Investors in MannKind Corporation (NASDAQ:MNKD) received some news that on the surface looked good on Tuesday, when the company announced that it was exploring its strategic options, including putting itself up for sale. This announcement helped to increase the share price surrounding speculation about a potential sale of the company. While investors may at this point want to take the money and run, the issue is finding a suitable buyer at the other end. In this article, I will explore the reasons why I believe that a sale will be rather unlikely, and the company appears to be ultimately headed towards bankruptcy.
Why Does MannKind Need To Sell Itself?
MannKind is going to quickly find itself without any viable marketing strategy for its insulin drug Afrezza. As I have written in a previous article (linked here), Sanofi (NYSE:SNY) recently cut its ties with Afrezza and will no longer support its marketing costs in the United States. While this is not promising, it also does not appear as though MannKind has any viable option towards building a sales force in order to be able to sell Afrezza directly to the consumers. Even more worrisome, however, are the substantial questions raised about the market viability of Afrezza considering that Sanofi was not able to help the product takeoff in the marketplace.
MannKind shareholders have faced a substantial loss over the last year, and this move appears to be an effort to at least preserve some value for shareholders.
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MannKind has dropped substantially over the last year, as concerns about Afrezza sales have mounted. While investors have recently received some positive news regarding potential partnerships for MannKind's Technosphere platform, it appears as though the partnerships may be too little too late for MannKind.
Recent Partnership Development
MannKind shares rose late last week as the company announced a surprising partnership deal involving a newly formed entity, Receptor Life Sciences. This agreement covers the development of a couple of undisclosed compounds, which are focused on inhaled treatments for a variety of therapeutic areas including chronic pain, neurological diseases and inflammatory disorders. Under the terms of the agreement, MannKind will complete the initial formulation studies and then hand the compound and manufacturing off to Receptor, who will handle all of the manufacturing, clinical trials, and (should the drug reach the market) commercialization efforts. The deal initially looks good for MannKind, with the company being eligible for development and commercialization milestones of up to $102.25 million as well as mid-single to low double-digit royalties on net sales of the product.
This agreement looks promising for MannKind, and caused the shares to increase substantially. However, upon closer examination, it becomes clear that this deal does not meaningfully solve any of MannKind's short- or mid-term liquidity problems and should not create much in the way of shareholder value initially. It will take MannKind quite a while to conduct the initial studies and make sure that the formulation is correct... while the company is doing that it will continue to burn through its rapidly dwindling cash pile.
While we do not know the exact terms of the agreement, it is likely back loaded, meaning that MannKind collects most of its milestones and royalties on the later stages of development and commercialization. This would mean that MannKind is at best years away from seeing any major revenue from this agreement. It should also be noted that Receptor is a relatively new company without any products currently on the market. This should raise questions about the ability of Receptor to be able to successfully commercialize a product once they obtain FDA approval, nor has the company ever guided a product through the FDA clinical trial process.
While this agreement may look good for MannKind, the fact that it is with a newer company without a lot of experience would suggest that this might be a last ditch effort. What makes me say this? If this were an interesting technology, it would be more likely that a larger pharmaceutical company would be approaching MannKind. That is not the case with Receptor, and it seems as though the agreement is heavily skewed in Receptor's favor. MannKind needed a large upfront payment in order to be anywhere near changing its short-term problems. In the absence of any major upfront payment (as with this agreement), this agreement should be viewed as neutral at best.
Other Partnership Agreements
MannKind's Technosphere Delivery platform appears to be rather promising. MannKind was able to get approval for Afrezza using the platform and has numerous partnership agreements revolving around technosphere. This would suggest that while there may be interest in partnering with MannKind on technosphere projects, the company is unlikely to attract good partnership agreements due to a potential cash crunch. When companies know that MannKind is hurting for upfront cash, the competitors will do one of a few different things.
The first is that they might provide MannKind with some cash up front but cut out a lot of milestones and lower the potential royalty amount compared to what MannKind would have otherwise gotten. In this case, MannKind's short-term growth would be coming at the price of long-term gains. Another option would be to sign a long-term agreement (like the one with Receptor), and just not give MannKind cash upfront but give them the good PR and just wait and see if MannKind will be able to deliver a compelling product. The third option that a company could adopt would be a wait and see option, wait to see if MannKind is able to correct course and if the company can't and has to go into bankruptcy (assuming that it is not bought out), then any potential partner would have leverage when either negotiating an agreement or just attempting to buy the technosphere platform for themselves.
The big partnership agreement that investors are still holding out hope for is an agreement for the commercialization of Afrezza. An agreement is, however, unlikely. MannKind does not have anything compelling to offer in terms of an agreement. Afrezza was unable to sell in the marketplace, largely due to the fact that doctors seemed to be either hesitant to prescribe the drug, or potentially didn't know about Afrezza existing. Either way any marketing partner is going to look at the money that Sanofi already pumped into marketing Afrezza and balk at the amount of money needed in order to help make Afrezza have potential within the marketplace.
Furthermore, any agreement would likely be very favorable to the commercialization partner because as mentioned above, MannKind really needs the money. I would not expect nearly as friendly terms as the initial terms between MannKind and Sanofi. It also seems unlikely that a large pharmaceutical company would take a stab at Afrezza. The inability to convince doctors to prescribe Afrezza and insurers that it was worth the cost should dampen any large pharmaceutical company from wanting to do the legwork necessary for the product. This is especially true because some of the partners might have concerns about the viability of inhaled insulin, as this is the second failure of an inhaled insulin product (with the first being Pfizer's (NYSE:PFE) Exubera.
MannKind is caught between a rock and a hard place. In order to successfully market Afrezza, it is likely going to take a very large advertising campaign and a very large sales force. Both of these items cost large amounts of money, which MannKind is unlikely to have, but MannKind has no quick way of generating the money necessary because Afrezza is not going to be on the market for long after the Sanofi agreement. I would expect for any agreement surrounding Afrezza to be very favorable towards the commercialization partner and to likely be a mid to smaller pharmaceutical company trying to take a stab at the product.
None of these situations would suggest that there are assets worth significant value or worth buying at MannKind. While Technosphere may be promising, the FDA's concerns about lung function whenever companies are dealing with inhalation should be enough to give any potential buyer pause. It is also likely that Afrezza is not worth a whole lot of money because the product has flopped (generating 5 million euros in net sales over the last nine months) so badly commercially and without an incredibly expensive campaign (with no guarantee of success), it is unlikely that the product will be able to move the needle in the marketplace. It appears as though a buyout is increasingly unlikely.
Perhaps the most compelling reason, however, that a buyout is unlikely is the fact that MannKind appears to be in dire financial straits. The company has a large amount of long-term debt, while at the same time has a cash pile that is dwindling at an alarming rate. Neither of these prospects would scream that MannKind is a buyout target, and indeed point towards a more dreary picture for MannKind's future.
Any acquiring company would have to take on the company's massive debt load and any other unknown obligations. MannKind does not seem to have a quick way out of its debt hole and cash burn problem. Also, any company interested in MannKind's assets would likely get a better deal by waiting until the company is forced to declare bankruptcy and then buying the assets that it wants should MannKind be forced to liquidate assets.
When looking at MannKind's financial situation, the situation looks bleak. According to the company's conference call after the termination of the Sanofi partnership, MannKind expects to end with between $59 and $60 million in cash. The company will also have an additional $30 million that it can access through its funding arrangement with the Mann Group (it is unclear as to whether or not this funding arrangement is at all affected by the recent Sanofi deal termination). In the same call, MannKind management said that this will give the company, using historic cash burn rates, a cash runway until only about the middle of 2016.
While MannKind could conceivably try to cut expenses, it is unlikely that the expense reductions would be able to meaningfully increase the company's cash runway. Should the company decide to cut R&D expenses, then those cuts could come at the cost of future growth. MannKind does not seem to have any compelling options about where it can cut in the company that would still help MannKind's value over the long term.
Also, it should be noted that with Afrezza essentially being pulled off of the market after Sanofi leaves that MannKind would have to invest in order to be able to market Afrezza, and it appears to simply not have the money needed in order to be able to absorb such an investment. MannKind after a few rounds of layoffs at its facilities is already operating with a tight belt and it is unclear as to whether it can tighten its belt any further.
While the cash runway situation looks dire, that analysis did not take into account MannKind's large debt load. According to its most recent quarterly report, MannKind is carrying a whopping $185.4 million in debt. This does not include any increase in the debt that will occur due to the fact that MannKind and Sanofi are splitting the losses associated with Afrezza, which will only increase the long-term debt load at MannKind. This is at the same time as MannKind has very few options that are viable for being able to obtain any sort of revenue streams to be able to pay off its mounting debt. There appears to be a cash flow problem at MannKind, and it does not look like it is going to get any better in the short or midterm.
With a purchaser appearing to be unlikely, MannKind appears to be on the path to bankruptcy. There are substantial questions about MannKind's lead drug Afrezza, and Afrezza does not appear to be able to generate the profits needed anytime soon in order to be able to save MannKind. Additional concerns about the Technosphere platform could leave any acquirer uncomfortable, while at the same time partnership agreements would also come at unfavorable terms to MannKind compared to what it would have if it were a well-liquidated company. MannKind with a rapidly dwindling cash pile appears to be headed towards bankruptcy, as any company swooping in to buy MannKind appears to be unlikely.
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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