MannKind ( MNKD: Nasdaq)

By MLV & Co. ($5.92, Nov. 4, 2014)

We are lowering our price target of MannKind to $7 from $11 and maintaining our Hold rating.

On Monday, Mannkind (ticker: MNKD) reported its third quarter, but the focus is on Afrezza's [inhaled insulin] launch in the first quarter of 2015.

We updated our model to incorporate earnings as well as the 35-65 profit split between MannKind and partner Sanofi ( SNY). Our new estimates for Afrezza sales in 2015, 2016 and 2017 of $110 million, $280 million and $486 million, respectively, project a more gradual launch but are roughly in line with Bloomberg consensus estimates of $111 million, $286 million and $545 million. Our review of MannKind's capital structure reveals more debt-like instruments, detracting from valuation.

MannKind reported third-quarter earnings-per-share of a loss of nine cents versus our estimate of a loss of 12 cents. While MannKind did not book any revenue during the quarter, it received $150 million in an upfront payment from the closing of the Afrezza licensing agreement. Cash at quarter-end was $172.5 million, up from $41.2 million at June 30.

Additionally, we model the first $25 million manufacturing and supply milestone in the fourth quarter, which could slip into the first quarter of 2015. Coupled with the $175 million line of credit with Sanofi, we project MannKind has sufficient cash. However, we expect MannKind to refinance its $100 million note due August 2015.

Management reiterated that the U.S. commercial launch for Afrezza is on track for the first quarter of 2015, with sales and marketing plans to be finalized in the coming weeks. While details regarding the size of the salesforce were not disclosed, we were encouraged to learn that Afrezza will be the focus product for at least some of the salesforce, and, importantly, that the salesforce is experienced and will be "well-resourced."

MannKind is presently manufacturing commercial supply, and management is confident that it will be able to supply Sanofi with inventory to launch. This is expected to trigger the first of three chemistry, manufacturing and controls (CMC) milestones totaling $75 million. Since two-thirds of research and development (R&D) expense (total R&D was $19.2 million in the third quarter) was allocated to commercial supply and manufacturing, we expect R&D expense to decline sharply in 2015 and thereafter as this expense will be booked as cost of goods sold following launch. At the Danbury, Conn., site, MannKind's three production lines (two awaiting validation) should support about $850 million in sales.

According to MannKind, due to accounting rules, it cannot book either the $150 million upfront or $75 million worth of CMC-related milestone revenues until the Sanofi partnership becomes cash-flow positive.

Due to limited visibility on launch trajectory and costs, as well as accounting rules, we believe investors should not expect to see revenues flowing into MannKind's profit and loss until 2016, at the earliest.

As investors remain focused on Afrezza launch metrics, we note partner Sanofi is hosting a seminar on new medicines and vaccines on Nov. 20, during which we expect Afrezza will be highlighted.

-- Arlinda Lee

-- Benedict Shim

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

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