MannKind: It's Not Bankruptcy, But...

| About: MannKind Corporation (MNKD)

Summary

MNKD files up to $500M shelf.

Offering will likely be very dilutive.

Company will need to be reassessed after closing on proceeds, new fully diluted share count and potential new business strategy.

By Parke Shall

In our last article about MannKind (NASDAQ:MNKD), we stated pretty simply that we thought the company would either file for bankruptcy or produce a huge toxic dilutive equity offering. This morning it seems like the company has gone with option two.

MannKind filed up to a $500 million shelf this morning, indicating that it is going to be doing a large offering of stock. The losers in the transaction are anybody that holds MannKind stock right now. The company trades with a $700 million market cap and is likely to dilute its outstanding share count by probably somewhere near 50%-100%, depending on how it prices and whether or not there are warrants or options involved.

Theoretically, the stock should be getting cut down by at least 20% to 30% on this news already, but it looks like in pre-market trading that the stock is holding up for the time being. If the stock price winds up holding, the company's valuation is going to be even more absurd than it was when it was trading with a $700 million market cap. Again, this is a company that is not producing any meaningful revenue, has one product that has been ditched by its sole partner in SNY, and has over $100 million in debt that it needs to take care of.

The positive for the company is that this offering, should it become fully subscribed or close to it, is going to allow them to steady the balance sheet, pay down some debt, have money for operating expenses, and then potentially take the company in an entirely new direction. The good news would be that MNKD now has options that it did not have before, including potential acquisitions. As long as it is not the company's intention to use this money to try and keep pushing the AFREZZA story forward, the company may actually become investable at some point.

But that point is not now.

The company is going to have to adjust its valuation based on how it prices the sale of its stock.

Again, those holding stock here at what has been a dwindling $700 million valuation will not stand to benefit from this, we believe. We believe the prudent move would be to sell MNKD here, and wait for the market to readjust the company's valuation over the coming weeks when the shelf is priced and the company generates some cash. Everything will determine on how much stock it is able to sell and at what price it is able to sell it at.

If we were running MannKind, we would try to close on as much is possible, pay down the debt, consider a reverse split, change our name and change our business model. We would use large cash proceeds from an offering like this to possibly start to acquire some pipeline drugs once again and try to turn the company into a diversified pharmaceutical company, instead of one company that is trying to rely on a failed product which hasn't generated meaningful revenue.

The key all goes back to how much the company is able to raise. If the company is able to secure several hundred million dollars, this could ostensibly become a shell company with a hoard of cash once again.

The stock should negatively readjust itself lower on the basis of what would likely be large dilution. After this initial adjustment, perhaps one could then look to see what the company's roadmap is for going forward. Even if the company paid down its debt and had $200 million in cash left over, we are still not sure that a $700 million valuation makes sense at this point. After the dilution, the company could have a valuation well over $1 billion, if the stock stays where it is.

We think it is reasonable that the stock will sell off 50% to 60% as it tries to move through this financing and restart the business. At that point, we will reevaluate the company's balance sheet and see if we can find a valuation that we believe is attractive for entry. Something like 2x cash or 1.5x times cash with no debt on the balance sheet and a clear acquisition path moving forward could potentially be worth buying.

That, however, would likely be after a selloff and potentially a reverse split. We would sell if we are long here with hopes of buying in six months from now if all of our conditions are met.

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.