MannKind: December MidCap Requirement And Afrezza Losses

Summary

• 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.

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.

Comments

[WatcherOfTheSkies]

An ambulance ride to the ER and treatment for a severe hypo episode? Or how about an ambulance ride to the ER and then to ICU for severe ketoacidosis? Wait - amputations, blindness, kidney failure. The cost of Afrezza when compared to % of diabetics that will experience 1, or 2 or 3 of the complications associated with poor control? Cheap.

[happytrailstoyou]

@WatcherOfTheSkies Yeahhhhhhhh...well, until you can PROVE all that to the endos and insurers, afizzle is pretty much up s__t creek.

[happytrailstoyou]

LOL! Afrezza is back on the Anvisa price list but the numbers are a bit different:

portal.anvisa.gov.br/...

Let's see --- if I'm reading it correctly, 12U box costs about 3,000 reals at the pharmacy -- about 50-60 TIMES the cost of Humalog!. Figure that at about $750 a box, MNKD better hope there are a lot of diabetics who are independently WEALTHY!

[Matt_PK]

You read it incorrectly. The PF20% price is the maximum wholesale cost to the pharmacy (including import and sales taxes), and the pharmacy is allowed a mark-up that makes the consumer price a maximum of 3925 Reals (about US$967.50). Normal recombinant insulin in 10ml vials is available for free to diabetics in Brazil at the Farmacia Popular.

The new spreadsheet from Brazil makes the price of Afrezza at retail roughly comparable to the US price from GoodRx. This is a monitored price, not a regulated price, so these number could go down substantially in the future.

[wildpig]

mnkd: why don't we all just call it for what it is? mnkd is an ongoing 29 year failure and a legitimate scam- nothing more. Now that's just the naked truth. Of course I realize most all longtards and bagholders {roughly 97-98%} of anyone who has ever "invested" in mnkd has LOST major money per my research. So in essence one should conclude mnkd is garbage, it is a fanatical cult driven stock with tons of promise but in reality delivers micro grams of positevity... feel free to quote me --as usual I the Master am correct.

[happytrailstoyou]

Humor for the day courtesy of Mannkind's response to HFM request for board meeting documents:

static1.squarespace.com/...

Forget the legalese and recognize that Mannkind is SCARED of what would happen if those documents were made public.

[happytrailstoyou]

New 8-K out:

"On December 26, 2018, MannKind Corporation (the “Company”) issued a warrant (the “Warrant”) to purchase 11,750,000 shares of the Company’s common stock (the “Warrant Shares”) to CVI Investments, Inc. (“CVI”) in connection with an underwritten public offering of the Company’s common stock and warrants to purchase shares of its common stock, which was made pursuant to the Company’s registration statement on Form S-3 (Registration Statement No. 333-210792), previously filed with the Securities and Exchange Commission (“SEC”) and declared effective by the SEC on April 27, 2016, and a prospectus supplement thereunder.

On December 23, 2019, the Company and CVI agreed to amend the Warrant (the “Warrant Amendment”) to provide that (i) commencing immediately following the Company’s filing of this Current Report on Form 8-K with the SEC, and ending at 9:30 a.m. (New York City time) on December 23, 2019, the exercise price per share for 4,500,000 Warrant Shares will be equal to $1.311 but only with respect to a cash exercise under Section 2(a) of the Warrant and (ii) if and only if CVI purchases at least 4,500,000 Warrant Shares pursuant to a cash exercise of the Warrant under Section 2(a) of the Warrant prior to 5:00 p.m. (New York City time) on December 26, 2019, the termination date of the Warrant will be extended to June 26, 2020."

As USUAL, the exercise price is now below the closing price by bout 6% and now get another six months to short the stock to hedge the warrants! Such a lovely management team.

"Agedhippie" from proboards provides an analysis:

"What does this mean? My read is that:

- they are hedging their MidCap position. They just paid CVI $310k + the value of the warrants to agree to extend the warrants until the end of June. If things go off the rails with MidCap this will provide an immediate chance to offload the remaining 6.5M warrants for cash,

- and it's corollary, keeping CVI sweet so they can go back to that particular well if necessary. If things remain good with MidCap then the warrants will probably never get exercised,

- they don't expect the price to be over $1.60 before tranche 2 or they would have used the ATM instead,

- Mike is going to be asking for a lot more shares in the not to distant future

- the shorts feel a lot safer."

Sounds about right.

[happytrailstoyou]

"matt" from proboards adds:

"This is the equivalent of selling those shares into the market, but since warrant exercise doesn't generally incur a second investment banking fee placement (typically about 7%) and there is a lot less legal paperwork involved, it is less expensive. Whether the company needed the money that badly is another discussion.

Certainly the optics of repricing the warrants as they are about to expire is not favorable. As I mentioned in another thread last week, any time a company sells securities for less than the current market price the market tends to respond by discounting all outstanding shares to the same level.

It is still pre-market as I write this, but as of this moment the stock is trading down 6 cents. In other words, the company just imposed a $12.4 value loss on the shareholders to raise $5.9 million in cash, and put a price ceiling on the stock until the new expiration date in June. I leave it to you to opine on whether that was a prudent move or not."

[wildpig]

so surprising to discover another who accurately understand this flawed an failed penny stock trash for what it is --pure garbage. carry on

[wildpig]

as the "Brazil Deal" becomes slowly more transparent- no thanks to Mismanager Mike- it becomes yet once again clear the truism I tossed out all those mths an mths ago -- They got no peso's in Brazil. What does that mean exactly you might axe yoself- well it's quite obvious-- there is NO available money aka profit to any real degree for mnkd.... quite simple really.... Just another revealation in the ongoing saga of CESSPOOL MNKD. Stay tuned for more wisdom from me {the Master} as I choose to toss it out. Would I run you up on a sandbar?

[happytrailstoyou]

Now 10 days since the revised Anvisa price list minus afrezza came out:

portal.anvisa.gov.br/...

No new revision...no explanation from Mannkind...no explanation from Biomm...no announcement that afrezza can now be sold in Brazil...no Brazilian afrezza launch...what's the problem?

[wildpig]

one of the many problems is the totally inept and bumbling BOD & mgt. Both should have been re-vamped yrs ago and most sitting members of the BOD should be terminated by 7am tommorrow morning. MGT- there should be a mass firing by 6am tommorrow morning- i can assure anyone mnkd would be better for it. The company has been in fact hi-jacked by a group of under achieving bums who daily milk the company for all it's worth.

[happytrailstoyou]

Spencer Osborne comments on stocktwits:

"spencerosborne
03:57 PM
@vibes121 @detroitish interest rate was not mentioned specifically. Exit fee is now 7%. Net rev targets lowered. Tranch 3 has raised net rev targets, which seem unlikely to be attained. Bottom line...they can borrow $10m more on this deal with relative ease, but the final $25m is not easy. All things considered, they have funds to mid 2020, and another $35m in anticipated funds to get toward end of 2020.

spencerosborne
06:53 PM
@vibes121 @notmykind @woody81 I laid out just after the deal was announced that the covenants would ge difficult and laid out that the miss would happen in October or November. It was simply a realistic assessment. I stated that it would lead to an amendment and that midxap would get their pound of flesh. Making tranche 3 almost unreachable removes $25m in potential funds from the coffers. There will be ramifications from that, as the street must now contemplate what will happen in mid to late 2020. They key to playing this equity is to look at it from an accounting perspective until such time that the company demonstrates that close bean counting is not necessary."

[realalby]

which stock twits post do you refer? I cannot see it...

[happytrailstoyou]

New form 8-K modifying the afrezza net revenue:

archive.fast-edgar.com/...

[happytrailstoyou]

Still no announcement regarding the Anvisa afrezza price assignment from either Mannkind or Biomm SA. Also no explanation from either one as to why afrezza disappeared from the revised price list.

[Jonathan Cabrera]

Great and well put together John.
I’ve traded in and out, currently placing my best in. I feel a safe and profitable entry point 1.20 and below.

[happytrailstoyou]

Oddly enough, Brazil's ANVISA has revised its price list and afrezza is no longer on it:

portal.anvisa.gov.br/...

Why? Has Mannkind and/or Biomm decided against launching in Brazil?

[happytrailstoyou]

Afrezza as it appeared in the first ANVISA document:

pbs.twimg.com/...
And not a word from Mannkind to explain the disappearance? Seems pretty odd.

[WatcherOfTheSkies]

Again, if MidCap raises the interest rate that's their right. The Phase 3 Pediatric trial must proceed and it must be paid for. If that means more money, more shares - well then, that's what it means doesn't it. Two words - NEW DATA.

[HSAIN]

Sanofi ends research in diabetes, narrows units to spur profit. www.google.com/...

Definately not their strong suit, no surprise

[Looking For Diogenes]

John,
Nice recap! I'm pleased to see that finally you have come around to the reality that MNKD isn't the panacea for a good place to invest your hard earned money! The rabbits in the hat are getting to be fewer and fewer to be found!

[wildpig]

I can sum it all up in 3 count em, 3 easy words- mnkd is GARBAGE. Just that simple

[Figglebird]

So you Continue to be long a stock that you find extremely risky or volatile

regarding the facility agreement w Deerfield 1. A very different agreement in many ways that should not be compared in the simplistic manner it was - But if you remain persistent in doing so recognize that every time the df facility agreement was amended due to any issue including mankind failing to meet a contingency and so forth an 8K was filed and released - specifically the mere dozen amendments to the Deerfield agreement-

What is your point? Do you think investors should trail the view of the street or try and get ahead of a larger trend that mnkd has clearly invested capital in order to position itself well within - if the former, as you seem to suggest you should reconsider what being an investor is vs a day trader...

4. I would ask you how you feel ab this larger macro trend of dry powder inhalers dpis
in terms of both the inhalers and the formulations themselves and how that impacts your general thesis but I already suspect your answer as you do not have an opinion which to me is absurd - trading vs investing - confuse the two at your own naievity - something even the prior
author mentioned distinguishes

[lojothehus]

When people are not quite sure of outcomes, they stand on both sides of the fence. MNKD believers are still here, haven't gone anywhere and the one who laughs last, will laugh the loudest (LOL)

[Looking For Diogenes]

<<>>>

But you can't make the claim that their "money" hasn't gone---poof!

[davidebby42]

If you had bought a few weeks ago, the money hasn't gone 'poof". That's the difference from understanding when to buy and when to sell. I have control over the 'poof'. So, this is a great place to make money and if you are savvy, you can sit on a a core at these price points and place your bets...red or green, black or red, heads or tails...life is full of these 50/50 opportunities. The outcome, a win or a loss...not difficult to play the odds. As EVERY prospectus read...past performance is not an indicator of future returns.

[MNKDdiehardlong]

It's hilarious how pumpers are rejoicing on my message boards. They forget so easily this was well above $2 just a few months ago. Yet $1.40 and they are acting like they won the lotto. Anyway, always love watching these pops come cashing down.

[Figglebird]

This has not been above 2 in many many months try 9 or 10 - just for factual sake

[johngalt49]

It all depends on what price you buy it at. I'm in the $7 range. No good news in years.

[realalby]

"retail sales of $1.24 million. My model estimates net revenue of $496,713"

John, the net is higher... at least 45% of retail and not 40%... Anyway we will see in 2 months. In Q4 was only 40% for extraordinary account... Never been so low in the previous quarter.

Saying that, I appreciate very much your articles