Mannkind

hopetoretire,

Q: What P/E ratio are you using? After today's fall, Bristol Myers Squibb at 30X earnings and SNY at 15Xs with JNJ at 23 Xs earnings with 195B Mkt cap @ 2.75B shares.

Answer: I am not using any P/E ratio.

Method II is a discounted earnings model.It starts out by assuming that Afrezza will capture the same market share as Humalog.It also assumes that it takes until 2020 to fully ramp up to that market share.So for 2014 Afrezza has 5% (ramp up percentage) of Humalog's market share, for 2015 it has 15%, for 2016, it has 25%, etc.It also assumes that the market (potential sales) grows by 10% per annum (diabetes growth rate).The projected sales is the ramp up percentage * potential sales.Projected income is 30% of projected sales.Discounted income is the projected income discounted back to about mid 2013, so the 2014 discounted income is [projected income / (1+Discount Rate)], the 2015 discounted income is [projected income / (1+Discount Rate)^2], etc.The present value of the income, $3,600, is the sum of the discounted income column and represents the present value of the profit earned from 2014 through 2023.The share price is 3,600 / 500 = $7.20.

The discount rate is 10% because it is a risky income stream, and is a rough guess of the cost of equity capital.You might argue that the discount rate should be higher, but this is a rough approximation.

The income stops after 2023 because I don't know if there will be a new drug that takes Afrezza's place.Some of the patents may start to expire, or a competitor discovers a different way to make a similar drug that doesn't breach the patents.These are fairly conservative assumptions.It is likely that the company has some residual value after 2023 from continued Afrezza sales and from other as-yet-to-be-discovered products (new drugs, Technosphere, etc.).The residual value should be added to the $7.20 share price.

Method III is a comparison with the sale of a company that had a diabetes drug in the early stages of commercialization.

Method IV assumes that, since Eli Lilly trades at 2 times revenue, that Humalog has $2 billion in revenue, so if Afrezza can take the same market share as Humalog, Afrezza is worth $4 billion.This makes the assumption that Afrezza will have about the same margin as the other drugs that Eli Lilly sells.

So you see, I did not have to make any assumptions on P/E ratios.

Medtronic is 12.65 X earnings with 42B cap @ 1 Billion shares.

Or is your $10/share before any sales? Just spec price upon approval?

These are valuations, not share prices. Method II is what the future earning might be worth discounted back to some time in 2013.Method III is what someone might pay for the company.Method IV is a valuation, that in the end, assumes if Afrezza margins are similar to other Eli Lilly drugs, then Afrezza's revenue is worth $4 billion -- so in a sense it assumes the same P/E as Eli Lilly, but does not consider any other assets that either Eli Lilly or Mannkind owns or will develop in the future.Also, it does not consider that some of Eli Lilly's drugs are mature and will lose patent protection before Afrezza.

Later - $4B earnings X 15 = $60B / 500M sh = $30/sh

Later - $10B earnings X 20 = $200B / 500M sh = $100/sh

Mannkind getting $10 billion in earnings, from an insulin market that is projected to grow to $32 billion in sales by 2018, does not seem likely to me.With a 30% margin, that would require that Mankind takes the entire market share. However, Afrezza may increase the size of the insulin market by displacing oral drugs for type 2 patients, but I would not count on it growing by that much.I think it is far more likely that earnings growth in the distant future are more likely to come from developing other drugs with the Technosphere platform -- I just don't have any way to know what that would be worth.

What is the upper limit of future earnings? Who knows? Not me.

You can also say the same thing about all the other BP companies.

I hope this clears up some of what I was trying to show with these valuations.