As seasoned MannKind (NASDAQ:MNKD) investors have come to expect, company management revealed few specifics in their latest conference call. A few more bits of actionable information emerged in their presentation to analysts at the RBC 2015 Healthcare Conference.
The new information provided fodder for those on both sides of the long/short argument. What I'll attempt to do here is give an evenhanded interpretation of how what was said might impact MannKind's profitability over the next few years.
Keep in mind that I value stocks using a fundamental approach that is based on the belief that the price of a stock should over time relate to the company's earnings per share. Obviously, there are stocks like Amazon.com (AMZN) and Tesla (TSLA) whose investors have done very well completely ignoring fundamentals. So, if you believe that MannKind is one of those stocks, ignore my valuation-based musings.
But if you do ignore valuation, do so with the awareness that this stock does not have a history of supporting highly inflated prices. Over its long history since IPO, it has burnt enough investors that it may have trouble attracting the story-driven optimists who invest in those highly successful momentum "nonprofits."
The State of the Afrezza Launch
In both the conference call and the RBC presentation, management described marketing partner, Sanofi (SNY), as enthusiastic about MannKind's inhaled insulin, Afrezza, and as doing an excellent job with the launch. The only new fact about the launch that was revealed was that Sanofi has asked that MannKind's factory provide them with more samples than originally planned. This is a plus from a marketing standpoint, as it suggests that there is interest in the product from physicians. But every cartridge given away for free is one less cartridge contributing to profits.
Many questions were asked about sales figures. But management explained they only know what shows up in the IMS numbers that MannKind investors have already been discussing online and what inside insight Sanofi, which also looks at those IMS figures, shares with them. They suggested that analysts will find the most reliable sales numbers in the first quarter report issued by Sanofi. This is expected to be made public the last week of April, a month earlier than MannKind's next quarterly report.
CEO Hakan Edstrom explained at the RBC conference that they estimate that there will be a delay as long as 3 weeks between the visit to a doctor where Afrezza is discussed and the prescription hitting the databases. This is due to patients using samples and the fact that endocrinologists, unlike GPs do not have spirometry equipment in their offices, requiring that patients be referred for that testing before a prescription is issued. Since the official launch was on February 3, there is only two weeks of post-launch data available now, and because of those expected delays significant numbers won't start to emerge until the next few weeks.
Insight into How Advertising Will Proceed
Management explained why we aren't seeing ads for Afrezza. There are over 100,000 physicians in the U.S. and some 1,200 Sanofi reps, so it will take some time for them to be able to familiarize doctors with the product. It would be a mistake to advertise the product before physicians are knowledgeable and comfortable with it, as you don't want patients asking for a drug that the doctor knows nothing about, as they are then likely to refuse to prescribe it.
The advertising campaign, which will begin in the second half of this year, will initially focus on medical journals and involve presentations to doctors at conferences, as it should. Direct to consumer ads come later. Meanwhile, MannKind's management is heartened by the social media activity.
Expanding the Label Proceeding Slowly
The pediatric study has not apparently been designed or submitted for approval yet, as management is not aware of any plan to make the smaller dose cartridges that would be needed for such a study. Two other FDA-required follow up studies have been approved, probably including the dosing study, but the specifics were not given. The long-term safety study will be submitted by April.
The time frame for the pediatric study was not discussed, but given the lack of progress here, the pediatric study could take a few years to complete after the protocols are approved so there is little likelihood of the label expanding to encompass these patients in the near future.
The Progress Payments May Be Spent on Expanding the Factory
A bit more insight was given into the progress payment schedule, which was helpful since this information was redacted in the published version of the Sanofi-MannKind partnership agreement, supposedly for competitive reasons.
There will be one more progress payment of $25 million received for hitting development milestones. After that, the progress payments occur when sales thresholds are met and when foreign markets are brought on board.
Matt Pfeffer, the company's CFO, stated that the sales targets were selected with reference to the factory's capacity, since increasing sales require more factory capacity and there is a time lag as it takes time for factory build out and approval of new lines. Hence, the sales targets are relatively low to allow the progress payments to pay for future expected sales demand. This suggests that the progress payments will go into the expenses of building out the factory and will only turn into profit when Sanofi purchases, at cost, the insulin the new factory lines produce.
Pfeffer stated that the current factory capacity allows it to manufacture between 100 to 120 million cartridges a year. This works out to 1.1 million to 1.3 million boxes of 90 cartridges. It is still not clear what a "prescription" will be and how much each prescription will cost.
The much cited Twitter poster, Afrezzauser, for example, is using considerably more than one box of 90 cartridges a month as he is also covering snacks and in-between meal corrections, which is what you would expect for insulin used by someone with Type 1 diabetes. I have read online that multi-box prescriptions are being covered by one co-pay by some insurers. So the actual profit from these multi-box prescriptions remains unknown. We will only start to understand pricing and profits better when we see Sanofi's prescription counts and sales figures which MannKind management told us should appear in Sanofi's next quarterly report.
Impact on Stock Valuation
Were boxes to be reimbursed at $200 per box of 90 cartridges, the current factory at full capacity with all boxes sold would generate a potential profit to MannKind at a 30% margin, with MannKind taking 35% share of total profits of approximately $23.4 million to 27.3 million. With 405 million shares outstanding, that works out to a maximum, roughly of $.06 per share, justifying a price at a PE of 20 of $1.20.
However, Pfeffer also stated at the RBC conference that this factory capacity will be tripling shortly, as the two new lines will be getting approved next quarter. Should three times as much Afrezza be sold at a profit, those sales could support a fundamentally valued price of $3.60 per share. (However, remember those samples aren't being sold at a profit.)
Since the progress payments may be going to build out additional manufacturing lines, it may be premature to bake them into the stock price. It sounds like the last development milestone payment Pfeffer mentioned, which they expect to receive in the near future, which will be $25 million, may be paid when the lines about to be approved are approved. The cost of these lines may have been funded from the $200 million that MannKind has already received from Sanofi. So this next progress payment could possibly add to earnings. That could add another $.06 to the earnings per share, which would raise the valuation to $4.80/share.
Since more progress payment(s) money is linked to approval in the EU and Japan, these approvals could also raise the valuation per share by another $1.20/per country, perhaps more. Since the details of these progress payments have been kept entirely secret from shareholders, we have no way of figuring this more exactly.
More Insight into the Technosphere Development Strategy
The most interesting news came from the conference call, where the company revealed that recommendations of the expert committee, which they had told us previously they had hired, had been reported to the board, who found them very exciting.
Once again, investors' excitement should be tempered a bit by the fact that for "competitive reasons" we are denied any actual information about these new applications save that they are in the area of pulmonary drugs, pain medications, and cancer support medications, and that they involve well-understood, already approved drugs which should make for an accelerated approval schedule and that the company believes they will be relatively cheap to develop.
MannKind management also stated that the drugs under consideration are occasionally used drugs, not chronic, daily use drugs like Afrezza. So the potential profit from these drugs is likely to be lower unless they are drugs that would be used by a huge market.
To illustrate this, a person using a drug given for migraine might buy only 25 cartridges a year rather than the 1,080 cartridges that a year of Afrezza prescriptions would use. On the other hand - and I am just putting this out as an example and in no way suggesting there is any hint that this is in the works - a Technosphere application of generic acetaminophen (Tylenol), which by bypassing the liver could avoid potential liver toxicity, could be used a couple times a month by many people and become a blockbuster product.
However, since we have zero idea what actual drugs are being considered, it is premature to even begin trying to estimate the size of the market the next Technosphere applications might command.
The Prospects for Technosphere Partnership Remain Murky
The terms with which these new Technosphere applications were presented suggested very strongly that the company is going to go it alone with them, and will most likely be applying the Technosphere technology to out-of-patent generic drugs. This did not suggest to me that any important partnership is about to happen.
Indeed, the question of potential partnerships was only brought up by analysts at the conference call, not by management in its initial presentation. And in response to questions about partners, MannKind management said only that there were discussions ongoing with potential partners that were confidential and we would hear about them if any actual agreement was signed.
The possible partnership with Sanofi to develop a Technosphere-delivered GLP-1 agonist was also described as a possibility, however. The statement was made in a previous presentation that the GLP-1 agonist Technosphere application that MannKind has actually built was unsatisfying as its half-life was too short to be effective is a consideration.
MannKind is not talking about modifying the existing Technosphere applications, just applying it. However, injected long-lasting GLP-1 analogs like Bydureon are already encapsulated in a microsphere. So it is unclear if a long-lasting inhaled GLP-1 product could be created. In addition, the Sanofi GLP-1 drug is not yet approved in the U.S. and all the currently approved GLP-1 agonists, except for short-acting Byetta, already carry black box warnings.
It is possible that there are companies who might want to apply the technosphere technology to patented drugs in order to extend their patents, who would pay MannKind for the rights to the technology, but these were not the drugs that MannKind was discussing at this conference call. It isn't likely that they will find a partner for the development of a generic drug unless it is a true blockbuster. And if it were, why share it with a partner?
I will leave speculation about possible buyouts to those who enjoy such things. There was nothing in anything MannKind presented here to suggest a buyout is in the works, and the contract between MannKind and Sanofi prohibits Sanofi from acquiring more than 5% of MannKind stock for the next few years.
The Time Frame for New Technosphere Products Developed In-House
When asked about whether there would be a new Technosphere product this year, MannKind management replied that they were hoping to get started on "proof of concept" studies for the first drug this year.
A proof of concept study is a Phase II study, which is intended to find out if the drug does what it is supposed to do. These are usually studies performed with a small number of patients. If they are successful, further Phase III studies must be done with a larger patient body to determine what the side effects are. Since the Technosphere approach delivers drugs by a pulmonary pathway that may not have been supplied that way before, these studies are going to have to be done and safety will be examined carefully.
This suggests that approval of any new Technosphere drugs, as exciting as they may be, is several years in the future and that the cost of the studies they require will soak up some of the profits MannKind eventually earns from Afrezza.
I don't think it is possible to value the impact of Technosphere drugs on MannKind's bottom line with the information we have now or apply it to the stock's valuation. If the proof of concept study is submitted to the FDA by the end of this year, we will finally learn what the drug is that the company has decided to proceed with, and that may make it possible to ballpark its potential market and possible earnings for such a drug, should it be approved.
Bottom line, the theme song of this stock is "You Keep Me Hanging On." There is just enough here to encourage investors, but as has been the case for so long, significant profits look to be many years away.
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Disclosure: The author is long MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.