Post by yossarian on Sept 21, 2015 22:55:19 GMT -5
www.forbes.com/sites/greatspeculations/2015/08/26/mannkind-and-afrezza-can-the-drug-cure-the-company/
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Valuation
This is the relatively bearish part of my article. There are two aspects to valuing MannKind. The first is of course Afrezza’s sales potential. The second is the total number of outstanding shares. Let me address the second issue first. MNKD has spent tremendous amounts of money getting Afrezza to commercialization. Raising all that money has meant significant dilution. MNKD currently has more than 400 million outstanding shares. Now, dilution is always a risk for any biotech. The idea is that during clinical stages, companies dilute the stake of existing shareholders. But if the company reaches commercialization stage and is successful, it can create value for shareholders through buybacks.
Ideally that should be the case with MNKD. And, given Afrezza’s potential, that is a possibility. But remember that MNKD has a deal with Sanofi and will share only 35% of profits. The deal is structured differently than usual biotech licensing deals. MannKind is not getting a share in the gross sales. It is getting a percentage of profits.
In a conference call shortly after the deal with Sanofi was announced, MannKind said that the structure of the deal was beneficial to both companies. The company said that its internal financial models indicate that the 35% share in profit would equal mid-twenty percentage in royalties. Now a mid-20 percentage royalty is a very good deal but I do not have access to MNKD’s financial model so I am not sure what the company’s assumptions were. They could have been extremely bullish, which would of course make the deal look more attractive than it really is.
So back to MannKind’s valuation. The peak sales estimates for Afrezza range from just $200 million to $5 billion. The huge difference in sales estimates highlights the debate over whether Afrezza will succeed. Indeed, several analysts have brought down their expectations following the launch of Afrezza. But as I explained in the article, while the uptake for Afrezza has been slow, it has potential.
But Afrezza’s potential does not necessarily translate into a high valuation for MannKind.
Let’s first see how much Afrezza can achieve in peak sales. The product is already approved in the U.S. and an approval in the EU could come by 2017. The global market for insulin is expected to reach $47.5 billion by 2020, growing at a CAGR of 12.3%. The largest segment of the insulin market is intermediate and long acting insulin at around 45%. Afrezza is a rapid acting insulin. Assume that rapid acting insulin will account for around 20% of the total market; this would mean that Afrezza’s addressable market by 2020 would be nearly $10 billion. If the insulin market continues to grow at the same CAGR over the next five years, Afrezza’s addressable market would be around $17 billion by 2025, which is when it could achieve peak sales. In the bullish scenario, Afrezza achieves peak sales of $6.80 billion based on 40% penetration rate.
Remember that MannKind gets a share of the profits and not sales. The operating margin for major pharma companies is at around 20%. So this would translate to $1.36 billion. At peak, MannKind’s profit-split revenue would be approximately $475 million. Based on this and roughly 450 million shares outstanding, MNKD is currently trading at around 3.50x peak sales estimates. This is well below the average for the biotech industry. According to Stern, the average for the biotech industry stands at around 10.38. If MNKD’s multiple moves to the industry average, this translates to a value of $10.50 per share for MNKD.
Last year, when MNKD was trading at $11, this wasn’t a good deal. Now, especially with the pullback, the risk-reward profile is better. When in 2011, MNKD had to spend money doing additional trials, had it been approved at that time, things would have been much rosier.
In the best case scenario, MNKD has 200% upside. But the million dollar question is whether Afrezza can meet these bullish expectations notwithstanding its potential. On that, I take the Fifth because my expertise limits me to the science. And I suggest David Kliff join me because while there is much of concern with MannKind, there’s nothing “laughable,”- his words not mine – in a medical product that helps reduce a diabetic’s pain.
* * * * *
Valuation
This is the relatively bearish part of my article. There are two aspects to valuing MannKind. The first is of course Afrezza’s sales potential. The second is the total number of outstanding shares. Let me address the second issue first. MNKD has spent tremendous amounts of money getting Afrezza to commercialization. Raising all that money has meant significant dilution. MNKD currently has more than 400 million outstanding shares. Now, dilution is always a risk for any biotech. The idea is that during clinical stages, companies dilute the stake of existing shareholders. But if the company reaches commercialization stage and is successful, it can create value for shareholders through buybacks.
Ideally that should be the case with MNKD. And, given Afrezza’s potential, that is a possibility. But remember that MNKD has a deal with Sanofi and will share only 35% of profits. The deal is structured differently than usual biotech licensing deals. MannKind is not getting a share in the gross sales. It is getting a percentage of profits.
In a conference call shortly after the deal with Sanofi was announced, MannKind said that the structure of the deal was beneficial to both companies. The company said that its internal financial models indicate that the 35% share in profit would equal mid-twenty percentage in royalties. Now a mid-20 percentage royalty is a very good deal but I do not have access to MNKD’s financial model so I am not sure what the company’s assumptions were. They could have been extremely bullish, which would of course make the deal look more attractive than it really is.
So back to MannKind’s valuation. The peak sales estimates for Afrezza range from just $200 million to $5 billion. The huge difference in sales estimates highlights the debate over whether Afrezza will succeed. Indeed, several analysts have brought down their expectations following the launch of Afrezza. But as I explained in the article, while the uptake for Afrezza has been slow, it has potential.
But Afrezza’s potential does not necessarily translate into a high valuation for MannKind.
Let’s first see how much Afrezza can achieve in peak sales. The product is already approved in the U.S. and an approval in the EU could come by 2017. The global market for insulin is expected to reach $47.5 billion by 2020, growing at a CAGR of 12.3%. The largest segment of the insulin market is intermediate and long acting insulin at around 45%. Afrezza is a rapid acting insulin. Assume that rapid acting insulin will account for around 20% of the total market; this would mean that Afrezza’s addressable market by 2020 would be nearly $10 billion. If the insulin market continues to grow at the same CAGR over the next five years, Afrezza’s addressable market would be around $17 billion by 2025, which is when it could achieve peak sales. In the bullish scenario, Afrezza achieves peak sales of $6.80 billion based on 40% penetration rate.
Remember that MannKind gets a share of the profits and not sales. The operating margin for major pharma companies is at around 20%. So this would translate to $1.36 billion. At peak, MannKind’s profit-split revenue would be approximately $475 million. Based on this and roughly 450 million shares outstanding, MNKD is currently trading at around 3.50x peak sales estimates. This is well below the average for the biotech industry. According to Stern, the average for the biotech industry stands at around 10.38. If MNKD’s multiple moves to the industry average, this translates to a value of $10.50 per share for MNKD.
Last year, when MNKD was trading at $11, this wasn’t a good deal. Now, especially with the pullback, the risk-reward profile is better. When in 2011, MNKD had to spend money doing additional trials, had it been approved at that time, things would have been much rosier.
In the best case scenario, MNKD has 200% upside. But the million dollar question is whether Afrezza can meet these bullish expectations notwithstanding its potential. On that, I take the Fifth because my expertise limits me to the science. And I suggest David Kliff join me because while there is much of concern with MannKind, there’s nothing “laughable,”- his words not mine – in a medical product that helps reduce a diabetic’s pain.
