Is MannKind Corp Finally a Buy?

Published October 11, 2017
Motley Fool

MannKind Corporation (NASDAQ: MNKD) shares are up over 175% this month, and that's got anyone who's been paying attention to this troubled biotech wondering, "Can I still buy?" The company's massive short interest is likely behind a significant amount of the share-price rally, but the short covering was sparked by fundamental news regarding MannKind's inhalable insulin, Afrezza. So is this a stock investors should be buying?

Kick-starting a rally

MannKind's shares were trading below $1 as recently as August on the fear that a heavy debt load and anemic Afrezza sales would eventually result in the company's winding down.

However, shares built up momentum ahead of an FDA decision to change Afrezza's label. Following that change, shares have rocketed up by nearly 200% this month.

At the heart of the change are two new pieces of information on the label that could finally convince doctors to prescribe the treatment to patients.

First, the label will now include study data that describes the onset of action by dosage strength. Second, the label gets some needed clarity in how to use Afrezza alongside mealtime insulin injections.

MannKind hopes that these changes will allow it to overcome worries that previously have kept a lid on demand. For instance, management believes that concerns over the impact of dosing before bedtime can now be overcome with the data on the label.

Financial rejiggering

One of investors' biggest fears is bankruptcy. By most accounts, MannKind has been flirting with an unwinding for a while now.

The company spent big money creating Afrezza and conducting trials to prove its efficacy, a process that saddled it with a mountain of debt. Debt grew even bigger when Sanofi inked a deal to market Afrezza only a short time before showing its CEO the door. Not long afterward, it abandoned Afrezza, leaving MannKind without a commercialization partner.

Overall, MannKind exited the second quarter with $86 million in short-term liabilities and $300 million in total liabilities, including $80 million owed to principal stockholders.

Since Afrezza sales were only $1.5 million in the second quarter and yet the company's spending on operating expenses eclipsed $33 million, it's no wonder investors were nervous about this company's chances to stay afloat. Some of those concerns, however, got pushed out into the future by a bit of financial rejiggering. 

Specifically, MannKind negotiated with four holders of stock purchase warrants to exchange their warrants for 1.3 million newly issued shares. The deal dilutes shareholders' investment, but it also gets rid of restrictions imposed by the warrants that crimp the company's ability to sell shares via its at-the-market facility (ATM). If its warrants hadn't been exchanged, MannKind could raise only $10 million using the ATM; however, after the exchange, it can raise up to $50 million. This also dilutes investors, but it offers the company a bit more wiggle room during which it can attempt to grow Afrezza sales without going insolvent.

Proof in the pudding?

Afrezza's label change and MannKind's ability to tap its ATM facility are good news for bulls, but ultimately, the company's survival depends on translating these developments into prescription volume relatively quickly.

The company finished June with $43.4 million in cash, but that's only because it borrowed $19.4 million more from The Mann Group. It's going to have to sell more shares under its ATM facility to keep the lights on, but given its spending, there's uncertainty as to whether sales can ramp up fast enough as MannKind draws down its coffers.

There is some evidence that MannKind's sales force is making some headway. According to data from Symphony Health, a pharmaceutical analytics firm, there were about 4,900 scripts written for Afrezza in the third quarter, up 27% from Q2. That's the highest level of quarterly scripts since Sanofi withdrew from the Afrezza partnership in 2016.

More cartridges per script should provide MannKind with a tailwind to third-quarter revenue, but net product sales probably won't be much better than $2 million to $2.5 million. If that's the case, the stock would have to make up a tremendous amount of ground before it's out of the woods. For perspective, MannKind's interest expense alone was $3 million in Q2.

Overall, bulls have been handsomely rewarded by a short squeeze sparked by the company's news this month, but the fundamental picture for MannKind is still very fuzzy at best.

MannKind remains a wild-west stock that's unsuitable for just about every investor. If you've been lucky enough to ride this wave higher, I think that the right move would be to book profit so that you're only playing with house money.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.