What's MannKind Really Worth?

What's MannKind Really Worth?

Here's your one-question pop quiz of the day. Does MannKind deserve a market cap of:

  1. $1.4 billion

  2. $1.7 billion

  3. $2.2 billion

  4. None of the above

What's the correct answer? It depends on whom you believe. Here are reasons any one of these answers could be right.

1. $1.4 billion

This is close to the market cap that Bank of America's Steve Byrne thinks MannKind is worth. He recently downgraded the stock from neutral to underperform and also lowered the price target from $8 per share to $5.

Why such pessimism? Byrne's action came after a survey of 75 doctors was conducted to determine their interest in Afrezza based upon MannKind's recently released phase 3 study results. The physicians took a more cautious stance about the inhaled insulin than in the past, leading Bank of America to presume that capturing market share could be more difficult than earlier thought.

2. $1.7 billion

Right now, the market is saying the answer is "2," give or take a little. To put that valuation in perspective, let's look at a company with a similar market cap: Nektar Therapeutics , which has a market cap of more than $1.5 billion. This comparison is a little ironic, because Nektar years ago failed commercially with an inhaled insulin product, Exubera, along with partner Pfizer . That's the past, though, and there are plenty of reasons why Afrezza is superior to Exubera.

I think the mere fact that the market is placing a higher price tag on MannKind right now shows that many investors expect much more from Afrezza. MannKind has only one product, while Nektar counts 13 in clinical trials, six of which are in phase 3. MannKind doesn't yet have a revenue-generating product. Nektar does, with more than $96 million in revenue coming in over the last 12 months (although a significant portion of that revenue stemmed from collaborations with larger partners).

There is definitely some level of optimism about Afrezza's chances already baked into MannKind's price.

3. $2.2 billion

If we look at analysts' estimates for where MannKind's value will be within a year, "3" looks to be about right. The mean one-year price target for the seven analysts surveyed by Thomson Reuters is $7.46 per share, which equates to a market cap just north of $2.2 billion.

Is this price target a stretch? Not really. MannKind traded above this level just a little over a month ago. A negative market reaction to generally positive phase 3 study results brought the stock down somewhat. It wouldn't be surprising for good news (like snagging a marquee commercialization partner or FDA approval) to lift shares to this level or even higher.

4. None of the above

MannKind bulls and bears could both easily go with this answer. The most pessimistic analyst, for example, set a price target of only $4 per share, reflecting a market cap of below $1.2 billion. The most optimistic analyst thinks MannKind will climb to $11 per share, which would put its market cap at nearly $3.3 billion.

At least one potential rival is already dismissing Afrezza to some extent. Novo Nordisk's CFO Jesper Brandgaard said recently that his company sees Afrezza as "solely a product you use for mealtime." Brandgaard noted that patients who use mealtime insulin often also need long-acting insulin, which would currently require an injection. Novo, by the way, also threw in the towel on its inhaled insulin product several years ago following Pfizer and Nektar's failure.

This view, though, focuses more on Afrezza's attraction as an inhaled insulin versus an injected insulin and doesn't really address what many would say is Afrezza's greatest strength: how well it works. Afrezza acts rapidly and mimics the normal functioning of a healthy pancreas relatively closely.

On the bullish side, investment firm Piper Jaffray thinks that Afrezza could hit peak annual sales of more than $2 billion, assuming approval in the U.S. and Europe. If this estimate is in the ballpark, MannKind could be worth a lot more than $2.2 billion in the future.

Best guess
To me, the safest answer for this quiz is "none of the above." I'm not sold on the idea that a survey of 75 doctors accurately represents the opinions of the the entire medical community. MannKind must get a partner to help commercialize Afrezza. If it gets a good one with a solid sales team in place for the diabetes market, my hunch is that doctors can be swayed to try Afrezza. I suspect that patients will like it if the doctors prescribe it. In this scenario, that $3.3 billion market cap from the most optimistic analyst will likely be blown away.

However, the key word in the above paragraph is "if." If MannKind doesn't land a partner with a sales team that can effectively educate physicians and if that physician survey was on target, I wouldn't be surprised to see the market cap drop even lower than $1.4 billion.

I think that MannKind will secure a solid partner, but none of us can be absolutely sure. I'm definitely not a bear on MannKind, because my view is that Afrezza holds tremendous potential. On the other hand, I'm not quite as gung ho as many of the company's most ardent supporters. Call me cautiously optimistic. My caution has overridden my optimism for now, though: I don't currently own any MannKind stock.

What do you think? Leave your thoughts in the comments section below. Anyone who makes a solid case for their answer, regardless of what it is, automatically gets an "A" on the quiz.

A really good answer
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Originally published