MannKind Corporation (MNKD), Arena Pharmaceuticals, Inc. (ARNA), VIVUS, Inc. (VVUS) – Attention Biotech Investors: Stop Looking at Share Price

How do you track the value of companies you’re invested in? If you’re like most people, you probably check the increase or decrease in share price.

Hate to tell you this, but you’re doing it wrong.

Let me explain…

Don’t anchor yourself
After my article on MannKind Corporation (NASDAQ:MNKD) earlier this week, a reader wasn’t too happy about my view that the company was overvalued given the most recent phase 3 data.

“Why was MannKind Corporation (NASDAQ:MNKD) at 10 last time around at this juncture and suddenly we have everyone wanting to cut it down,” the reader asked in an email.

MNKD data by YCharts.

The reader is arguing, as you can see from the chart, that MannKind Corporation (NASDAQ:MNKD) hasn’t reached the level it was the last time it was on the cusp of an approval for its inhaled insulin Afrezza. With an approval as likely — I’d argue, more likely — than it was in March 2010 and January 2011, before the first and second FDA rejections, shouldn’t MannKind Corporation (NASDAQ:MNKD) be valued as high as it was back then?

Turns out it is. Higher even.

MannKind Corporation (NASDAQ:MNKD)’s share count has doubled since 2011. Since the value of the company — its market cap — is the share price times the number of shares outstanding, the value of the company — the orange line on the graph below — is much higher than it was in 2011 even after the pullback the last couple of days. The company is worth more, but each share is a smaller portion of the pie.

MNKD data by YCharts.

Part of the biotech game
Investors who bought before the last FDA rejection haven’t recouped their losses, but it’s hard to fault MannKind Corporation (NASDAQ:MNKD). Drug development costs money. Capital raises are a necessary evil, and they’re painful for investors when cash is needed when valuations sink after surprise rejections.

Here’s a look at a few more companies that have had recent failures to illustrate the point. The theoretical share price is based on the 2011 weighted average diluted share outstanding and the current market cap. Essentially it’s the price if the company hadn’t sold any shares recently.

Company	Share Price Aug 16, 2013	Theoretical Share Price	Potential Increases Investors Missed
MannKind	$5.77	$13.46	133%
Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)	$6.83	$10.70	57%
VIVUS, Inc. (NASDAQ:VVUS)	$12.28	$14.49	19%
Orexigen Therapeutics, Inc. (NASDAQ:OREX)	$6.84	$13.88	103%

Source: S&P Capital IQ.