By Brian Marckx, CFA
READ THE FULL MNKD RESEARCH REPORT
The results for Q4 and the full year 2018 from MannKind Corp. (MNKD) were a pleasant surprise. Not only did the company beat earnings expectations but also reported gross profit for the first time. Product margin was 13% in the quarter and, if not for a $2M amendment fee paid to Amphastar (to reduce MNKD’s insulin purchase requirement by $11.5M), product margin would have been a very healthy 48% (according to our calculations). Importantly, management is guiding for product margin to remain in the black every quarter in 2019 (and, presumably, going forward from there). Notably, fourth-quarter 2018 Afrezza sales came in 19% higher than our estimate. MNKD also received a milestone payment of $10 million, which reflects $6.4M under the United Therapeutics (UTHR) license agreement, $3.8M from the UT research agreement and $0.1M from the Cipla marketing and distribution agreement.
On the earnings call, management shared results related to Afrezza’s quarterly prescription growth since 2017. The fourth quarter of 2018 marks the eighth consecutive quarter of accelerating prescription growth. Management mentioned that since initiating the DTC campaign in January 2019, there has been an increase in copay savings card downloads (Q1 2019 had as many downloads as all of 2018). Meanwhile site visits to the Afrezza website was up five-fold. This offers a positive outlook for 2019 and we expect this momentum to be maintained in the coming year as the DTC campaigns complement their sales forces’ efforts in building awareness at the physician level.
Annual revenue from Afrezza came in just better than $17 million primarily due to higher product demand and a favorable mix of sales of the higher priced 12-unit cartridges. Also noteworthy is that accelerating sales of the 12-unit (as well as 8-unit) cartridges is indicative of ‘stickier’ demand from patients (particularly T2D) reflecting them having honed in their specific titration. R&D expense in 2018 came in at approximately $9 million. We model R&D spend to more than double in 2019, reflecting assumed progress in the development of TreT as well as Dronabinol. Selling expenses were $47 million related to Afrezza’s commercial operations. General and administrative expense came in at $32 million for 2018. We expect SG&A expenditures to increase on an absolute basis in 2019 as the company continues to invest in Afrezza adoption initiatives but, on a percentage of sales basis, expect SG&A to fall as compared to 2018.
MannKind’s balance sheet was strengthened with the recent capital raise and Q4 milestone payments. Management is guiding for the current cash balance, which stood at $72 million (cash and cash equivalents) as of December 31, 2018, to be sufficient to fund operations until mid-2020.
Afrezza picking up steam…
MannKind kicked off the year with a substantial ad campaign focused on getting diabetic patients to adopt Afrezza. The “Unexpected Moments” commercial highlights the fact that since it is difficult to remain regimented to inject insulin before eating, Afrezza offers diabetics dosing flexibility at mealtime. Afrezza’s flexibility in this regard relates to its superior time-action profile as compared to injected insulin, a benefit that we believe will drive patient switching and repeat prescriptions.
While the pilot DTC campaign in 2017 was aired in a dozen markets, the current ad commenced in the second half of January across national cable networks and local TV stations. Additional marketing initiatives began in February. MannKind intends to remain flexible on overall spend on the campaign as the marketing push continues.
These ads seem to be a step in the right direction for the company. On the earnings call (2/26/19) management stated that it already resulted in a significant spike in copay card downloads (in one month got as many downloads as a normal year), while hits to the Afrezza website was up five-fold. We continue to expect Afrezza demand to benefit from the DTC campaign as well as the company’s other sales, marketing and reimbursement related efforts and model sales of the product to increase nearly 80% in 2019.
Evidence supporting the benefits of inhaled insulin…
The American Diabetes Association’s (ADA’s) Professional Practice Committee (PPC) updates the Standards of Care annually as they determine new evidence supporting/opposing care in diabetes. As a result of evidence from the STAT study, the ADA recently updated their position statements on the management of diabetes in adults. In their statement, they mentioned that
“… supplemental doses of inhaled insulin taken based on postprandial glucose levels may improve blood glucose management without additional hypoglycemia or weight gain…”
Although this guidance represents the ADA’s current thinking on this topic, policy makers are not expected to merit it immediate incorporation. They are of the opinion that since the evidence is still emerging, results from larger clinical studies may be required to provide clarity on this issue and refine the recommendations.
Additional Afrezza trial data forthcoming…
Dr. Phil Levine initiated a trial in T2D patients whose HbA1c levels were not within recommended guidelines when treated with oral agents, basal insulin or GLP-1 for 6 months. About 40 subjects were treated with Afrezza and we anticipate the interim results of this study in Q1.
Pediatric study data could also be available in the relative near term. As a reminder, cohort 1 (ages 13 – 17) of their ongoing (safety and PK) pediatric study completed in September 2018. MannKind is guiding for cohort 2 (ages 8 – 12) to complete in the coming months and, if all goes well, to commence a Phase III pediatric study before current year-end. Assuming eventual positive results of the Phase III study, this could significantly expand the market for Afrezza and provide a meaningful complementary revenue source for MannKind.
MannKind is also looking to expand in international markets including Brazil, India, Canada and Mexico. MannKind received GMP certification, a prerequisite to regulatory approval, and anticipates receiving ANVISA (Brazilian regulatory authority) marketing approval by mid-2019. MannKind has an agreement with Biomm for distribution of Afrezza in Brazil and with Cipla for the Indian market. The company is currently seeking clarity on a regulatory pathway for Afrezza in India. One potential option may be to utilize existing data and then to conduct a post-marketing study in that country.
As a reminder, in September 2018, United Therapeutics entered into a worldwide exclusive license and collaboration agreement with MannKind for the development and commercialization of a dry powder formulation of treprostinil called Treprostinil Technosphere (TreT) for the treatment of PAH. UT has undertaken the responsibility for global development and regulatory and commercial activities. As per UT’s 10-K, they plan to commence a clinical study (called BREEZE) during the first half of 2019 to evaluate the safety of switching PAH patients from Tyvaso to TreT, as well as a PK study in healthy volunteers. The FDA has indicated that these two studies, if successful, will be the only clinical studies necessary to support FDA approval.
While MannKind has agreed to manufacture clinical and initial commercial supplies of TreT, UT will be manufacturing long-term commercial product. Per terms of the agreement, MannKind received an upfront payment of $45 million and is eligible to receive milestones of up to $50 million upon the achievement of specific development targets. $6.4M of the upfront payment was recognized as revenue in Q4’18 while another $30.8M is expected to be recognized in 2019. Management noted on the Q4’18 call that they expect to achieve the initial milestone under this agreement in Q1’19 and had previously mentioned that they anticipate receiving a total of $25M in UTH milestones during 2019.
MNKD also entered into a research agreement with United Therapeutics to develop other candidates for which it received $10M upfront. MNKD is eligible to receive $30M upon achieving developmental milestones as well as double-digit royalties on net sales of the product. MannKind recognized $3.8M of the upfront payment as revenue in Q4’18 and expects to recognize nearly all of the rest in 2019. Additionally, we expect to hear from MannKind’s partner, Receptor Life Sciences, on the development of Dronabinol, an inhaled therapeutic for cancer pain.
We use a sum-of-the-parts methodology to value MNKD, applying a P/S multiple to the Afrezza portion of the business while using DCF to value the UTHR collaboration related to TreT. Our model and valuation are subject to updating, including incorporating other collaboration candidates, if and when we feel there is enough information with which to base reasonably-confident assumptions (including related to RLS) – which could provide upside to our current target price.
LLY and NVO trade at an average of approximately 5.6x forward sales. Given MNKD’s much more rapid estimated percentage revenue growth, we apply that same multiple to our forecasted 2021 Afrezza sales of $124M, which values the Afrezza portion at approximately $3.65/share. Our 10-year DCF uses a 15% discount and values the TreT collaboration at approximately $105M, or ~$0.56/share (which is subject to our 35% risk-of-failure discount). Our sum-of-the-parts calculation puts total value of the company at ~$4.25/share.
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