By Brian Marckx, CFA
READ THE FULL MNKD RESEARCH REPORT
Q1 2019 Update: Product Sales Up 49% on 71% Growth in Demand. Product Margin Continues to Expand..
MannKind (MNKD) reported financial results for their first quarter ending March 31st and provided a business update. As it relates to the financials, total revenue was $17.4M, which included $5.1M in product sales and $12.4M in collaboration revenue. This compares to our estimates of $21.6M of total revenue, $5.7M in product sales and $27.3M in collaboration revenue. Our sizeable miss on collaboration revenue is largely immaterial as it reflects a difference in anticipated-versus-actual timing of recognition of the $12.5M initial milestone under the UTH TreT development agreement. As a reminder, that agreement paid MNKD $45M upfront plus up to an additional $50M in development milestones. MNKD received the first $12.5M in Q1 and anticipates receipt of the second and third in 2H’19 and 1H’20, respectively.
Meanwhile, while product sales (i.e. Afrezza sales) of $5.1M were about 10% ($590k) shy of our estimate, it appears that based on prescription demand, all of the difference is attributable to inventory burn-through at the wholesale and retail channels. While net product sales increased 49% yoy, management noted on the call that prescription demand actually increased an even more robust 71% (which compares with our estimated 66% yoy growth rate).
The Afrezza ad campaign ran for 11 weeks, spanning the end of January through the end of March of this year. The campaign was targeted at ten markets with a goal to build awareness and drive utilization of Afrezza. While management is awaiting data from Symphony to provide an update on the specific outcomes of the DTC campaign, CEO, Mike Castagna indicated that the early metrics have been positive as they have been witnessing growth in prescribers.
Voucher programs have also aided in adoption. Afrezza total prescriptions increased by 28% and 37% yoy with and without vouchers, respectively to 7,736 and 7,118 TRx. While TRx fell by about 11% from Q4’18 to Q1’19, the decline may be related to challenges associated with seasonality occurring in the first six weeks of the quarter as it relates to reauthorizing patients. Management is of the opinion that ad campaigns can slowly-but-surely change the way patients manage their diabetes as they get acquainted with Afrezza. Also, informing patients through ads can change their conversations with physicians, who might be more willing to write prescriptions. We continue to be encouraged by MNKD’s evidence-based approach towards educating both physicians and patients of the clinical and quality of life benefits of Afrezza as compared to traditional insulin delivery.
Also encouraging is that COGS related to Afrezza remained largely flat at roughly $4 million. Q1 marked the second consecutive quarter (and second quarter in history) of Afrezza generating positive gross profit. Gross margin expanded from 62% in Q4 2018 to 68% in Q1 2019. Product margin grew from 13% to 21% over the same period. Management expects that continued growth of Afrezza sales and, absent any significant inventory write-offs, that they will generate positive product gross income in every quarter of 2019.
Research and development expenses came in around $1.6 million, declined 37% quarter-over-quarter and were 60% below our estimates. The decline in expenses was driven by reduced clinical trial activity. We had forecasted higher expenses related to commencement of work of TreT and possibly RLS’ candidate. Selling expenses increased by 70% (18.6 million), compared to the same quarter in the prior year, largely related to $9.3 million spend on television ad campaigns for Afrezza. Some of that was offset by a restructuring of sales territories and personnel which resulted in a decrease of $1.2 million. General and administrative expenses for the quarter were ~$7 million. Total SG&A was largely inline with our $23.3M estimate.
As it relates to liquidity, the company exited the quarter with more than $59M in cash and short-term investments, which includes the initial $12.5M UTH milestone. MNKD used $11.6M in cash (or $13.8M, ex-changes in working capital) for operating activities in Q1. Subsequent to Q1, MannKind repaid the $2.5M Tranche B Deerfield note. Another $9M comes due in July. Near-term capital should be bolstered by another $25M in UTH milestones, which are anticipated over the next ~12 months.
A-One, an investigator-initiated randomized control trial, was conducted in 400 Type 2 diabetics (T2D) patients to evaluate inhalable insulin and digital therapy. Results demonstrated that people with T2D using the integrated digital diabetes care platform with Afrezza improved their A1c. The results were presented at the 2019 Advanced Technologies & Treatments for Diabetes (ATTD) conference in February 2019.
Subsequent to quarter-end, MNKD presented additional data supporting the ultra-rapid acting profile of Afrezza at the American Association of Clinical Endocrinologists (AACE 2019) annual scientific meeting. The data continues to demonstrate that Afrezza closely approximates the time-action profile of physiologic insulin needs after a meal in patients with T2D, provides significantly better control of early post-prandial glucose levels and its onset uniquely affects early post-prandial glucose levels.
Interim results from Dr. Phil Levine’s study involving 40 subjects will be presented at the ADA. In this trial, T2D patients’ HbA1c levels were not within recommended guidelines when treated with oral agents, basal insulin or GLP-1 for 6 months. Pediatric study data could also be available in the near term. As a reminder, cohort 1 (ages 13 – 17 years) of their ongoing (safety and PK) pediatric study completed in September 2018. MannKind is guiding for cohort 2 (ages 8 – 12 years) to complete in the coming months and follow with commencement of cohort 3 (ages 4 – 7 years). If all goes well, a Phase III pediatric study could commence 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.
Management’s priority in the near term will be to continue their marketing strategy aimed at educating prescribers and patients on the benefits of Afrezza and, ultimately, on driving adoption and usage. While greater marketing spend is benefiting higher sales, it does come at the expense of increased cash burn and an elevated expense base. The company plans to strategically fine tune TV ad campaigns in their various territories.
We continue to think MNKD’s approach will pay dividends over the long-term and we support their strategy of leading their awareness-building efforts with a science-based approach. While educating entrenched ‘old-school’ injected-insulin delivery prescribers on the clinical benefits of inhaled insulin (specifically of Afrezza) is undoubtedly an uphill climb, we think the ever-growing database of proven clinical benefits of Afrezza will progressively soften the traditional insulin-only mindset. Meanwhile, indications are that patients that try Afrezza largely do experience quality-of-life benefits – this stickiness, we continue to think, represents the major catalyst to steepening the adoption and utilization curves for the product over the long term.
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 5.5x forward sales. Given MNKD’s much more rapid estimated percentage revenue growth, we apply that same multiple to our forecasted 2021 Afrezza sales of $116M, which values the Afrezza portion at approximately $3.40/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 ~$4.00/share.
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