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
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