MannKind: Stretching Cash Is Key

About: MannKind Corporation (MNKD), Includes: AMPH, UTHR
by: Spencer Osborne

Annual shareholder meeting on deck.

The company's cash situation is very interesting.

26.6 million warrant shares at $1.60, each expiring at the end of the year.

MannKind (MNKD) has its annual meeting on deck for May 14, 2019. While shareholders speculate about whether or not the company will break some news, the share price is down to $1.20. That share price could be a great entry point for active traders, as it rests at the low end of a trading range and shares appear to be oversold.

While some readers may have read the title and imagined an article about whether or not the stock price will flirt with $1 per share again, that is not at all what this piece is about. This article is about whether MannKind can stretch its cash out until such time that the 26.6 million warrant shares priced at $1.60 come into play. The warrants expire at the end of December, and as has been covered in depth, these warrants can have toxic properties.

Before moving forward, let's take a look at a chart on cash:

(Chart Source: Spencer Osborne)

As you can see in the chart above, there is a pathway to getting to the warrants in December. Set aside the fact that these shares would be dilution for a moment. What has shifted that moved the date from running out of cash at the end of Q3 to getting deep into Q4 before running out of cash?

  • The company has stated that it anticipates a $12.5 million milestone payment in the second half of the year from United Therapeutics (UTHR) and, more importantly, has stated that obtaining this milestone is in MannKind's control. That last statement is the important one and makes the $12.5 million infusion more obtainable because it does not rely on the whims of the partner to get it. I have placed an assumption that the milestone will happen in Q3 of this year.
  • I have removed the $5 million milestone expense to Deerfield from an event that would transpire in Q3 to an event that will transpire in Q4. The $5 million payment is due to Deerfield when net revenue for Afrezza passes $50 million. The language of the milestone agreement states that the payment be made within 5 days after the quarter in which it was obtained. With the event anticipated in Q4 2019, it would push the payment to Q1 2020. Ironically, this is a case where slower-than-desired sales of Afrezza may actually be helpful. Yes, it is a bit of a "punt", but sometimes a punt can be a critical play.
  • I have reduced the weekly expenses from $2.1 million to $1.9 million. This reduction in costs can be tricky in that we do not know whether the sales force will increase in size again now that the television ads have been stopped. We also do not know if the company will bring forward any pipeline work and associated costs related to that effort. Essentially, I am making an assumption that MannKind will run a bit lean in 2019 in hopes of a reset in 2020. While it is my belief that the company should invest in the pipeline and thus increase some spending there, I try to be as realistic as possible.

Wild Cards

There are some wild cards in the mix. These deserve some discussion:

  • The company could use the ATM facility and some of the unencumbered shares on the shelf to handle the remaining $9.5 million in Deerfield debt. Use of the ATM would allow the debt to be handled in shares without having to go to Deerfield to negotiate a share deal directly. The move would be dilutive. The use of the ATM facility is essentially invisible to investors until a quarterly report. While the company would avoid the negative impact of an 8k with a low share price attached in a negotiation with Deerfield, the selling pressure that such shares would have on the market has its own impacts. I actually feel that this move has a pretty high probability of happening.
  • United Therapeutics could advance a second molecule triggering at least one of the two $15 million milestones. Personally, I do not see this as likely. MannKind has given no indication that this will happen, nor has United Therapeutics. In fact, United has placed its dry powder Adcirca initiative late into its mid-term pipeline category. It defines mid-term as an anticipated launch between 2022 and 2025. Dryvaso is in the exact same category but earlier in the timeline. I give this wild card very low odds of delivering anything in 2029.
  • MannKind could do a deal with Afrezza. This is certainly possible, but one must look at this in the same manner that any prudent buyer or partner would. Sales have been much slower than needed, costs have been much higher than needed, there is a very substantial insulin contract with Amphastar Pharmaceuticals (AMPH) which requires insulin purchases well beyond what the company can realistically use, and there are still costly clinical trial obligations to be completed. While such a deal can happen, and it could deliver enough cash to bridge the gap in cash, it would not likely be as fruitful as some may hope.
  • MannKind could do a deal with another compound with a new partner. This is possible, but I do not see companies breaking down the door at HQ to get a deal done. It is my belief that MannKind is going to have to push something through a phase 1 clinical trial to get a deal. Given that it has not advanced anything and it is May, I do not anticipate the company being able to get anything done on this front in 2019 that would deliver a deal with the desired terms.

What I see as realistic is possible use of the ATM to handle Deerfield debt, or at least portions of it. The issue is that MannKind cannot flood the market with shares in one fell swoop. A good assumption is that the use would be no more than 10% of the daily volume. Average volume is about 3 million shares. This means that the company could sell about 300,000 shares on any trading day. At about $1.20 per share, the average day could raise about $250,000 in cash. That means it would take 38 trading days to raise the $9.5 million due to Deerfield. It just so happens that there are about 38 trading days left until the Deerfield debt is due. As stated earlier, such action would be virtually invisible to investors, but would take a toll on the share price simply due to the laws of supply and demand. Such use would also compound the problem of very few unencumbered shares on the shelf. It would take about 8 million shares to handle the principal due to Deerfield and some more to handle the interest. That would leave only about 7-8 million unencumbered shares on the shelf - a level that is much lower than what is ideal or prudent.

Handling the Deerfield matter with shares would bridge the gap to the warrants date, but would leave the company operating on a very thin budget. As painful as the Deerfield cash covenant has been to MannKind over the years, there is wisdom in it. Dipping below $20 million in cash is simply not very wise. Further, going that low in reliance of warrant holders exercising their shares is a dangerous game. More often than not, these warrants are toxic and holders tend to short whenever the price gets above the strike. It is a game that can even be played multiple times. If management decides to rely on the warrants, it could find itself getting dangerously low on cash and then in need of a quick negotiation to raise cash if the warrant strategy fails. That could mean yet another offering with a new set of warrants at even less desirable prices. Potentially this could create a 2020 that has toxic financing hurdles as well.

While this may be frustrating to hear, a prudent move might be to get more shares authorized and do a capital raise sometime in Q3 or very early in Q4. Low cash means that the company lacks leverage in a negotiation. One needs to look no further than the deal United Therapeutics was able to strike for Dryvaso when MannKind was down to about $11 million in cash. I do not think anyone would deny that United had MannKind over a barrel in that deal negotiation.

In simple terms, while one might argue that there is a "pathway" to being funded through mid-2020, there is little doubt that the path has many hurdles and needs a lot of things to go just right. MannKind has control over two things. The first is obtaining the second $12.5 million milestone from United Therapeutics, and the second is using its ATM facility. Unfortunately, even the ATM has its issues, because this company did not get more authorized shares to work with.

There is a saying about being between a rock and a hard place. It has applied to MannKind for a number of years now. Perhaps the company is not so tightly wedged between that rock and a hard place as it was a year ago, but it is still there in many respects.

This company is still dominated by active traders' playing ranges. The new range is between about $1.10 and $1.70. Trading at the bottom of this new range presents an opportunity, but as with any speculative play, some caution is warranted. The stock tends to overreact to good and bad news. A lot can depend on whether the next piece of news is positive or negative. A buy here in the $1.20 range could be a great play for an upside swing, but you may want to have a mental stop at $1.05 or so.

In summary, there is a way that MannKind can stretch its finances, but there are some negative attributes to consider. I would rather see getting some financing done and advance the pipeline than stretching the cash simply to say that the company avoided another offering. Regardless of what happens in 2019, there will most likely need to be an offering at some point in early 2020 anyway. 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.