Putting Revenue And Cost Estimates To MannKind

| About: MannKind Corporation (MNKD)
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Summary

Company has guided to monthly expense of $10 to $12 million.

Revenue source is diabetes drug Afrezza.

Realistic models show cash running out in Q4.

In covering MannKind (NASDAQ:MNKD) I seem to get some very passionate comments. The common theme among these comments is that very few will assess the numbers given, and many will proclaim that MannKind or its drug Afrezza will be massive, huge, and dominant.

Before moving forward let me establish a few things:

1. I think that Afrezza is a compelling product that can help people with diabetes.

2. I do not think that Afrezza is the ultimate solution for every diabetic out there. It is one potentially good product among several other potentially good products.

3. I do not really care about the debate of efficacy and side effects. As stated, Afrezza is a great solution for some, and could be a terrible solution for others.

4. This is all about the equity, the business, the cash, and the potential for equity moves that investors can profit from.

A couple of weeks ago I took the time to outline what I feel are some realistic sales projections for Afrezza between now and the end of the year. Critics say that it is to soon to assess such things, but I disagree. MannKind has enough cash to get into Q4. After that, the company will need capital. There is a very real potential that the method by which MannKind gets that capital is not very shareholder friendly.

In this article, I am going to take the script sales projections and extend that data into revenue and cash burn. There are some assumptions that need to be made, so I will qualify those right off of the bat:

1. I made assumptions on three paths for script sales. The assumptions are based on my experience in assessing launches as well as script sales.

2. I make an assumption that MannKind will spend $10 million per month in order to operate the business and market Afrezza. MannKind itself has stated that it anticipates spending between $10 million and $12 million per month. I have used $10 million in order to present the best case situation in terms of cash burn.

3. I am using a gross revenue figure of $275 per script. This is actually more generous than what is likely being received, so once again, I am using a number that is favorable to the company.

4. I am using a cash balance of $50 million at the beginning of July. The assumption is that cash burn in Q2 was about $26 million.

I have often stated that investors should model things. Modeling makes you think with a critical eye. It lets you identify flaws, and allows you to grasp rates of growth, extrapolation, etc.

In a previous article I had a reader state that their expectations were that script sales would be at 625 per week by the end of September and growth would continue up from there. I responded to that reader indicating that such assumptions may be overoptimistic and that the growth line associated with such numbers is quite vertical. The first chart below has my models built in. The second chart models what the reader was thinking (yellow line).

Source of Charts - Spencer Osborne

The purpose of pointing out the readers' assumptions is not to embarrass them, but rather to hammer home the point that models can be a critical reality check for investors. I would love to see the sales do what that reader was saying, but it is simply not very realistic.

Now it is time to take this to the next step. I am doing this because it appears some readers feel that it is way to early to try to project what will happen and that we should wait 6 months to see how the company does. The financial models I outline below demonstrate exactly why trying to assess things now is prudent.

PROJECTION #1 (MY MOST CONSERVATIVE PROJECTION)

In my opinion this is the most conservative look at what MannKind will do in its re-launch that is realistic. It assumes that the company is successful in training sales reps and that these reps will have an eagerness to pound the pavement and do their jobs. Under this assumption, MannKind runs out of cash at the end of November or beginning of December. This projection calls for sales of 7,476 scripts between the beginning of July and the end of the year.

Chart Source - Spencer Osborne

PROJECTION #2 (MY MIDDLE GROUND PROJECTION)

This projection assumes that the sales force is capable of getting pretty decent traction and that doctors are more responsive. This, in my opinion also has a realistic approach. Simply stated, It is a bit more aggressive that Projection #1, but not outside the realm of realistic. The company would actually run out of cash at the same week in this projection as it did in Projection #1. This model calls for sales of 8,473 scripts between the beginning of July and the end of the year.

Chart Source - Spencer Osborne

PROJECTION #3 (MY AGGRESSIVE PROJECTION)

This is my aggressive projection that I feel still fits inside the realm of realistic. It actually matches up pretty well with the trajectory that was established with the initial launch of Afrezza by Sanofi (NYSE:SNY). Despite being more aggressive, the point in time at which MannKind would run out of cash is identical. This projection has scripts sales of 9,681 between the beginning of July and the end of the year.

Chart Source - Spencer Osborne

READER PROJECTION

Remember that reader projection with the nearly vertical yellow line? Did you feel that it looked realistic? Here it is again:

Chart Source - Spencer Osborne

Let's assume for a moment that you think I am low-balling and the reader is much more realistic than my projections. That model has script sales at 16,825 between the beginning of July and the end of the year. What if I were to tell you that even this projection has MannKind running out of money at the exact same week as each of my own projections? You do not believe me? Check it out.

Chart Source - Spencer Osborne

REALITY CHECK

One reader, DeadAim, feels that it is way to early to project anything. He feels that my projections suffer from "GIGO" (garbage in - garbage out). DeadAim is entitled to an opinion, but he is the same poster that states he is adding to his position without any compelling reason as to why he is making such moves. I hope he gets rich on his moves. I really do. I simply like to understand things better before throwing real levels of money at them, and even when I fully grasp things, I may never become an investor.

The reality is this. At some point in the next 6 months MannKind will need to raise capital. If I had to venture a guess as to when that happens, I would say that it will be the first week in October. The reason for that is simple. The company will want to have as good a Q3 report as possible, and delaying the move until October will allow the move to happen and be counted in Q4.

Is MannKind a good play prior to the need to raise capital? It could be when the price is down by $1, but it could also fall on its face. What if there is dilution of 90 million or 100 million shares at low prices just above $1? What if there is a private placement that attaches lucrative warrants? These are very serious questions that investors need to ask themselves. Those same investors that ring the bell for patience and seeing the data before making a decision should be understanding in the call for patience before investing and seeing how the cash situation is dealt with.

A CHALLENGE TO READERS

If you decide to comment on this article, have the courage to stick to relevant discussion. Have the courage to outline some numbers, dates, and cash balances. Have the courage to discuss revenue, costs, sales, and timing. 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.