At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Come on in! The water's fine
That's the general upshot of JPMorgan Chase's latest upgrade  for shares of diabetes-drug maker MannKind (MNKD 2.43%). With the sell-off after the firm's massive share issuance now over, and earnings out of the way as well, JP sounded the all-clear for investors Friday, and removed its sell rating on MannKind.
Was it right to do so?
According to Fool biotech analyst Keith Speights, the answer's a definite maybe. On one hand, MannKind beat earnings estimates last week, reporting losses of $0.22 per share, versus the $0.24 loss Wall Street had been steeling itself for. On the other hand, working that per-share loss down below last year's Q3 loss of $0.31 required issuing more than 40 million new shares), and involved substantial dilution of existing shareholders.
Costs and benefits
Dilution is continuing. MannKind's share count rose to 199.8 million through Sept. 30, and could rise further in the event the 30 million warrants, attached to the 40 million recently issued shares, are exercised. What's more, MannKind is burning increasingly large amounts of cash. But on the plus side, Keith thinks the share issuance, plus more cash to be raised from exercise of warrants, plus even more cash that will be provided when CEO Alfred Mann trades some of his loans to the company for stock, should be enough to keep MannKind afloat through 2013.
He's right. Between the funds raised from last month's follow-on offering ($86 million), the $90 million or so that exercise of the warrants could bring, and the $107 million CEO Mann intends to pay for his shares, the company should be able to grow its cash balance as high as $285 million within a fairly short time frame. Even with the company burning cash at the rate of about $107 million a year, that should be enough to get MannKind through 2013 easily, and probably fund the company through 2014 as well.
Meanwhile, the company is going "full steam ahead" on phase 3 clinical trials of its Afrezza inhalable insulin drug, preparatory to seeking FDA approval of the drug -- also expected in 2013.
Valuation matters
So at the very least, we know MannKind's business is on track, and it appears to have solved its near-term liquidity issues. But that's still not quite enough to determine whether the stock is a "buy."
We need to know, too, if the price is right. Now, for a company like MannKind, which has almost no revenues and absolutely no profits, and isn't expected to earn anything before 2015, establishing a valuation is no easy matter. (The more so when you consider that even after its recent cash infusion, the company may run out of money and need to dilute again before it reaches profitability).
But we can make an educated guess. Consider, for example, that analysts who see MannKind earning its first profit in 2015, and its first significant profit in 2016, have the company pegged for about $333 million in revenues that latter year. That's about 1.1 times today's $377 million market cap. Call it a "far-looking-out price-to-sales" ratio (FLOPS) ratio of 1.1.
A fair price? Let's find out, by comparing it with the prices we're asked to pay for a few similarly high-risk, high-reward drug companies.
Dendreon (NASDAQ: DNDN)
Cancer researcher Dendreon is pegged for $667 million in 2016 revenues. At $668 million, Dendreon has a 1.0 FLOPS ratio. On the other hand, even assuming this revenue target is met, Dendreon isn't expected to be earning a profit by 2016.
ImmunoGen (IMGN)
Similarly, antibody-based cancer researcher ImmunoGen is unlikely to reach profitability by 2016. Yet the $107 million analysts postulate for 2016 sales works out to a FLOPS ratio of 8.5.
Geron (GERN -3.35%)
And consider the case of Geron, formerly a leading light in the field of stem cell research. Analysts have this one doing only $14 million  in business in 2016 (and losing money to boot). FLOPS ratio: 12.0.
VIVUS (VVUS)
Obesity-drug maker VIVUS? By 2016, this company's supposed to leap from last year's standing start to more than $1 billion in annual revenues. FLOPS ratio: 1.3. That's right in line with MannKind's valuation. Coincidentally, VIVUS is expected to be solidly profitable by 2016. Just like MannKind.
Foolish takeaway
I have to admit, Fools -- I'm no great fan of unprofitable companies with a history of stock dilution, a likely need to dilute more before they reach profitability, and no guarantee they will ever reach profitability at all.
That said, it looks to me like investors willing to take a gamble could do a whole lot worse than MannKind. If you believe the analysts, it appears to have a shorter path to profitability than many other stocks in this industry, and sells for a much more reasonable valuation than some. While I probably won't buy it myself (at least not before the profits start materializing), I can at least see why JPMorgan has decided that the case for shorting MannKind is no longer as strong as it once was.
