By Parke Shall
Again, we thought we were done commenting on MannKind (NASDAQ:MNKD), but it seems that something has once again stirred up hope in the camp of the longs. We wanted to treat this new news with some fairness, because we know that MannKind bulls have been through the ringer and back. I guess if there is one thing that you can admire them for, it is their tenacity in following a drug that really hasn't performed up to the company's expectations and doesn't seem to be coveted by any major drug companies at this point.
The story of MannKind is very similar to a lot of speculative biotech and pharmaceutical companies. They had one drug, and inhaled insulin product called AFREZZA, which they managed to get through FDA approval several years ago. The product was supposed to be revolutionary in the field of diabetes and while it sounds like an innovative approach to addressing an every day problem, it hasn't caught on as well as it should since its approval. After approval, MannKind entered into an agreement with Sanofi (NYSE:SNY) to try and distribute the drug. And early this year, at the first time possible for SNY, they terminated the deal, citing poor demand.
All the while, as this was happening, traders were pushing up the price of MNKD stock, and subsequently the company's market cap. At one point, MNKD had a market cap that was in the multiple billions, and while reality has set in that this price tag is far too high for a drug that has not been proven to generate significant amounts of revenue, there still is about $450 million in market cap for MNKD at today's prices near $1.10.
After the SNY deal failed, MNKD stock shot as low as $.60, as longs as dumped their shares and shorts begin to smell blood in the water. There was a slight bounce, as you can see above, off the $250M line.
But the newest piece of news, that has driven shares from the $.77-$.80 region up to over one dollar once again is the news that MNKD is looking to explore strategic options, including selling itself.
Struggling drugmaker MannKind (MNKD) is looking for a way out of its perilous financial situation, according toReuters, scouting for a buyer in the wake of ex-partner Sanofi's (SNY) decision to abandon the company and its inhaled insulin.
Citing unnamed sources, Reuters reported that MannKind has tapped investment bankers to help it search for strategic alternatives, including an outright sale to a larger firm.
This has put into motion an interesting change of events that we would like to comment on.
First, it has driven the stock price back up to over a dollar. While many longs seem to think that this is the first step to then moving to over $2, we look at this problem by market cap. The company's market cap is just too high for it to be able to sustain this price, we think. But right now, the stock is probably as expensive as we are going to see it in a little while and this does two things. It allows those who have taken severe losses to cut those losses at only "severe" instead of "very severe". It allows speculators who bought at the bottom to exit their shares at a healthy profit. And finally it gives the company the most attractive price it may ever see again if it needs to ever perform some type of equity raise. The company is loaded up with debt and liabilities, as you can see from the chart below.
This is just one of the reasons that, along with a product that isn't selling as well as anyone had hoped, we don't think MannKind will ever be bought out at a meaningful premium. A buyer would simply be paying too much for too little. While bulls argue that the intellectual property could be worth its weight in gold if a major pharmaceutical company were to develop it, the numbers just do not add up. Pharmaceutical companies are interested in products with a niche pipeline that can sell very well and have proven records of high demand. It just does not seem like AFREZZA is being sought out. This was reaffirmed by the lack of significant interest in the drug once it was approved.
Just to make another note about the drug. We do not think that this drug is a bad product. We are sure that there are many people that it has helped already and we want those people to continue to get the care that they want in the way that they want it. The argument we are making here is an argument against the valuation placed on the company by the public market. We are not arguing against AFREZZA. If MNKD was a $50 million or $100 million company, this might be another discussion altogether. But with the way the company is priced now, at over $500 million, we just think the odds of the company finding a strategic buyer at this price are slim to nil.
Sometimes, it is very difficult to take a loss on investment. When you see a large percentage of the equity disappear your natural inclination sometimes is to either buy more or wait and see if the price once again goes up. There is an old saying that "a trade becomes an investment the second you start losing money on it". Even some of the best investors have trouble knowing when to take a loser off the table.
This leaves MNKD shareholders with two roads at this point.
The first is the road of hope.
Those that go along here or continue to hold shares must simply hope that the company can somehow monetize this drug enough to fill out the valuation of the company. For some perspective, investors may look for the company to generate $30 million-$50 million in free cash flow per year as a profitable company to try and support the market's current valuation. MNKD is nowhere near that and has never gotten anywhere near that.
We just don't think this is achievable, especially without a partner. There is also the idea that somebody is going to grossly overpay for this debt filled company and that you might get a small premium on today's share price. Even then, what are investors holding out for? The case of the stock going back to $5, $10, or much higher seems to be nonexistent. You can hold risky shares in hopes of a small premium over yesterday's closing price in the case of a buyout, but we are just not sure we are going to find someone to purchase the company. You can also wait and see if another partner joins the equation. The companies last "partnership" that was just announced a couple weeks ago seems suspect and should be evaluated on as objective of a basis as possible. You can read about that company here on Seeking Alpha. If you are sticking with hope, these are your three outs.
Then, there is reality. In order for us to hold shares here, we would need the risk/reward to be greatly in our favor, and we would think that the "hope" case is much stronger than the "reality "case. But the reality is that this is the stock that has taken investors from $11 to $1 in a very short amount of time.
Many people have taken significant losses.
The company's only drug received approval, but lost it's only partnership after failing to deliver the sales that SNY hoped for. The copmany's share count is so large that it is still a $500 million company despite the drugs failure.
The company has a significant amount of debt that is going to have to deal with. And, to steal one from the "hope" argument, the company's latest partnership seems very suspect.
We know that the trek has been long and disappointing for MNKD shareholders. It is not our business to deliver analysis that we think is going to make people miserable. But at this level, reality is trumping hope for us. We would take our $1.10 per-share that we could get today and sell, because while we believe MNKD might have a good product, the valuation that the market has irresponsibly assigned to the company does not match well with the company's realistic future prospects.
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.