MannKind (NASDAQ:MNKD) is certainly an interesting equity to watch and cover. It is a company with an almost fanatic cult-like following and in many ways, the most passionate proponents of the company become the worst enemies of the stock. Expectations are all over the map, and when I attempt to engage in dialogue, I am stunned by those that make bold statements yet will not put defined parameters to them.
With any speculative stock, I have always found it best to model situations in order to arrive at more realistic expectations and goals. Over the last few months, I have had readers state that sales will be over 1,000 scripts per week by the end of the year. When pressed as to how this happens, they ultimately have no real answer.
At this stage, with the MannKind relaunch a few weeks away, I felt that perhaps it would be prudent to outline a model that can generate discussion, but more importantly, can make investors think a bit more deeply.
A common stance among MannKind bulls is that former marketing partner Sanofi (NYSE:SNY) "sandbagged" Afrezza and had a terrible launch. I will warn you now, I am going to make you as an investor think. Consider this:
- If Sanofi had a terrible launch, is it safe to assume that beating Sanofi numbers will be easy? My stance has always been that MannKind has severe challenges with the relaunch. Many readers are critical of me for having such an opinion. It will be interesting to see how those same readers characterize the relaunch and the charts I present below
MannKind bears take the stance that Sanofi gave a real attempt at the launch and that the drug simply was not a big seller.
- If that is the case, then bears should anticipate that MannKind, with fewer sales reps and a more localized campaign, should see sales that are even worse than the launch data we got from Sanofi's first 6 months. It will be interesting to see how bears react to the charts I present below
MannKind bulls seem to feel that a smaller sales force will outsell a larger multi-tasked sales force by a wide margin. Bulls point to statements by management that seem to indicate that 70 dedicated reps are far superior than 700 shared reps.
- If bulls really believe this mantra, then they will likely be expecting to see 10% week-over-week gains in scripts and see an immediate shift in new scripts. If the smaller sales force is indeed "far superior," it should be able to outpace the first 6 months of Sanofi by at least 30% to 50%. Beating Sanofi by 10% or 20% would not seem to fit into the category of "far superior" in my opinion.
MannKind bears feel that the smaller sales force will lead to smaller numbers and that ultimately the attributes of the drug, the testing required, a lack of insurance, and cost will see sales continue to decline.
- If these bears are correct, then a continued week-over-week decline should happen and be identifiable within a month or so of the launch. If new scripts continues to decline after about a month, then perhaps the bear mantra on this point has validity.
I try to be a realist. Over-exuberance is not a winning strategy in assessment, nor is high caution. Being realistic allows an investor to set expectations that are more likely to come into play. The group that will have the most difficult emotional battle in putting numbers and goals to paper are the ones that likely invested far too much in the first place and have seen their investment erode by 75% or more. These people are most likely to shift the discussion to unimportant matters, refuse to put any goal on paper, and will tend to speak in a manner that cannot be quantified. These investors will build excuses for anything and look for any glimmer of hope that they can find. There will be a few that read this article, see the wisdom in establishing realistic expectations, and become a better investor because of it.
Building A Model
In order to build a model, it is helpful to gather and digest as much data as possible. If you get too aggressive with your model, you can find yourself getting disappointed and out of the game very early. If you are too conservative with your model, you can again be out of the game early. Models on the extremes are typically made by investors that have the least chance of investment success.
In my model, I developed three sales paths that I feel are realistic and possible. In my opinion, they are not too aggressive, and they are not too conservative. My sales model makes an assumption that sales will continue to dip a bit through June, and that the starting point when MannKind takes the sales reins will be about 242 scripts.
I built these models to take us through the end of 2016. This will represent 6 months of sales. In my opinion, at the 6-month mark, investors will be able to assess, beyond a reasonable doubt, as to the longer-term potential of Afrezza. I actually believe that the assessment can be made much earlier, but will allow room for confirmation.
- My most conservative assessment has peak sales at 414 scripts in a week and has a 6-month total on sales at about 8,400 scripts.
- My middle model has peak sales at 509 weekly scripts and a 6-month total of about 9,500 scripts.
- My most aggressive model has peak sales at 629 scripts and a 6-month total of about 10,900 scripts.
Chart Source - Spencer Osborne
Before reading on, I want you as a reader to look at the chart above and see if you agree with any of the sales paths. Do you agree with any of them? Do you think that they are all too low? Do you think they are all too high? Take a piece of paper and write down what you think peak sales will be, and what you think the total will be at the 6-month mark.
Next, I want to present to you the same data that was represented above and overlay the first 6 months of sales data that was accomplished by Sanofi. Consider that Sanofi stated at zero, while MannKind is starting somewhere around 242 scripts. Keep in mind that Sanofi had to "educate" doctors while MannKind gets the benefit of many doctors already being in the loop. Keep in mind that Sanofi started with essentially no insurance coverage, while MannKind at least has some insurers that cover Afrezza. Here is the chart.
Chart Source - Spencer Osborne
Here are some points to consider:
- Sanofi sold about 8,000 scripts in the first 6 months
- Each sales projection I made has 6-month totals above that which was accomplished by Sanofi.
- My most conservative model has MannKind beating Sanofi by about 4.6%
- My middle model has MannKind beating Sanofi by 18.3%
- My most aggressive model has MannKind beating Sanofi by 35.2%
- When you saw my first charts, did you think that all of my models were "low-balling"? Do you still think that now?
Why The Challenges of MannKind Need Consideration By Investors
I have stated many times that MannKind is in a race against time and money. The company is in a dire financial situation. The drug has potential, but needs financial backing to bring sales to the types of levels needed to market the drug.
Here are some numbers to consider. If we consider that the gross to net sales number is 50%, then we can assess what level of revenue we will see from these levels of sales.
Using a round number of a retail price of $300 per script, and taking half of that number would mean net revenue of $150 per script.
- My conservative model had 6-month of sales at 8,400 scripts. Multiplied by $150 per script, net revenue would be $1,260,000. Now subtract sales and marketing, and operations costs.
- My middle model had 6-month of sales at about 9,500 scripts. Multiplied by $150 per script, net revenue would be $1,425,000. Now subtract sales and marketing and operations costs.
- My aggressive model had 6-month sales at 10,900 scripts. Multiplied by $150 per script, net revenue would be $1,635,000. Now subtract sales and marketing, and operations costs.
An example of a modest sales force selling a drug in targeted markets can be found in the anti-obesity space. Vivus (NASDAQ:VVUS) sells Qsymia with a sales force of about 50 reps in targeted markets. The company does not advertise on television, offers discounts, and has seen sales decline from a peak of 12,000 scripts per week to somewhere around 9,000.
As the company cut the size of the sales force, it saw sales decline. The Qsymia sales force has been unable to generate sales traction that delivers sales growth. The company has resorted to massive cost cutting to try to improve the bottom line. Since the peak in sales, Vivus has been trimming back the sales force quarter after quarter to its current level of about 50 reps.
Chart Source - Spencer Osborne
The bottom line is that many investors on the fringes of being ultra-bullish or ultra-bearish likely have some new things to consider. Ultra bulls need to see the financial challenges, and ultra bears need to consider the possibility that this drug can get enough traction to allow a slow path to success.
If you have not modeled the sales and the financials, you owe it to yourself to give it a try. It will make you a better investor because it forces you to assess things in concrete terms and avoid generalities that allow you to make excuses. Stay Tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.