MannKind Scripts Improve, But Cash Situation Remains Troublesome

Summary

• Scripts for week ending July 27th were just over 570.
• Cash situation would seem to indicate a capital raise is on deck.
• Company lowered its guidance for net Afrezza revenue.

MannKind (NASDAQ:MNKD) investors got to get a decent look at where the company stands this week because the company hosted its Q2 conference call. Management did as expected and concentrated on the year over year growth which happens to have the best optics. The company essentially avoided discussion of the cash crunch and also lowered its guidance on Afrezza net revenue for 2018. Various points from the call will be discussed in this article, but let's get down to the script report.

For the week ending July 27th, Afrezza scripts came in at just over 570. This represents (excluding holidays) about 12 weeks where scripts have been in the 500's. The good news is that estimated net revenue has finally broken above the $400,000 mark. The average net revenue per reported script is seeing growth on the heels of multi-month scripts.

Chart Source - Spencer Osborne (based in part on Symphony data)

Quarter Over Quarter Scripts

On a quarter over quarter basis, Q3 scripts are pacing 17.67% better than what was delivered at the fourth week in Q2. This is positive territory, but well shy of the pace that would be needed to deliver the company to its guidance or deliver stock price appreciation. For perspective, MannKind needs to deliver a bit over 9,000 scripts to be on pace for its now lowered guidance vs. 6,481 delivered in Q2. The quarter over quarter growth needs to be at a 40% clip rather than a number less than 20%. Thus far, Q3 has delivered 2,144 scripts, which would imply a need of about 6,900 scripts over the remaining 9 weeks in the quarter. That averages out to about 767 scripts per week.

Chart Source - Spencer Osborne (based in part on Symphony data)

From a net revenue perspective, Q3 has thus far delivered about $1.47 million out of about $5.6 million needed to be on pace for guidance. That would leave a delta of about $9.2 million to be accomplished in Q4. For perspective, the first 4 weeks in Q2 delivered an estimated $1.1 million in net Afrezza revenue.

Chart Source - Spencer Osborne (based in part on Symphony data)

Projections

Based on the data presented at the quarterly conference call, I have adjusted my model slightly for the second half of the year. When all things are considered, my net revenue estimates come in close to $20,000,000 vs. the $22,000,000 that represents the lower end of MannKind guidance. I had repeatedly cautioned readers that my projections were running aggressive and the latest information simply verified my assumptions. In simple terms, I am now projecting (my middle model) that the second half of the year will deliver $12.73 million in net Afrezza revenue vs. $7.2 million (verified by financials) delivered in the first half of the year.

Ironically, when MannKind first issued its guidance, my model showed net Afrezza revenue of $20,000,000. I adjusted upward to $22,700,000 after the Q1 conference call to account for more aggressive marketing and sales efforts. Now, based on the action since the Q1 call and the data delivered in the Q2 call, I find myself back where I started. The moral of this story is that putting too much faith in the words of management can lead you toward some assumptions that are simply too aggressive.

Source of Charts - Spencer Osborne (based in part on Symphony data)

MannKind Guidance

Let's face it. MannKind management has not been very good at guidance. If you stop and think about it, the initial top line of guidance was $30 million and now that number is $25 million. The company has trimmed $5 million dollars off of its top line expectations. That may not seem like a lot, but when you consider that the most recent quarter delivered just $3.8 million in net revenue, that is over 1 quarters worth of sales lower than what management expected it could accomplish! That guidance haircut happened in just 6 months! If we look at the lower end, it has been trimmed from $25 million to $22 million. The lower end was lowered by about 10 weeks from a quarter!

The purpose of guidance is to give a realistic idea of what investors can expect. Sure being aggressive on guidance has its merits, but overall, the track record of revising downward is never good. Had management offered initial guidance of between $20 million and $25 million, it could be argued that it is on track. Considering that hitting $20 million would be a year over year double, the optics would be okay.

MannKind's revision of guidance downward to $22 million may still have the company in a pickle of sorts. Given that the first half of the year delivered $7.2 million in net revenue, the balance left to hit guidance is a second half with $14.8 million in net revenue needed. Four weeks of the second half are already in the books, and the net revenue delivered is just $1.47 million. This implies that the company needs to get $13,300,000 in net revenue over the next 22 weeks. That is an average of about $606,000 in net revenue per week with the most recent week delivering a bit over $400,000.

The new MannKind Guidance implies a need to deliver nearly 50% growth in Q3 relative to Q2, and then another 50% growth quarter to close out the year. The lower guidance has eased the vertical nature of what is needed slightly, but if you model the guidance, it seems overly optimistic yet again. Guidance needs to be believable. MannKind has a history of issuing guidance that is not believable. It was just a month ago that the company told potential investors that it was on pace to hit the low end of guidance. That investor conference did not lead to a stock offering, and now just weeks later the guidance has already been trimmed.

Chart Source - Spencer Osborne (based in part on Symphony data)

We have now seen data representing almost 58% of the year. Meanwhile estimated net revenue is at just 41% of what is needed on the adjusted guidance. The delta here is 18 points with 22 weeks left. Even an exponential trend line (see chart above) based on 2018 sales does not come close to the guidance level.

Chart Source - Spencer Osborne (based in part on Symphony data)

The bottom line of guidance is this. If MannKind is not on track in the next 6 weeks or so, the believability of the guidance will once again come into question. Considering that the company will likely need to do an offering in the not too distant future, believability on the prospects of sales is critical.

I am going to be blunt here. It seems as if MannKind does not even believe its guidance when it offers it. Just 4 weeks after giving its 2018 guidance, the company cautioned to the low side. Weeks later at the Q1 call, it cautioned to again to the low side. Weeks later at an investor conference, it cautioned to the low side, and a month later, lowered guidance again. It also seems that management feels any excuse will be accepted by the street. Naive investors may buy some of these excuses, but savvy investors will not. Saying that the lowering in guidance is because of Medicaid is folly. MannKind is missing guidance because it is missing its sales goals. Saying Medicaid ate the homework is not taking responsibility for the fact that MannKind has not been realistic in its projections. These types of statements pile up and take away believability.

How confident is MannKind in its guidance? Is the company confident to state that the net Afrezza sales guidance is for U.S. sales of Afrezza, will not rely on accounting shifts, and will not be accomplished with any channel stuffing?

MannKind Cash

First things first. I had stated that given the stock price action in recent weeks, it was my belief that the company had been tapping the ATM facility during Q2. With the data now in hand, we can see that this was not the case. The concern with that is two-fold: 1) while tapping the facility means dilution, seeing that the price action was bad without that selling pressure is concerning, 2) the company is now in a more precarious position because of its lack of cash, and it could have been in a less precarious position had it raised even a few million dollars during the quarter.

MannKind finished Q2 with about $26.8 million in cash. There is a covenant that requires the company to have at least $20 million in cash at the end of any quarter. Essentially this company went into a quarterly call with about the same level of cash that it burned in the quarter being discussed. By my estimates, MannKind finished July with about $19 million in cash. That is already lower than the $20 million that the company needs to show Deerfield at the end of the quarter. Consider that the company owes $3 million to Deerfield by August 31st, and about $2.7 million to Amphastar before the end of the quarter, and you can see quite clearly that the need for cash is pretty immediate.

By my math, this company will need at least $20 million to finish Q3 in compliance with Deerfield and then another round of financing to finish off the year. Despite management stating (again) that it is seeking non-dilutive ways to finance the company, it appears that dilution will be needed (again).

Chart Source - Spencer Osborne

Summary

The summary this week is pretty simple. This company has immediate problems that it must address. I have long spoke about the cash concerns at MannKind and the overhang that cash concerns place on an equity. MannKind is down to its last gallon of gas and the only filling station for 200 miles charges a pretty penny for petrol. Afrezza sales are not ramping at the triple digit rate that the company wanted investors to look at in the year over year numbers. Guidance still requires a second half hockey stick in terms of growth and the 15% of the second half is already gone with another 15% having holidays. MannKind has broken below its old trading range and will establish a new one. The stock is now flirting with $1 per share, and that could get very ugly.

There is a very speculative play in catching a bottom here. This stock took a bigger beating than it should have, and there is no immediate concern of bankruptcy. There is immediate concern that the next steps will not be shareholder friendly and that the reality of slow sales will catch up with the company, but it can remain operating for quite some time even under strain.

If I were playing this equity (I committed to not own it for as long as I write about it), I would put a few chips on the table at these levels, and I would put more chips on any dips below $1. My strategy would not be long term, but rather a play on a bounce. Watch the action on Monday and Tuesday to see if there is a marked recovery or if this stock will continue to suffer until the issue of capital is resolved. Watch the scripts to see if the guidance story gets more or less believable. As always, this is a traders' stock and some wild swings will happen. Stay Tuned!

Analyst’s 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.