By Brian Marckx, CFA
READ THE FULL MNKD RESEARCH REPORT
Zacks SCR analysts Brian Marckx, CFA and Anita Dushyanth, PhD have initiated coverage of MannKind Corporation with a $4.25/share price target. See above for free access to our 36-page report on the company.
MannKind Corporation (MNKD) was founded in the early 2000’s by the late Alfred Mann, a physicist by training, Mann was a pioneer in several fields including aerospace, electronics and medical devices. Among his successes prior to MannKind was development of the first rechargeable pacemaker and MiniMed, a revolutionary miniaturized insulin pump that was sold to Medtronic in 2001 for more than $3B.
MannKind is engaged in the development and commercialization of inhaled biopharmaceutical products for chronic diseases such as diabetes and pulmonary arterial hypertension. Afrezza, a rapid-acting dry powder inhaled (human) insulin approved for use in managing both type 1 and type 2 diabetes, launched in the U.S. in early 2015 and is expected to make its international debut in the near-term. It is built around MannKind’s proprietary platform drug delivery technology, called Technosphere.
While Afrezza is currently the company’s only commercial product, MNKD is actively engaged at building out their commercial portfolio. The focus of their product development strategy is on leveraging the versatility of their Technospehere platform drug delivery technology and expanding into other disease areas. In early September they announced a collaboration with United Therapeutics (UTHR) related to development and commercialization of a dry powder formulation of treprostinil for the treatment of pulmonary arterial hypertension (PAH). This is a significant market. Drug therapies approved to treat PAH via the prostacyclin deficient pathway generated nearly $2 billion in sales in the U.S. in 2016, of which, treprostinil contributed the bulk.
This follows a January 2016 announced collaboration with Receptor Life Sciences (RLS) related to development and commercialization of (potentially) multiple inhaled therapeutic products – the first of which could be an inhalable cannabinoid for cancer pain. Other programs, collaborations and partnerships could follow.
In addition to expanding the pipeline and opportunities for long-term value creation, collaborations, partnerships and licensing agreements have brought significant non-dilutive funding which MNKD has put to work in the form of cleaning up their balance sheet, product development and commercialization of Afrezza. The RLS agreement included $1M upfront and another potential $100M+ in development and commercialization milestones, while the UTH deal brings $45M upfront and another $50M in possible back-end payments. These follow more than $200M received from Sanofi-Aventis for commercialization rights to Afrezza.
Technological advancements in injected insulin have not resulted in better patient outcomes…
Diabetes is an epidemic in the U.S. and getting worse. Prevalence in the U.S. is on the rise, having grown at a CAGR of approximately 4% since 1980. Approximately 30M Americans have diabetes (22M of which have been diagnosed) and nearly 2M new cases are diagnosed each year. Prediabetes affects another 86M people, or approximately 37% U.S. adults. If not sufficiently controlled, blood glucose peaks and valleys can have serious consequences and result in organ and nerve damage, cardiovascular disease, loss of eyesight and death.
Approximately 96% of the six million diabetic insulin users in the U.S. use injected insulin (from a needle, pen, patch or pump). Despite the feverish pace of technological advancements in diabetic care, including introduction of ‘novel’ rapid and long-acting injectable insulin, personal mini-pumps and continuous glucose monitoring, there has been no significant change in the percentage of diabetics (~50%) that regularly reach their A1c goals. In fact, some studies (Carls et al., Casagrande et al.) indicate that among diabetics that use injected insulin, fewer are actually reaching recommended the HbA1c target of <7% today as compared to a decade (or more) ago. This highlights the unmet need for a new class of insulin therapy that can increase compliance, increase the proportion of diabetics reaching goal and improve patient outcomes – as we discuss below, we think Afrezza represents that therapy.
Technosphere and the importance of natural action profile…
While oral administration is practical for small molecule drugs, parenteral routes, such as intravenous, subcutaneous or intramuscular injection, are used to deliver therapeutic peptides and proteins (i.e. biologics) which cannot survive the harsh environment of the gut. MannKind’s Technosphere technology allows for the delivery of a dry powder formula of certain drugs through inhalation into the lungs. Unlike traditional administration, inhaled drugs bypass the liver, thereby improving systemic exposure. Technosphere’s powders are dissolved extremely rapidly following inhalation and are delivered directly into the arterial circulation. Clinical studies have shown that this translates into a much more natural physiologic profile as well as dose-to-dose consistency. Technosphere insulin (i.e. Afrezza) represents a new class of insulin therapy that has the potential to provide incremental clinical benefit to injected insulin and result in a greater number of diabetics reaching A1c targets.
Inhaled insulin’s novel time-action profile translates into better patient outcomes…
This ‘fast-on-fast-off’ profile means Afrezza begins to decrease sugars faster and return serum insulin levels to baseline sooner than injected insulins. In October 2017 Afrezza’s label was updated to include its rapid time-action profile. Clinical trials have shown that this duration of effect which closely mimics physiological insulin results in lower rates of hypoglycemia (i.e. too low glucose levels), a significant drawback (and contributor to lack of adherence) of insulin treatment. As optimal hypoglycemia control can improve patient compliance and lack of compliance is the most significant contributor to insufficient glucose control (which eventually results in serious complications), Afrezza’s unique time-action profile has demonstrated the ability to improve patient outcomes. The convenience benefits, such as pain-free administration and related stigma of injecting in public, also lend themselves to improving upon adherence to treatment guidelines.
View Exhibit I - Afrezza Mimics Endogenous Insulin
OUTLOOK and VALUATION
We think the general investor sentiment implied by MNKD’s current market capitalization is underestimating the long-term potential of Afrezza and is mistakenly categorizing it as a perennial niche product. Our case for why we believe Afrezza will likely grow to significant double-digit market share and represent formidable competition to traditional exogenous insulin therapy hinges on several catalysts…
- Afrezza’s label recently updated to include language of its rapid onset of action, specifically that it gets into the blood within ~1 minute and reaches measurable effect in 12 minutes. Update also includes new table describing optimal titration. As determining ‘correct’ injected insulin-to-Afrezza conversion and lack of physician awareness of Afrezza’s superior time-action-profile have been cited as impediments to uptake, this label update has the potential to facilitate steepening sales growth
- New published data such as from the STAT study should bolster MNKD’s direct-to-physician awareness efforts. Management has commented that physicians largely lack understanding of the significant clinical and quality-of-life benefits of Afrezza’s time-action-profile. That has undoubtedly stunted adoption and utilization. Expect additional manuscripts to be published in the near term as MNKD looks to further leverage clinical evidence to support the case of Afrezza’s superiority to injected insulin
- DTC campaigns. MNKD has recently tested new DTC programs in certain markets. If conducted effectively we think this marketing channel can drive patient demand - key will be to prompt insulin users to ask their doctors about Afrezza as physician inertia to move away from injected insulin can be significant
- Patient stickiness will also be key and with the updated labeling providing more hand-holding as to adjusting dosing, along with the outcomes of STAT, demonstrating benefits of doing so, we think stickiness will benefit. DTC campaigns could be an important tool in that regard. Repeat Rx increased an average of 75% through the first nine months of 2018, which also indicates patients who try Afrezza, remain on it
- Cash and debt position have greatly improved. Total debt has been cut by nearly $40M over the last 12 months. Liquidity benefitted from recent $45M upfront payment from UTHR related to TreT and another $10M for research unrelated to the agreement. MNKD expects to receive $25M of milestones in 2019 and another $25M in 2020 from the United agreement. The improved debt and liquidity position should provide MNKD with added flexibility to put resources behind Afrezza marketing – such as expanding the direct sales force and advertising, including TV and digital
- Payers loosening their grip. Requisite prior authorization has undoubtedly been a headwind. Based on our due diligence and conversations, we believe the reimbursement picture is evolving to MNKD’s benefit. Lawsuits against Eli Lily, Novo Nordisk and Sanofi claiming unfair trade practices as a result of collusive insulin price hikes appears to have made payers and pharmacy benefit managers somewhat skittish in continuing to protect (our words and our conclusions) the big three injected insulin makers. If that is indeed the case, MNKD could be a major benefactor as eliminating prior authorizations would essentially put Afrezza pari passu with the likes of Humalog, Novolog and Apidra. In addition, management mentioned on the Q3 call in early November that managed-care contract resets for 2019 should reduce the amount of rebates they pay – which should increase the gross-to-net Afrezza sales ratio (and also benefit margins)
- Patient testimonials. While we typically would not cite patient feedback as a catalyst towards increasing adoption, we think for Afrezza it is warranted. Users have documented the ability to change their lifestyle and overall QoL with Afrezza in ways that were not possible with injected insulin. Such as dosing as they take their first bite of a meal or even afterwards. The relative lack of hypoglycemia appears to have significantly changed the way diabetics can live. This may be the most compelling illustration of the difference between injected insulin and inhaled insulin. While there is little to no difference between when, how and how much Novolog vs Humalog an insulin user will take and little to no difference in how they feel afterwards, there is a difference between injected insulin and Afrezza on these same parameters. Patients’ desire to have access to Afrezza may eventually prove to be one of the most potent catalysst to driving payer access and by extension, adoption of MNKD’s product
- Pediatric indication. MKND is pursuing a pediatric indication for Afrezza that, if successful, would expand its total market opportunity
- International commercialization. MKND has regulatory filings for Afrezza in-progress in Mexico and Canada. They are also pursuing commercialization in Brazil and India. While we do not anticipate international commercialization to generate anywhere near the profit potential as the U.S., they can be important from a manufacturing capacity utilization standpoint (i.e. margins) as well as for pass-through demand to help meet MNKD’s insulin purchase agreement
- Collaborations increase shots on goal, add credibility to Technosphere. R&D collaborations have been a significant source of capital for MNKD but they also add pipeline shots-on-goal. Such an approach could help mitigate the risk of significant idle capacity of the facility. Tyvaso was the most prescribed medication for PAH and generated more than $370 million in net sales in 2017 for United Therapeutics. Along with TreT, RLS’ cannabinoid program for inhalable Dronabinol could be a fast-moving development program. Management is actively evaluating additional opportunities. These partnerships also further bolster the credibility of the Technosphere platform technology and, by extension, the differences between injected insulin and Afrezza
Outlook - Afrezza
An aggressive attempt to create maximum awareness of Afrezza and drive physician and patient adoption is underway. Based on the aforementioned catalysts, we anticipate a steeper rate of sales growth during 2019. Effectiveness will be measured by patient wins, new and repeat prescription growth, and declining gross-to-net revenue percentage. But it will also be measured by efficiency - that is revenue growing at a faster rate than that of SG&A. The company is closely monitoring market uptake, making necessary adjustments and fine tuning their sales, marketing and reimbursement strategies – which we think results in improvement in operating leverage. We model gross margin to widen and suspect that this may expand further with favorable evolvement of the reimbursement picture.
In an effort to increase their reach, over the last year Mankind has beefed up its online presence through social media, optimized the size of their sales force, launched targeted TV commercials and attended conferences. Efficient sales and marketing will require an ability to pick-their-spots and grab low hanging fruit. MannKind has effectively utilized targeted DTC campaigns in the past, although widespread use is not something that we anticipate. Management has also indicated that productivity gains from the existing sales force, as opposed to significant expansion of the sales team, is a priority – which we think also supports anticipated efficient revenue growth going into 2019. The marketing strategy also includes focusing on areas of the country which offer the most profitable return.
Growth in Afrezza production volume and collaborative activities, including those related to the United Therapeutics and RLS agreements should reduce current overcapacity of the company’s Danbury, CT manufacturing facility and ‘soften’ the impact of fixed expenses flowing through the income statement. We also anticipate that the company will continue to develop other potential candidates in its pipeline.
View Exhibit II - Rapid-Acting Insulins WW Sales
Outlook – TreT
Prostacyclin analogs account for ~45% of the U.S. PAH market, which is valued at approximately $3.5 billion. Inhaled prostacyclin analogs account for about 11% of the total. United’s Tyvaso, approved in 2009, currently generates about $370M in annual sales. Liquidia’s experience, including regulatory pathway, with their LIQ861 candidate presents UTHR with a potential template to follow as they finalize next-steps for late-stage development of TreT. Following a 505(b)(2) FDA pathway, LIQ861 advanced directly from a Phase 1 to a single, pivotal Phase 3 trial. Enrollment of LIQ861’s pivotal trial commenced in March 2018 and, per the most recent investor presentation (Nov 2018), Liquidia anticipates making an NDA filing in late-2019.
Assuming UTHR can follow a similar pathway and timeline, it is conceivable that TreT could enter Phase 3 testing sometime next year and, if all goes to plan, be the subject of an NDA 505(b)(2) filing in late-2020 and launch shortly thereafter. Our DCF, which incorporates a 60% chance of development and regulatory success, assumes MNKD receives $25M in 2019, $25M in 2020 and, upon launch of the product, 12% royalties on net sales. All assumed milestones and royalties are currently risk-adjusted by 60% - which would likely increase (i.e. risk of failure would be assumed to decrease) with further substantive development progress.
View Exhibit III - Prostacyclin Analogues WW Sales
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. We note that, given current lack of clarity on how and when upfront and milestone payments will be recognized on the income statement, that as a placeholder and for DCF-valuation purposes, we assume for now that there are no income statement implications. So, while this assumption implies any cash payments remain on the balance sheet, they are included in our DCF model.
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 $106M, 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 $98M, or ~$0.60/share (which is subject to our 40% risk-of-failure discount). Our sum-of-the-parts calculation puts total value of the company at ~$4.25/share.
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