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.
And speaking of the best ...
Is MannKind (MNKD +3.73%) the best biotech investing idea ever? If you believe the buy recommendation that emerged from life sciences equity research firm Brinson Patrick yesterday, it almost certainly is. Emphasis on "if you believe ..."
According to Brinson, you see, inhalable insulin firm MannKind is a potential triple in the making. A stock destined to hit $6 in under a year, selling for just two bucks and change today. According to StreetInsider.com, which reported the rating, Brinson believes that MannKind's Afrezza drug, "currently in two Phase 3 pivotal trials with their handheld drug delivery device called Dreamboat," addresses "a $33 billion worldwide branded diabetes market opportunity," and could capture $1 billion in sales by 2016.
Is it right?
Let's go to the tape
A billion in sales. Huh. That's quite a tall tale Brinson's telling. So far, the drugmaking world has seen three companies -- Eli Lilly (LLY +0.82%), Novo Nordisk (NVO +1.51%), and Pfizer (PFE +2.63%) -- attempt to create a market for inhalable insulin. All three failed at some point in the process. Yet according to Brinson, MannKind's not only going to succeed where everyone else failed, and get its drug approved.
Brinson's saying that from a near-standing start of just $35,000 in annual revenues, MannKind's going to take off and begin compounding revenue at a rate of 1,300% (no, I didn't misplace a decimal) over the next four years. That's ... impressive.
Fun with numbers
Just for the fun of it, let's consider what this means to MannKind shareholders. It means that at just a $440 million market cap today, MannKind is selling for a "price-to-2016 putative sales ratio" (yes, I just made that up) of less than 0.5. For comparison, based on 2016 consensus sales numbers, Lilly, Pfizer, and Novo Nordisk are respectively selling for P/2016S ratios of 2.5, 3.2, and 4.6. Dendreon (NASDAQ: DNDN), a company closer to MannKind in terms of its prospects for profitability, and a former fast-growing biotech that analysts were -- until recently -- also predicting would one day do $1 billion in annual sales, today carries a P/S ratio of just 1.5.
Needless to say, none of these companies is growing sales and earnings at anywhere near 1,300%.
Yet I ask you: If you agree with Brinson that MannKind is going to grow sales much faster than its rivals, does it make sense that these rivals would command price-to-sales ratios higher than MannKind's?
I think not.
Back to reality
It's worth pointing out of course, that basically no one else in the world is predicting anything like the sort of sales numbers that Brinson Patrick relies on in making its MannKind endorsement. To the contrary, the consensus of even MannKind's most optimistic backers on Wall Street is that the company might make $333 million in sales in 2016. That's barely a third of what Brinson is predicting.
So what, an investor may wonder, is Brinson Patrick thinking when it makes such an outlandish claim? If I might be so bold, I'll try to sum up their thinking thusly: Up until January 2012, there was no such thing as "Brinson Patrick" equity research. While its parent investment bank has been in business for 15 years or so, Brinson Patrick's research division literally just set up shop this year, and has yet to make a name for itself among individual investors. And what's the best way to make that name?
Well, one way might be by running out on a limb and recommending a moonshot stock, and guessing so high on its target price that, if MannKind hits it, Brinson will be the only analysts on Wall Street who called it right. They'll be the "smartest guys in the room," almost by default. On the flip side, if turns out that Brinson's wrong, well ... they were a no-name shop to begin with. What did they have to lose?
Other than your money, of course.
