MannKind - Scripts, Sponsorships, Warrants

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About: MannKind Corporation (MNKD)
by: Spencer Osborne
Summary

Afrezza scripts come in a bit over 600.

MannKind set to sponsor an Indy car.

Warrants are getting interesting.

MannKind (MNKD) investors are quite a happy bunch over the past week or so. The stock has marched above $2.00 per share, and the company seems to have been able to put a bit of news on the table with an Associate Sponsorship of an Indy car participating in the Indianapolis 500. It also appears that the previously undisclosed compound in a deal with United Therapeutics (NASDAQ:UTHR) has been unearthed.

Before getting into scripts, let's cover the other news. The undisclosed compound appears to be Adcirca, currently a pill used to treat PAH. As it happens, the active ingredient in Adcirca is the same active ingredient in the erectile dysfunction drug Cialis. This connection has gotten many investors excited, but we need to be realistic. United Therapeutics is not licensed to offer Adcirca for an ED indication, nor will market Adcirca for ED. Adcirca is licensed from Lilly (NYSE:LLY) at a milestone fee of $325,000 per $1,000,000 in net revenue, plus a 10% royalty. In concept, an inhaled version would give MannKind a royalty as well.

Adcirca has seen its sales dip because the drug has now gone generic. Mylan (NASDAQ:MYL) and Teva (NYSE:TEVA) are among the players that have entered the generic Adcirca space. Realistically, an inhaled Adcirca is a move by United to a) attempt to improve upon results over the pill form, b) stop the erosion of market share to generics, and c) perhaps even increase market share if the results are compelling enough. In essence, the Adcirca move appears to be defensive in nature while the company advances its lead candidate Ralinepag through clinical trials.

The next piece of news is that MannKind has announced an Associate Sponsorship of the Conor Daly Air Force car in the Indianapolis 500 race. Daly is a Type 1 diabetic who will be racing the big race on May 26, 2019. There seems to have been quite a bit of debate about whether or not the move is worth the expense, but it does garner some exposure for MannKind. Given the flatness of script sales thus far in Q1, the move could be needed.

Shifting to Afrezza sales, we are still seeing flatness here in Q1. For the week ending March 8th, the total scripts were 616 with retail sales a bit below $1 million. The lack of traction in scripts this late into Q1 is a bit concerning when you consider that the company is running more television ads than it has in the past.

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

Quarter Over Quarter

From a quarter-over-quarter perspective, the Afrezza story is not very good. Scripts in Q1 of 2019 are pacing 7.36% lower than what was delivered in Q4 of 2018. Estimated net revenue is pacing pretty much on par with what was delivered in Q4. Some softness in Q1 is typical, but the dip in actual scripts this year is more pronounced than last year.

Chart Source - Spencer Osborne

Projections and Estimates

This week I have pulled the trigger on adjusting script projections for the balance of the year. As readers know, the actual script sales have been tracking below my projections all year. While I previously adjusted the assumptions on retail sales, gross revenue, and net revenue, I had left the script sales alone. It is now to the point where the actual results were simply remaining below my projections far too long with the gap continuing to widen.

With my new projections, I have 2019 net sales coming in at about $27 million. This number excludes revenue from direct sales, which could add as much as $2 million to the overall numbers. Once the company reports Q1 numbers, I will blend in the impact of direct sales.

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

Estimates on cumulative net revenue stand at a bit over $4.2 million. This puts the company on pace to deliver about $5.5 million for the quarter. Essentially net revenue, absent any direct sales, will be at about $5.5 million. In simple terms, when it comes to Afrezza, the results of Q1 are less than compelling.

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

Television Ads

The television advertising in Q1 seemed to start off with a bang, but has since tapered down. This past week there were about 105 ads run. For the quarter, the ad tally stands at 2,005 with an estimated spend of just over $4 million. We are now nine weeks into the ad campaign with an average of 222 ads per week.

Chart Source - Spencer Osborne (based in part on iSpot.tv data)

It appears that the initial retail investor excitement over the ad campaign has died down. It now boils down to whether or not the money being spent on the campaign can deliver the desired results in terms of script sales. Thus far, the results on the sales side are underwhelming. While it takes time for ad campaigns to work, the reality is that the early results are not cutting the mustard. The big question is going to be what happens to the spending line when the Q1 numbers are released.

Warrants

The warrant dynamics with this equity are most interesting. There are warrants for 14 million shares priced at $2.38 and warrants for 26.6 million shares priced at $1.60. The $2.38 warrants expire on April 9th, while the $1.60 warrants are in play until December.

It is interesting in that the current trading of this equity actually gives the warrant holders a lot of cover to initiate the typical warrant holder strategy. With the price flirting with the $2.30s, it becomes a question of whether or not these 14 million warrants will get played and/or exercised.

It is my opinion that these warrants will expire worthless, but... they will be leveraged against the current stock price to allow maximum cover on the $1.60 warrants. Think like the holder of these warrants. To exercise and go long would mean shelling out $30 million for a stock which they may not really desire to hold. If the stock were to run to $2.50, it could be a no-brainer to exercise and sell out. The question is how can they liquidate 14 million shares without tanking the price per share on their own. Forward purchase contracts or dark pools could assist in that effort, but that requires a party to be interested at $2.38.

The issue here is that the underlying story about cash and lack of Afrezza sales is still very real. This company has enough cash to get through Q3, and script sales (despite 2,000 ads run) are not showing great traction.

We have seen a few high volume days, and sites that provide short data are showing that the equity is being heavily shorted at these levels. Is there enough positive news on deck to really make the $2.38 warrants come into play? Good question. In my opinion, the next piece of material news will be the proxy cards for the annual meeting. It is my belief that the proxy will ask shareholders to authorize additional shares. How that type of news is received will be interesting to watch.

Cash

The cash situation at MannKind is simply trudging along. By my estimate, the company has about $56 million in cash. This is enough to get into Q3 of this year when one considers a possible milestone from United Therapeutics, the cash outlay to Deerfield, and the now lower insulin payments. It is possible that the company sits at the table with Deerfield again, which would buy about six weeks added time. Seeing either set of warrants exercised would buy the company until the end of the year, but the warrants game can be tricky.

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

Summary

The stock is trading above the trading range I had established. Essentially the trading range will shift upward a bit at least until the outcome of the April warrants becomes obvious. The base is now $1.60, where the December warrants are priced. A lot is going to work itself out here in the first half of the year. The Afrezza story is going to need some form of resolution in the coming months. New revenue streams are still distant, and the reality of things like how long it takes to complete clinical trials will begin to set in. MannKind is in better shape than it was at this point a year ago, but still has a lot of work to do. 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.