- My model of trailing 12-month net revenue had MannKind missing November's MidCap requirement. Some raised issues with my model. However, without a multi-million dollar order, MannKind will miss December's requirement.
- The December MidCap requirement will cause share price to remain below $1.60, making 23.3 million shares unencumbered.
- MannKind boasts of Afrezza gross profitability. However, that doesn't translate to Afrezza profitability.
- Afrezza will launch in Brazil in early 2020. If MannKind would provide assurance of the remaining $35 million from MidCap, share price could rise during 2020.
As December comes to an end, two events will influence MannKind (NASDAQ:MNKD) share price in the near term: (1) the MidCap December $27 million trailing 12-month net revenue, and (2) the expiration of 23.3 million warrants exercisable at a price of $1.60. These two events are offsetting keeping share price within a tight trading range through the remaining year.
In my last article, I postulated MannKind missed MidCap's November's $25.5 million net revenue requirement. My model estimated net revenue at $24.3 million that includes a shipment of Afrezza to Brazilian partner Biomm. Commentary on my article raised issues with my net revenue estimates. While these were legitimate issues for the November's trailing net revenue, without an order from Biomm, MidCap's December requirement will unquestionably be missed.
For the week ending November 29, total scripts came in at 687, retail sales of $1.24 million. My model estimates net revenue of $496,713, bringing trailing 12-month net revenue to $24.8 million. Weekly reported scripts are delayed one week. Because of this delay, the December MidCap requirement will replace weeks 12-7-18 of $402,069, 12-14-18 of $401,629, and 12-21-18 of $491,368 with the three weeks ending 12-20-19. The highest net revenue week came in at $585,240. Assuming scripts during next three weeks come in at $585,240, US Afrezza sales alone will not meet MidCap's requirement of $27 million, triggering a 2% increase on $40 million. While MannKind can service the additional interest costs, questions of MannKind's accessibility to the remaining $35 million MidCap loans are being raised.
The MidCap trailing net revenue requirement creates uncertainty surrounding MannKind's finances negatively affecting share price. In some respects, the MidCap requirement benefits MannKind in the short term by ensuring the expiration of the $1.60 warrants making 23.3 million shares available for future uses.
Afrezza gross profit doesn't imply product profitability
I would like to address issues I have with the way CEO Castagna presents Afrezza revenue and expenses that leads some to believe MannKind will not have a cash shortfall in 2020. When MannKind reports Afrezza quarterly numbers, they highlight Afrezza gross profitability. Investors need to be cognizant that profitability normally subtracts selling costs from gross profits. While scripts and retail sales have increased since MannKind's launch of Afrezza, the product is nowhere near to being profitable.
Source: 3Q 2019 presentation
To demonstrate Afrezza's unprofitability I summed data on a quarterly basis since MannKind's launch. Afrezza total scripts and retail sales, as reported by Symphony, were:
Source: John Kastanes
Applying factors to reduce retail sales to net revenue yields:
Source: John Kastanes
Subtracting cost of goods sold and selling costs from net revenue produces the following losses:
Source: John Kastanes
As one can see, despite Afrezza scripts tripling from 3,000 scripts to 9,000 scripts per quarter, Afrezza generates significant losses for MannKind as a one product company.
What investors need to consider
When MannKind announced MidCap financing, it provided a possible pathway for MannKind to reach cash-flow breakeven by the end of 2022. With Afrezza trailing 12-month net revenue failing to meet MidCap's requirement, interest increases by 2% on the $40 million and raises questions of the availability of future loans.
Some readers asked: If the MidCap requirement was violated why has MannKind not issued a 8-K? The best explanation for the lack of an 8K was provided by SA poster Matt_PK:
Legally a default is not a default unless the lender serves notice of default, but the lender is under no obligation to put a loan into default. MNKD defaulted on the technical terms of the Deerfield note multiple times, but Deerfield always granted them forbearance and waived the default (at a cost of course). A notice of default absolutely requires filing of an 8-K while a technical default where the lender grants forbearance does not unless there is material compensation paid.
Without clarity of future funding, share price will be under pressure. Without news of launch of Afrezza in Brazil in the remaining weeks of 2019, warrants will expire worthless reducing some selling pressure. With the Brazilian launch now anticipated sometime in early 2020, share price may increase if MannKind would provide assurance of availability to the remaining $35 million MidCap financing.
MannKind's future rests with its pipeline, CEO Castagna has been slow to make meaningful progress to excite Wall Street. If you are an investor or contemplate buying, wait for clarity on funding and pipeline advancement before making purchases.
This article was written by
Analyst’s Disclosure: I am/we are long MNKD. 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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