MannKind (NASDAQ:MNKD) longs were treated to red today after Piper Jaffray analyst Joshua Schimmer downgraded MannKind based on lackluster prospects for Afrezza. Schimmer lowered his price target from $4.00 down to $1.50, implying 60% downside from current prices. This caused MNKD to sell off Wednesday, and the stock is down 10% to $3.66 as I write this.
As a MNKD long, Wednesday's drop was slightly disappointing for two reasons: 1) Schimmer's logic is shaky and mostly unsubstantiated and 2) The stock had staged a brief rally in the past few days and broke the $4 mark before plummeting back down. I am not too upset though because I'm holding MNKD for the long haul, and for this reason I view the drop Wednesday as a nice buying opportunity for long-term investors to add to their positions.
In this article I will show why I think Mr. Schimmer's downgrade does not hold up under rational analysis and why Afrezza's prospects are still bright.
Schimmer states that lackluster script numbers for Afrezza led him to speak with five primary care and endocrinology specialists, who gave the impression that Afrezza is a "very niche" product that will see expanded use but "not dramatically so". Schimmer then states that he believes "MNKD has vastly over-estimated the commercial potential for the drug," which led him to set a price target of $1.50 or a valuation of $620 million.
It's evident from his analysis that Schimmer made two very big mistakes: 1) He assumed, like many, that Afrezza would be a blockbuster hit right off the bat and 2) He committed a fallacy of inductive reasoning.
Let's start with the first mistake. Like so many others that follow MNKD whether they be analysts, bulls or bears, Schimmer made the mistake of assuming Afrezza would burst out in its first year and blow away expectations. So far, the ramp-up in sales has obviously been disappointing, but is nothing that shouldn't have been cautiously expected. In my first ever article on MNKD, which I wrote back in October of 2014 and can be found here, I stated that the most likely scenario for Afrezza is a gradual increase in sales, which will eventually reach blockbuster levels.
This narrative is still in the midst of playing out, and for long-term investors the current status of Afrezza and MNKD isn't worrisome in the slightest. Unfortunately, there are many investors, and apparently analysts as well, who think that this first year of slow beginnings for Afrezza already spells doom for MNKD. If Afrezza and Technosphere are being valued at $620 million then I think there's a flaw in the analysis.
The direct-to-consumer ("DTC") advertising campaign has been in action for just two months yet already Schimmer can tell it's going to be a "very niche" product? I don't buy it. The more likely explanation is that he is misinterpreting the slow ramp-up in sales as an indicator that Afrezza will be a niche product. This is further evidenced by Schimmer's mention that "awareness is high" about Afrezza. If one were to believe that awareness is high then lagging sales would indicate a niche product. But awareness about Afrezza has actually been one of the biggest contributors to the weak sales figures.
As I've argued in previous articles, such as this one, Afrezza is a drug that should be marketed as a consumer-friendly alternative. The drug is superior in efficacy and its A1c profile is being shown by early adopters to be better, but these two characteristics won't be the sales drivers. Afrezza's sales drivers will be its consumer convenience characteristics: it is inhaled and it is ultra-rapid acting.
Doctors are wary of Afrezza because of the stigma surrounding inhaled therapies and because of the mandatory spirometry tests, so marginally superior efficacy won't convince many to prescribe it. The convenience factors of Afrezza are also not given high priority when most doctor's make decisions. For all these reasons, DTC advertising is especially important because what makes Afrezza marketable is the benefits it gives to consumers. Patients have to pick up the torch and demand Afrezza because many doctors will not prescribe it on their own for the reasons I have stated. And due to how important I think DTC advertising is to Afrezza's success, I believe Schimmer has done Afrezza and MNKD a great disservice by counting them out after only two months of DTC marketing.
In addition to a mistake in expectations, Schimmer also applied faulty inductive reasoning in his analysis. He says that the low script numbers prompted him and his firm to reach out to five primary care and endocrinology specialists who see a lot of diabetes patients to ask about their outlook on Afrezza. From speaking to these physicians, Schimmer came to the conclusion that Afrezza is a niche product.
However, it is possible for the premises to be true but for the conclusion to be false. If he had surveyed hundreds of doctors that deal with diabetes patients and a majority said they don't think they will prescribe Afrezza often, then he could possibly have a case for concluding that the drug is facing hurdles among doctors.
Note, that even from surveying hundreds of physicians, one cannot conclude that Afrezza will be a niche product; one can only conclude that doctors might not prescribe it. If one surveyed both hundreds of doctors and hundreds of patients, and the results were disinterest in Afrezza, then you might be able to reasonably conclude that Afrezza will only be a niche product.
But five physicians? Schimmer claims that these five see a "high-volume" of diabetes patients, but still five is much too low of a number to be considered statistically significant. This is not to say that there is no way Schimmer is correct that Afrezza will be a niche product. Obviously, this is still a possibility. But the logic used to reach the conclusion is flimsy and is not substantial enough to warrant a downgrade, and especially such a significant one. For this reason, the drop in stock price is unwarranted and investors should use it as a buying opportunity.
Piper Jaffray analyst Joshua Schimmer downgraded MNKD and lowered his price target from $4.00 to $1.50 after weak script numbers and lackluster enthusiasm from physicians. His analysis reflects that his expectations were unrealistic from the get-go and that he based his conclusion off feedback he received from just five physicians. I don't think this downgrade should hold any real weight and MNKD investors should use this as a buying opportunity.
Disclosure: I am/we are long MNKD.
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.