After spending much of 2017 in a downtrend, MannKind (NASDAQ:MNKD) lit up on the stock market and closed above $2.00 a share on Sept. 4 for the first time since June.
The company announced that it would collaborate with United Therapeutics (NASDAQ:UTHR) on treprostinil, an investigational drug for the treatment of pulmonary arterial hypertension. The cash infusion from the deal is just what MannKind needed.
United Therapeutics will pay MannKind $45 million upfront and reward the company an additional $50 million in potential milestone payments for developing and commercializing a dry-powder formulation of treprostnil.
The product is currently under evaluation through clinical trials. If the product reaches the market, MannKind will get low double-digit percentage royalties on net sales of the product. The company also gets up to $40 million for every additional option exercise, and development milestone payments.
The partnership does not end there. United will pay $10 million immediately for product development outside the scope of the agreement. The deal is a big win for MannKind, which previously had limited potential without a partner as big as United Therapeutics.
The $95-million upfront payment for treprostnil development may also lead to another development opportunity for the micro-cap biotech firm. MannKind also developed Afrezza, but it could never make it commercially. Now, with support from United, the upfront funds invested is a vote of confidence for the firm.
More Upside for MannKind Stock
MannKind stock’s 89% pop on Sep. 4 could be just the start of a longer-term uptrend. The company reported quarterly sales of $3.8 million for Afrezza, up 153.3% from last year.
The commercialization of treprostnil will more than accelerate the company’s much-needed revenue growth in the quarters ahead. This is troubling for short sellers (22.63% of the float is short), and they will face further losses if MannKind stock continues to move higher.
Before its deal with United, MannKind reported an unsustainable negative free cash flow. Cash, cash equivalents and restricted cash at Jun. 30, 2018, fell to $26.7 million. On Dec. 31, 2017, cash was $48.4 million.
Now, the partnership negates the cash flow concern and undermines the bearish bet against the company. The short squeeze over the course of the next few days could help MNKD stock in a positive way.
Fair Value on MNKD Stock
Only one analyst offered a price target on MannKind stock, setting a $4 price target, or over 90% upside. Though it is too early to predict, the company has a better chance of moving higher not just on the commercialization of treprostnil, but also because it could develop new products with the additional $10 million it has available for spending on research and development.
Using a 10-year DCF Revenue Exit model, at a discount rate of between 12-14%, MNKD shares are worth between $2.05 to $2.73 with an average fair value of around $2.40. This assumes MannKind’s revenue will grow in the range of 20-25% starting in FY 2019. Readers may enter their own assumptions on finbox.io with this link.
Bottom Line on MannKind
Speculative investors may chase MNKD stock and still make money despite the run-up of over 80%. Those who prefer to wait for a pullback may now expect a brighter future for this biotech company.
Disclosure: The author does not own shares in any of the companies mentioned.