It is no secret that Big Pharma is in desperate need to fill their pipeline to replace the unprecedented number of BlockBuster drugs set to come off patent in the coming years. Sanofi-Aventis (SNY) is a top 5 Pharma company that has openly stated they will be looking to do small to mid-size acquisitions (>$15B) to beef up their pipeline. Rumors abound on who the targets are. Analysts point to Allergan (AGN,) Biogen (BIIB) and Genzyme (GENZ) as likely candidates. What if that target is a relatively unknown company on the verge of releasing the next blockbuster? What if that target is MannKind Corporation (MNKD)?
It seems outrageous that a company with a market cap under $800M could warrant a premium of more than 100% or so. However, MannKind isn’t your normal public company. Al Mann, founder and CEO of MannKind still owns 44.5% of the outstanding shares of MannKind. Al has previously stated that he won’t invest in a venture unless he can make at minimum 10X his investment. So far, Al Mann has invested $800M+ out of his own pocket to fund MannKind. The company has spent north of $1.6B to develop their Technosphere platform and to bring AFREZZA to market. No acquisition of MannKind will happen without Al Mann’s approval and that number would be $10B or more in my estimation. To learn more about Technosphere and AFREZZA, you can read my previous articles and blogs on the subject.
Rather than use MannKind’s current market capitalization to value a potential takeover price, you must instead look at the Net Present Value of the future revenue stream for AFREZZA. AFREZZA will become the new gold standard for Prandial Insulin therapy given its superiority to rapid acting analogs. I won’t debate the point on why that is the case in this article since I have already written on the subject. If Big Pharma also agrees that AFREZZA will replace drugs such as Humalog based on the wealth of studies available, then expected revenue of $2B a year for AFREZZA in the U.S. alone is a reasonable estimate. Triple that number once AFREZZA is approved in Europe and Asia.
In addition to AFREZZA, the underlying Technosphere platform will be a valuable ally to a Big Pharma looking to find ways to improve drugs on the schedule to come off patent. Small molecule, protein and peptide drugs can be reformulated for dry powder and delivered via Technosphere particles. Studies will need to be done to show the pharmakinetics of the new delivery platform on those drugs, but the safety of Technosphere will already be accepted if the FDA approves AFREZZA on December 29th, 2010. The valuation of Technosphere is difficult but could equate to billions if it keeps a valuable drug under patent.
MannKind’s Oncology program is also showing much promise. These programs are too early to really value but given that they are in the same vein of immune-based cancer therapy such as Dendreon’s (DNDN) Provenge, they could become quite valuable if they continue through trials to approval.
If a Big Pharma acquires MannKind they get a $2-6B drug in AFREZZA, a novel technology for new drug delivery and redefining old drugs, and a promising Oncology pipeline. The Pharmaceutical Global Industry Analysts (GIA) report values Inhalable Dry Powder Delivery technology at a whopping $37B.
An analysis of the top biotechnology acquisitions from this decade demonstrate that a $10B pricetag for MannKind is warranted if you expect AFREZZA to become the gold standard of Prandial insulin therapy.
Amgen’s (AMGN) acquisition of Immunex in 12/2001 for $15.9B. Immunex did less than 1B in revenue in 2001 and had a good pipeline but no blockbusters.
AstraZeneca’s (AZN) acquisition of Meddimune in 4/2007 for $15.6B. Meddimune only had 4 products on the market, none blockbusters and revenue was under $2B a year.
Merck’s (MRK) acquisition of Serono in 3/2006 for $13.4B. Serono was only a $2.5B company.
Johnson & Johnson's (JNJ) acquisition of Alza in 3/2001 for $10.6B. Alza was only a $900M company.
Novartis’ (NVS) acquisition of Chiron in 4/2006 for $10.1B. Chiron did $1.9B in revenue in 2005.
Takeda’s (OTCPK:TKPHF) acquisition of Millennium in 4/2008 for $8.8B. Millennium did less than $600M a year in 2007.
What is clear to me is that the current valuation of MannKind by the market is way too low. Perhaps it will take AFREZZA to be approved and generate $1B+ a year in sales to warrant a better market capitalization? Or perhaps, it just takes a Big Pharma understanding the potential of AFREZZA and Technosphere to force an appropriate valuation of MannKind? I don’t know the answer but I am confident that MannKind will either be acquired or execute on a Commercial Agreement for AFREZZA prior to the end of the year. If MannKind executes a Commercial Agreement for AFREZZA followed by approval by the FDA in December, then a launch would happen in Q1 2011. By 2013, AFREZZA could be a $2B+ drug in the U.S. with EU approval underway or complete. At that point in time, $10B for MannKind will look like a bargain.
Disclosure: Long MNKD.