In the flurry of punches and counterpunches that have preceded the MannKind (NASDAQ:MNKD) AdCom mtg on April 1st, the question of fair share value versus market cap continues to spark debate and concern. In this article, I will share some simple, common sense analysis of this issue. I like data and numbers so I went to the Forbes website and pulled up their list of the Top 10 U.S. Pharma companies by market cap in 2013. Interestingly, the listing also shows their sales figures. Of course, the big 3 are there (Pfizer, Bristol-Myers Squibb, Merck), but the group quickly drops down to smaller, much lesser known companies. Here's what caught my attention. Among these 10 companies, the average ratio of market cap to sales was 3 to 1. That's right, on average market cap was 3 times the size of the sales figures. I'm sure there are many folks who will have 1001 theories about this ratio. To them I say, "Tilt on!" The ratio is what it is, and I won't attribute it to anything other than current "market/economic forces".
Global sales of insulin are on a one-way slope going up. Projections vary widely for 2014 between $20B and $40B. That's a big range, but in the interest of skipping the debate about which figure is correct, I'll use the low number for my remaining analysis.
If approved, Afrezza will dominate this market. How long will it take? There are currently too many unknowns in that equation to solve it. I'll defer to those who like to speculate. At some point, though, Afrezza sales will approach $15B (75% of the $20B market, remember I'm using the low number). Any doubters out there, please talk to anyone who currently injects insulin. I have two family members - they're my data source.
Now apply the previously mentioned 3 to 1 ratio (market cap to sales), and you come up with a $45B future market cap for MannKind. Again, look at the Forbes numbers if that figure scares you. Today, MannKind's market cap is $2B. $45B is 22.5 times greater. So, to calculate the accompanying fair future share value, you'd apply the 22.5 figure to the current share price (since it's linked with the $2B market cap), and you get a future share value of somewhere between $115 and $130 (considering the share price fluctuations over the past few weeks).
Conclusion, don't be scared of MannKind's current $2B market cap. Look at the data to see what the market is currently supporting in terms of sales vs. market cap for the Pharma sector, and you'll see that MannKind has about as much headroom as I do when I walk under the St. Louis Gateway Arch!
Disclosure: I am long Mannkind and truly hope this drug is given the opportunity to improve the lives of those who suffer from diabetes around the globe.
Reminder: Be smart with your money. Do your own research, don't rely on someone else, then make prudent investment decisions based on your financial situation.
Disclosure: I am long MNKD.