Pricing MannKind Corporation, The Sequel
Jun. 16, 2014 11:09 AM ET | 18 comments | About: MannKind Corporation (MNKD)
Disclosure: The author is long MNKD. (More...)
Summary
Two potentially high-impact events are rapidly approaching.
These shares remain very attractively priced.
A huge short interest and the second event suggest investors should avoid the temptation to trade the first event.
In two articles published by Seeking Alpha last summer, entitled "Pricing a Highly Probable Takeover of MannKind" and "Pricing MannKind Corporation on a Stand-Alone Basis," we laid out in considerable detail the four possible scenarios that could unfold for the development-stage biotechnology concern in the year ahead. As articles geared towards investors, our primary objective was to assess the attractiveness of MannKind (MNKD) stock as an investment. Accordingly, we generated price targets for each of the four possibilities, after all, what's more important in evaluating an investment opportunity than its appreciation potential. The second of the two articles was written after a strong run-up in the stock price, and was prepared to help both ourselves and others in their buy, sell, or hold deliberations. (A disclosure may be appropriate at this point: We, as in 3DimensionalResearch.com, recommended MannKind shares and warrants to our clients as a speculative Special Situation on July 20, 2012, when they were trading at $2.62 and $0.70, respectively. Moreover, we recommended the stock to our clients again as a standard Stock Recommendation on September 2013, at a price of $6.05, after the company had reported Phase III results and the shares no longer seemed that speculative. We own both the stock and warrants and have bullish options positions - calls and spreads.) Other than recently closing out a short position in the January 2015 $15 puts, we haven't closed, or reduced, any of our bullish positions.
This article, too, is motivated by the need to review the state of affairs considering both the recent vigor in the stock (up 69.1% in the past five weeks) and two, probably, rapidly approaching potentially high-impact events. Truth be told, it's also inspired by the latest spate of bearish articles that, like all the previous waves, seem largely devoid of substance, objective analysis, or responsible investment advice. Before getting to our primary objective, we will briefly discuss the latter so that investors can dismiss the noise and focus on the fundamentals that matter.
The Short-Sellers' Latest Tactics
As stated in previous articles, we have no problems with short sellers. They generally serve a useful function - exposing corporate malfeasance and highlighting overvalued equities, etcetera - and deserve respect, since they are assuming considerable risk (and theoretically unlimited losses) to back their convictions. Indeed, we're all for their making a public case for why a particular stock may be overvalued, since good information is almost always useful information. That said, the seemingly never-ending bearish articles on MannKind from authors, all of whom claim not to have a position, have, with few exceptions, been scurrilous and irresponsible, written largely, in our view, to misinform, mislead, obscure, and frighten investors. We've detailed the shorts' tactics in the past, in "Follow the Smart Money," for example, and won't repeat here beyond noting that they've been right about virtually nothing for three years and are currently sitting on hundreds of millions of dollars in losses.
In their latest efforts to instill fear and fuel selling, the shorts almost uniformly recommend shorting MNKD stock after the FDA (Food and Drug Administration) approves the company's drug, suggesting Afrezza's maker will suffer the same fate as Arena Pharmaceuticals and Vivus Inc., neither of which has fared well since their respective weight-loss products were okayed for marketing. Their recommendation has at least the following five shortcomings:
Nobody knows what the price of MNKD stock is going to be after the likely FDA approval. How does one responsibly advise a specific course of action several weeks in advance without having such a critical piece of information?
The authors make absolutely no attempt to value the stock or assess its upside potential. How does one responsibly advise a specific course of action without having any sense of what some asset is worth?
It's generally accepted that MannKind will announce either a marketing partner or a buyout soon after FDA approval, either of which would probably trigger a further price run-up. Given this possibility, how does one responsibly advise shorting the stock?
The recommendation ignores the fact that the short interest is already huge, at 68 million shares as of May 15th, which could be the source of a potentially massive rally if the FDA's approval comes with very few strings attached.
The FDA has approved literally thousands of drugs in its history, some of which have done fabulously well and made investors in their makers very wealthy. But for some unexplained reason, all of the authors of the bearish articles decided, presumably independently, that Arena and Vivus and their weight-loss drugs, with their questionable efficacy and safety profiles, were the best comparators for MannKind.
A Brief Review
As we saw last summer, the future held four possible paths for MannKind. The first, and shortest, had Afrezza failing to meet its objectives in clinical trials and MNKD stock dropping to penny stock status. The other three had the inhaled insulin product achieving success in the trials, leading to MannKind being acquired; securing a marketing partner; or deciding to commercialize on its own. As detailed in the two articles mentioned above, the takeover scenario suggested a 12-month buyout price of $27.50 a share; the partnership $28.00, and going it alone $27.42.
The Current Situation
With the benefit of hindsight, we know that the first path was not taken. Given the FDA's three-month delay in making a decision on Afrezza, however, we don't know yet which of the other three scenarios will eventuate. That said, management's many comments (and lack of action) over the past several months very strongly suggest that we can rule out the possibility that the company will be going it alone. In its latest comments at a Goldman Sachs Healthcare Conference, the company indicated that it was in negotiations with multiple prospective partners and that a deal could be finalized within six to eight weeks of the FDA's decision. Moreover, it noted that cash on hand and a credit facility with the Mann Group afforded ample resources to get it to the finish line. The lack of action in terms of raising additional funds and building a marketing infrastructure also underscores management's confidence that it will not be going it alone; it is busy hiring people for its manufacturing operations, though, including employees to work weekends. This leaves only the buyout and partnership options.
Pricing the Buyout and Partnership Options
In the 12 months since we priced the shares, the outlook has improved on multiple fronts. On a company-specific basis, MannKind completed two Phase III clinical trials, reported solid results, received rave reviews from the FDA's Advisory Committee, garnering 27 out of 28 possible votes, and is now poised to get the long-awaited permission to commercialize Afrezza. Significantly, too, management recently indicated that it has received inquiries from several parties about its technosphere drug delivery platform, which has numerous potential applications and could be very attractive to both pharmaceutical and biotechnology concerns. The already huge diabetes market, meantime, continues to expand. According to the latest Diabetes Statistics Report, released on June 10, 2014, there were 29.1 million Americans with diabetes in 2012, or 9.3% of the population. This is 12.8% higher than the figure in 2010. The total cost of the disease in 2012 was $245 billion, consisting of $176 billion for direct medical costs and $69 billion in reduced productivity. Worldwide, the number of diabetics has climbed to 400 million, rising at a roughly comparable rate as in the United States. Importantly also, the pace of M&A activity in the drug sector has intensified dramatically of late, reflecting several realities at Big Pharma: maturing product portfolios that need to be replenished; unproductive internal R&D programs despite the investment of tens of billions of dollars; bulging coffers and cheap money. In February, Actavis plc agreed to pay $25 billion for Forest Labs. More recently, in a move that cost short sellers some $330 million, Merck announced last week that it would be acquiring Identix Pharmaceuticals for $3.85 billion.
The $25-billion price tag for Forest Labs values the specialty drugs maker at 5.4 times prospective 12-month revenues and 25.0 times earnings. As for Identix, although the small biotech has three products in clinical trials, two in Phase II and one in Phase I, all targeting the treatment of hepatitis C, any possible product launch is at least two or three years away. Moreover, it would undoubtedly enter an intensely competitive marketplace, one that would include Gilead's huge blockbuster, Sovaldi, and AbbVie's triple-combination product, which will probably be introduced towards the end of this year. (The $3.85-billion price tag for Identix clearly puts the bears' suggestion that MannKind is overvalued at around $4 billion into better perspective.) Novo Nordisk, meanwhile, the closest thing to a pure play in the diabetes arena, is trading at 7.2 times estimated year-ahead sales and 23.6 times estimated earnings. Given all of the favorable developments of the past 12 months, plus the realities detailed above, we certainly see no reason to lower our price targets. That said, in the interest of conservatism, we have decided not to raise them either. All things considered, including the fact that it has appreciated more than four-fold since our initial recommendation, we think MannKind shares still look very attractive.
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Comments (18)
rxbike
Comments (6)
Thank you George Rho for the great article.
16 Jun, 11:18 AMReplyLike5
BehindTheLensInBend
Comments (26)
George, I believe you meant '6-8 weeks after approval', rather than:
"In its latest comments at a Goldman Sachs Healthcare Conference, the company indicated that it was in negotiations with multiple prospective partners and that a deal could be finalized within six to eight months of the FDA's decision."
16 Jun, 11:18 AMReplyLike5
George Rho , Contributor
Comments (455)
Author’s reply » Thanks for pointing out the error BehindTheLensInBend.... it has been corrected.
16 Jun, 12:10 PMReplyLike0
Trevor Lowenthal , Contributor
Comments (91)
I enjoyed the article. I am just curious as to what you recommend investors do pre-approval. Are you suggesting that inaction is safer than action? Or are you strictly referring to those shorting MNKD?
In my earlier article, I recommend an option strategy that mitigates risk while capturing 50% upside. I am curious to know what you think about this 3-month target of $15.
This is the link to my article :
seekingalpha.co...
Best,
Trevor
16 Jun, 11:23 AMReplyLike1
Think Long Term , Contributor
Comments (102)
It is important to value the Technosphere platform when placing valuation. How to actually do that is another dilemma. But, with so many cross over possibilities, one has to think the value of the platform is not being priced in. No where near being priced in.
16 Jun, 11:23 AMReplyLike2
Think Long Term , Contributor
Comments (102)
finalization in 6-8 WEEKS not months, there was an error in there.
16 Jun, 11:24 AMReplyLike0
RuggedDC
Comments (148)
"a deal could be finalized within six to eight months of the FDA's decision"
I believe that comment cited weeks, not months.
I greatly appreciate your commentaries on Mannkind.
16 Jun, 11:25 AMReplyLike1
lunaca
Comments (7)
We at this point in time would expect that probably say within say six to eight weeks following but PDUFA date, we hopefully will be in the situation where we can finalize a partnership.
but again all in agreement with your comments
16 Jun, 11:33 AMReplyLike0
lunaca
Comments (7)
We at this point in time would expect that probably say within say six to eight weeks following but PDUFA date, we hopefully will be in the situation where we can finalize a partnership.
but I agree with all the other comments
16 Jun, 11:33 AMReplyLike0
SarahKnows
Comments (71)
Thanks for adding some sanity to the SA discussions about MannKind. While I generally agree with your thesis, a careful read of the transcript shows that although the advisory panel was positive, especially about the pharmacokinetic and pharmacodynamic profile of the Afrezza ultra fast acting insulin, there are still clinical questions regarding how the drug/inhaler device combination can be appropriately and safely prescribed. There are also unanswered questions about long term pulmonary affects. That said, there was universal agreement on the great need for this alternative, its tremendous potential in increasing compliance, safety and management of glycemia, thus reducing deaths due to hypoglycemia and complications due to poorly regulated hyperglycemia. I wouldn't characterize the vote as representing rave reviews as much as it represents cautious enthusiasm by very well informed experts about what this can do to improve the care of millions of people with diabetes.
16 Jun, 11:38 AMReplyLike2
Spectro
Comments (167)
George Rho- I agree with much of your article and appreciate your efforts to compose all the articles you post.
I can not and have never appreciated shorts or shorting. It is a moral thing with me and I find that immoral to bet on failure and even try to proactively facilitate that very failure. Much like pushing a disabled person down a flight of stairs since they may never make it anyway.
As I watch the various M&A in the drug sector, the choices of acquisitions by companies is sometimes puzzling. As Pfizer was ready to spend $105 billion.
The partnership process seems to be the path for Mannkind and the likely partners seem to be otherwise involved with spending stockpiles of money for odd purposes. I am thinking of Medtronics and Sanofi.
Regardless of my thoughts on M&A potentials, a partner should be easy to find, but terms could be a big hangup as Al Mann virtually given away so many assets for almost free as his companies have worked tirelessly to produce them with little benefit to shareholders. The potential partners are looking for another almost free drug and device as has been the case previously with Al Mann. I think this time he is trying to get more for the shareholders, but his historical efforts are undermining those terms in the current deal.
I hope Mannkind can make a deal happen and quickly show us our confidence and investment was worth the exposure to the risk.
16 Jun, 11:41 AMReplyLike1
BehindTheLensInBend
Comments (26)
Shorting is immoral at its base. It used to be illegal.
16 Jun, 11:50 AMReplyLike2
KCphaeton
Comments (147)
Nice piece and I appreciate all the information and background that you included. My guess is that the management team has their plan in place as to how to best partner with one or more companies and that it will fall into place once the drug is approved by the FDA. Since this is long term process you can be assured that management is wall down the path of knowing who that partner is and how to get the product on the market in a timely manner. Alfred Mann is a professional and has a lot of experience in that area. Time is our friend whether its on July 15th or longer this product will be a winner for MannKind ! not pun intended.
16 Jun, 11:41 AMReplyLike0
lance anderson
Comments (2)
My thoughts exactly. Thanks for your input.
16 Jun, 11:59 AMReplyLike0
Robert0713
Comments (1120)
The main reason to be bearish: prior to the previous CRLs, both MNKD and Al in person had been less than forthcoming. Retail, and possibly some tutes, got caught with their pants down. One might not make as much money, but the wise course is to stay away until FDA speaks.
16 Jun, 12:00 PMReplyLike0
brianklu
Comments (48)
Thank you George !
16 Jun, 12:02 PMReplyLike0
peakabull
Comments (11)
In Al Mann I Trust......remember who makes money and who loses money..This product is going to change the lives of diabetics like myself...Hopefully change the lives for more than diabetics with this new technology....As public speaker #11 at the AdComm i witnessed people cry after they voted for afrezza not because there stock accounts went higher but because they no longer want shots, they want/need a faster insulin. It was a truly special moment in my life. If you have ever experienced a high blood sugar (its horrible) at the moment the "fastest" insulin takes 45-60 minutes..WAY TO SLOW...Afrezza starts to work in 12-15 minutes......Please follow me on twitter for more MNKD information
peakabull16 Jun, 12:10 PMReplyLike1
mrmcchumba2
Comments (14)
Guys - He wrote "weeks". Thanks for surfacing for the shoot-out George. I give you rock-star status among us MNKD longs! Others have weighed in, but I would love your opinion - are you concerned with the ADCOM recommendations for additional studies relating to "treat to target" for basal insulin patients or additional studies relating to dosing? I'm nervous about how the FDA may blend those recommendations in with their ruling. Thanks again.
