise, we are going to go the Theravance route, whereby we will separate the JV, calling it MannKind Corporation (NYSE:MC), from the R&D operation, which we'll call MannKind Technologies (NYSE:MT). The MT spinoff, into a publicly traded entity, would take most of the cash on hand to fund ongoing developments. Management of that entity should also be able to access the capital markets, if necessary, just like most other development-stage biotechs. MC, meanwhile, would essentially be a "royalty management" enterprise, receiving the profit sharing proceeds from the JV. Operating expenses would be minimal. As well, much of its income would be sheltered from taxation for some time to come since the separation would leave all of the $2 billion-plus accumulated losses on its balance sheet. Note, too, that the manufacturing operation is essentially a non-factor on earnings since all costs are fully reimbursed and washes through the JV's P&L.
The scenario detailed above would have current MNKD investors holding stock in MC and MT in a few years. It's all but impossible to value MT at this juncture, but the company would most certainly be additive to the total. As for the MC component, readers are free to make all sorts of adjustments to our projections, including the time line, and assign their own multiples to sales and earnings. But almost any reasonable multiple would produce a stock price that's considerably above the current price. A Price/Earnings ratio of 20, for instance, which can clearly be characterized as reasonable for a company whose earnings are still rising strongly, would produce a price north of $40. A multiple of 10-times sales, which is the valuation being given Novo Nordisk, which is the closest thing to a pure play in the diabetes sector, would also suggest that MNKD stock offers considerable upside potential, even excluding MT.
The Bottom Line
Sanofi will not be abandoning Afrezza anytime soon, so investors should jettison this concern from their big portfolio of anxieties. The rapidly approaching debt maturity is probably of little concern, too, as the company has multiple relatively painless alternatives to meet its obligations. To go a little further, we think MNKD stockholders should stop obsessing about the weekly prescription data and every minute-to-minute tick of the stock price. Sanofi's game plan is undoubtedly measured in years, as evident in the data for Lantus, and it has an impressive history of marketing new products, unlike all of us armchair experts who are disappointed with every weekly scripts figure. With regards to the stock price, it's abundantly clear, from changes in the short interest, changes in the number of shares available for shorting on a daily basis, and changes in the interest rate being charged/paid to borrow shares, that the short sellers remain a major factor in the daily fluctuations. The day-to-day changes are of little consequence to investors, so letting the price changes affect your investment strategy (and blood pressure) makes very little sense.
As to our back-of-the-envelope calculation, it is clearly simplistic and subject to multiple adjustments. Moreover, like all of our other valuation exercises, detailed in previous articles, the scenario painted above is predicated on the opening assumption that sales of Afrezza will be robust. That said, the latest exercise is probably no less predictive than the sophisticated models put out by Wall Street analysts, who have been known to halve their projections at the proverbial drop of a hat. All in all, we continue to believe that MNKD shares offer a compelling risk/reward proposition.
