MannKind (NASDAQ:MNKD) has had a rough start to 2016, and the road ahead still has many challenges that investors will be watching closely. The company saw its Afrezza deal with Sanofi (NYSE:SNY) terminated last week, and this week performed a CEO shuffle after its first choice for the leadership role, Duane DeSisto, was withdrawn because of non-compete clauses. The company then named current CFO Matthew Pfeffer as the new CEO. Pfeffer will retain the role of CFO, and gains the CEO title as well as a seat on the Board of Directors.
On its face, it would seem that chaos is the rule of the day with MannKind. Let's be real, announcing a new CEO who has non-compete clauses in his contract was not the greatest move by the company. One would have thought that in the due diligence of the negotiations with DeSisto, the non-compete issue would have been raised. It seems that a hasty move was made as a form of damage control after the termination of the Afrezza deal was made public. Simply stated, the news seems to indicate that MannKind is reacting to situations rather than thinking things through and outlining a well-thought out transition plan.
Pfeffer may well be wonderful at the job, but essentially, the whole world sees him as a second choice at best and a stop-gap measure at worst. At a time when MannKind needs to deliver a clear and concise message, we are getting the exact opposite. The actions of the company are not necessarily aligned with the words spoken.
While the debate between bulls and bears regarding this subject will rage on, it is my opinion that investors need to still look at this company in terms of what its potential is in the short and longer terms, and consider how that aligns with an investment strategy.
I feel MNKD will be dominated by active traders in the weeks ahead. Let's face it, there can easily be 10-20% swings in this stock. Played right, there is opportunity to make a quick buck if you follow the sentiment rather than the fundamentals. Those who want to look at fundamentals need to have a longer-term horizon and understand the roller-coaster that this equity can have over the next several months.
With a current stock price of under $1.00, there is certainly temptation to speculate on MannKind. There is potential that the company lands a new partner. If that were to transpire, the equity would certainly have some form of positive traction.
On the flip side, the company has a substantial amount of debt. At the end of Q3 2015, that debt totaled $185 million. The debt and liquidity of the company can be summed up from its 10-Q:
To date, we have funded our operations through the sale of equity securities and convertible debt securities, borrowings under the Loan Arrangement with The Mann Group, borrowings under the Facility Agreement with Deerfield, receipt of upfront, milestone payments under the Sanofi License Agreement, and borrowings under the Sanofi Loan Facility.
As of September 30, 2015, we had $185.4 million principal amount of outstanding debt, consisting of:
• $27.7 million principal amount of 2018 notes bearing interest at 5.75% per annum and maturing on August 15, 2018;
• $60.0 million principal amount of 2019 notes bearing interest at 9.75% per annum, $5.0 million of which is due and payable in July 2016, $15.0 million of which is due and payable in July 2017, $15.0 million of which is due and payable in July 2018 and $25.0 million of which is due and payable in July and December 2019;
• $20.0 million principal amount of Tranche B notes bearing interest at 8.75% per annum, $5.0 million of which is due and payable in each of May 2017, 2018 and 2019, and $5 million of which is due and payable in December 2019;
• $49.5 million principal amount of indebtedness under the Loan Arrangement bearing interest at 5.84% and maturing and due on January 5, 2020; and
• $28.2 million principal amount borrowed under the Sanofi Loan Facility to fund our share of net losses under the Sanofi License Agreement.
MannKind's debt to Sanofi is likely to increase to cover the Q4 Afrezza losses. Adding insult to injury on this front is the fact that the Sanofi facility has some stringent requirements that even tie in to Deerfield under certain circumstances.
On September 23, 2014, the Company entered into the Sanofi Loan Facility, consisting of a senior secured revolving promissory note (the "Note") and a guaranty and security agreement (the "Security Agreement") with an affiliate of Sanofi which provides the Company with a secured loan facility of up to $175.0 million to fund the Company's share of net losses under the Sanofi License Agreement. In the event of certain future defaults under the Sanofi Loan facility agreement for which the Company is not able to obtain waivers, the lender under the Sanofi Loan Facility may accelerate all of the Company's repayment obligations, and take control of the Company's pledged assets, potentially requiring the Company to renegotiate the terms of its indebtedness on terms less favorable to the Company, or to immediately cease operations.
Advances under the Sanofi Loan Facility bear interest at a rate of 8.5% per annum and are payable in-kind and compounded quarterly and added to the outstanding principal balance under the Sanofi Loan Facility. The Company is required to make mandatory prepayments on the outstanding loans under the Sanofi Loan Facility from its share of any Profits (as defined in the Sanofi License Agreement) under the Sanofi License Agreement within 30 days of receipt of its share of any such Profits. No advances may be made under the Sanofi Loan Agreement if Deerfield has commenced enforcement proceedings in connection with an event of default under the Facility Agreement.
The outstanding principal of all loans under the Sanofi Loan Facility, if not prepaid, will become due and payable on September 23, 2024 unless accelerated pursuant to the terms of the Sanofi Loan Facility. Additionally, if the Company sells its Valencia facility, the Company is required to prepay the loans under the Sanofi Loan Facility in an amount equal to 100% of the net cash proceeds of the sale within five business days of receipt.
In my opinion, the challenges that MannKind has are numerous and give speculators and bears a distinct advantage with how this stock trades over the next several months. Boiled down to the simple components, MannKind has a lot of obligations on its books, and the product that was supposed to help clean up the debt of the company is not selling well enough to deliver the needed revenue. If MannKind cannot make money on Afrezza, what will fund its ongoing activities and how will it service its debt? Yes, the company's founder has a ton of cash, but is he willing to double down on an already difficult situation?
The odds of a new partner being announced with a deal that paves the way to profitability and marketability is what the street will want to see. The street wants to see some big pharma put its own neck on the line in a deal. That will be difficult to find. In other words, the next deal needs to be better than the Sanofi deal was in order to evince even a modest level of confidence from the street.
With the close today, MannKind will be six trading days below $1.00. At thirty trading days below $1.00, the de-listing process will start. If the company falls out of Nasdaq compliance, what will that do to its existing debt or the ability to renegotiate debt? Does the street really want to jump behind a company that will likely have to be conducting a reverse split?
MannKind's prospects at the moment can be argued between bulls and bears, but it is calloused and savvy traders that will dominate this equity seeking quick 10% and 20% moves on an equity, with overpassionate players thinking longer term in a quick-turn stock. Stay tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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