MannKind (NASDAQ:MNKD) offered its Q2 financial update this week, and the results were a loss of $30 million or $0.07 per share. Q2 of 2016, for all intents and purposes, wrapped up the relationship between MannKind and its former partner in Afrezza, Sanofi (NYSE:SNY). There was a bit of inventory linger into Q3, but nothing very material.
The nuts and bolts of Q2 were as follows:
- net loss for the second quarter of 2016 was $30 million or $0.07 per share
- $3.7 million was spent on manufacturing to fill the sales channel with MannKind branded Afrezza
- Company estimates that commercial efforts of Afrezza for the second half of this year will be between $16 million to $18 million.
- Company earned $0.3 million under the profit and loss sharing arrangement with Sanofi related to Afrezza. This which was applied as a prepayment against the balance owed under the Sanofi loan facility. The loan facility finished Q2 with a balance of $70.3 million (not due until 2024). The interesting note on this is that it implies that without much sales effort Afrezza was able to turn a profit of $850,000 with MannKind getting 35% or $300,000. There were 3,849 scripts in Q2. This implies that the net per script was $221.
- In May 2016 dilution brought in net proceeds of $47.4 million
- Company received $9.2 million from Sanofi for the sale of insulin inventory in connection with the insulin put option MannKind exercised following termination. The company expects additional receipts from Sanofi under the terms of this agreement later in the year and for some time to come.
- Company received $0.7 million from Connecticut as a research and development tax credit.
- Company has $30.1 million available to borrow under the amended loan arrangement with The Mann Group.
- Company has $50 million still remains available under an ATM facility, which if used is dilutive to existing shareholders.
- Company has $25 million cash on hand requirement to Deerfield.
MannKind spent a good portion of the call discussing the re-launch of Afrezza. A Glaring and notable absence was any flavor or discussion on the Recerptor Life Science deal That was announced earlier this year. Many MannKind investors have dreams of a big cash infusion from this deal because the company spoke to a possible milestone payment at one point in time. In my opinion the milestone payment, if made, will not be material and will not change the cash crunch dynamics that this company finds itself in.
One job of management is to "sell" the ideas that it is putting into place. I get the fact that "selling" is a function of the business. I think there are times when companies step over a line to "sell". Typically when companies are trying to achieve something they up-sell and then hope that they hit the numbers. Companies that have already achieved success undersell and over-deliver. MannKind is clearly in the up-sell mode. Here is an example.
"The next two aspects that we look at are NRx trends which we will try to be transparent and disclose those in some form or fashion as we fine tune this. But we know we've gone roughly from 84 to 116 new Rxs in the first few weeks and that trend should continue and that's despite some of the stock outs that I described earlier around the inventory transition."
This is an accurate statement, but a bit of an up-selling job. Indeed NRX at the beginning of the quarter was 84. Indeed, the NRX last week was 116. On its face it looks like some decent growth in the first month. In fact, it looks like new scripts are pacing upward by 8 new patients a week. The reality is different. The week when there were 84 new scripts was a holiday week (4th of July). The week prior to that holiday saw NRX at 107. The average NRX for the last 12 weeks is 103. Choosing the low-point as the starting point will certainly help the growth appear to look good, but such a move should be considered a slap in the face to those that follow these things closely.
MannKind is initiating pricing changes, direct to patient advertising, and investigating mailers, working on speaker programs, and essentially doing all of the things that are needed to give a chance of success. In my opinion that is all great stuff that can, given enough time, translate into creating a better story. The issue is time, cash, and the impacts to the equity.
MannKind started Q3 with $63.7 million in cash. The stock offering, monies for insulin from Sanofi, and a tax credit got that number to where it was. The company has guided to cash use of $10 million per month, but also has a $25 million cash requirement that it needs to maintain. This means that the company can operate for 3.9 months before it needs to either tap the loan facility or do a dilutive action by selling shares from the ATM facility. If we do not consider the $25 million requirement, then the company has 6.4 months of cash left. That however takes us the possible cash that the company will get from Sanofi for Insulin puts. Potentially the company can get $9 million a quarter for the next 4 quarters. That buys some time, but even when considered, the cash burn is anticipated to be $10 million per month.
The bottom line is this. MannKind is a long way from profits and a long way from sales levels that will impress the street. The company remains in a cash crunch, and is giving very little flavor on a Receptor Life Science deal that essentially tied up a segment of drugs that can be used with Technosphere to a company that the street cannot assess because they have Redwood trees as their landing page. It is hard to put faith in a deal that paid very little upfront cash, and only needs to pay more on things that it controls rather than what MannKind controls.
Some readers look at my articles and get frustrated because I do not deal with the sales pitch, or speak to the good attributes of Afrezza. For those readers I will say this. Investing in a company is not about whether a product is good or not. It is about whether the investment is good or not. MannKind has a very tough road ahead of it over the next 5 months. In my opinion it will need additional capital before the end of the year. It is highly likely that the method of raising cash will be dilutive. This cash situation means that the company has precious little leverage. Even partnering Afrezza overseas is more challenged because of MannKind's financial health. Management stated that its phone was ringing for deals from the moment that Sanofi stepped away. Since then 8 months have passed. It seems clear that the offers MannKind is getting are not at levels that will work. The virtual absence of discussion on that front in the Q2 call is telling.
MannKind remains a highly speculative play. At the right price, I would even consider a position. That being said, I am not about to consider such a thing until the company addresses its financial needs. From a strategic standpoint it is better to wait and see some financial answers before getting in than to absorb the risk here and potentially see a substantial dilution.
Afrezza has some attributes that make it a sellable drug. It has some drawbacks that make it less appealing. Given enough time and money any drug can see impressive sales numbers. This is not about the ultimate outcome of Afrezza, but whether investing now is appropriate. 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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