What: Shares of MannKind (MNKD 1.20%), a biopharmaceutical company focused on developing therapies for diabetes, fell 20% in March (per data from S&P Capital IQ) after being on the receiving end of a Wall Street downgrade.
So what: In early March, Jay Olson of Goldman Sachs downgraded MannKind to sell from neutral and set a $3 price target on the stock, or roughly 50% below where the stock was trading when Olson issued his commentary.
According to Olson, recent discounting in the hepatitis C market is likely to carry over into the diabetes market and result in estimated gross-to-net discounts of 40%, which is higher than the 20% Goldman Sachs had been modeling for MannKind's inhaled diabetes drug Afrezza. Additionally, Olson noted that the third-quarter 2014 launch of Jardiance and the fourth-quarter 2014 launch of Trulicity -- both diabetes products -- tracked about 75% below Goldman's sales launch expectations, and that Afrezza's launch is also tracking below projections.
Ultimately, Olson said he believes MannKind will reach the sales totals for Afrezza required to trigger the full $925 million in milestone payments from licensing partner Sanofi (SNY -0.47%), but the company lowered its peak annual sales estimates in 2025 by 50% to $1 billion from $2 billion.
Source: MannKind.
Now what: The question investors need to ask here is whether it's worth getting into a fuss over a Wall Street downgrade.
On one hand, it's not uncommon for Wall Street to focus on the near term. It's also not as if Wall Street analysts have any real accountability to shareholders, so on that accord MannKind investors can take some solace. Also, MannKind's rapidly acting formulation should help Afrezza leave the body quickly, reducing instances of hypoglycemia and giving it a potential edge over its peers.
On the other side of the coin, uptake of Afrezza has been disappointing in its first couple weeks on the market, and a slower launch could spell a much longer pathway to profitability, as well as delay in netting additional milestone payments from Sanofi. There's also the fact that MannKind isn't expected to deliver a significant annual profit until 2018, or perhaps later if Afrezza discounting is higher than anticipated.
I continue to watch MannKind from the sidelines. There could eventually be value here, but I'm certainly not willing to pay more than two times peak annual sales estimates for Afrezza. Based on Goldman's analysis of $1 billion in peak annual sales, this means $2 billion in market value is probably more than fair for MannKind -- which just so happens to be about $5 per share. Unless I see Afrezza's prescriptions written pick up in a big way, I see little upside potential in MannKind stock from here.
