MannKind (NASDAQ: MNKD) emerged as the topic of discussion recently in a conversation I had with several others who focus on the healthcare investing scene. We talked about the stock's incredible run of late and agreed that MannKind appears to be benefiting from a classic short squeeze.
But then the subject of MannKind's debt came up. One of my colleagues expressed his belief that this was a huge problem for MannKind in the months ahead. That comment prompted me to look into the company's debt at a more detailed level. Is MannKind's debt potentially a ticking time bomb -- or are fears overblown?
Racking up the IOUs
It's easy to forget just how long MannKind has been around. The company was formed way back in 1991. Ten years later, it merged with two of Al Mann's companies and changed its name to MannKind. During this 26-year period, the company has never been profitable.
This context is important to understand. The company certainly has accumulated plenty of IOUs through the years. As a result, its debt load currently stands at just shy of $165 million. That's a lot of money, but it's also lower than it could have been after close to three decades of operating in the red.
MannKind avoided incurring even more debt through a couple of ways. First, it has done what most small biotechs do to raise money: It has issued stock. Most recently, MannKind sold $61 million of stock earlier this month to generate additional cash. The second reason MannKind's debt isn't as high as it could have been isn't quite as common. The late Al Mann and his organization, The Mann Group, swapped out debt for additional equity along the way.
How scary is it?
There are two things to look at in determining how serious a problem debt is for a company. One is whether or not the interest expense is manageable. The other is how quickly the company must repay the debt.
In the first half of 2017, MannKind spent a little over $6.5 million in interest expense. By comparison, the company generated revenue of close to $5.2 million during the period. It's definitely not a good situation to spend more on interest than you make.
On the other hand, that interest expense could become more manageable if Afrezza sales pick up. And there are reasons to believe that could happen. MannKind has beefed up its internal sales force dramatically. The company also secured an important label change for Afrezza a couple of weeks ago that MannKind CEO Michael Castagna says presents "a pivotal moment in the history of the company."
The worse news for MannKind, though, is that it has a lot of debt coming due relatively soon. As of the end of the second quarter, the company must repay $10 million this year, $20 million next year, and $30 million in 2019. At this point, it's hard to see how MannKind will be able to make those payments. The company will almost certainly need to refinance its debt.
A giant step for MannKind
Make no mistake: MannKind's debt load is worrisome. It could very well be a ticking time bomb for the company. But just how big of a problem it really is depends on one thing: Afrezza sales.
MannKind could take a giant step toward reassuring shareholders -- and debt holders -- with fast growth for the inhaled insulin product. That would give the company more money to use in paying interest and give it more flexibility in refinancing. Even significant incremental improvement would help on both fronts.
I think Castagna is right in his view that the label change for Afrezza represents a big opportunity for the company. What I'm not sure about is just how big that opportunity will really be. I'll need to see several months of impressive sales results with the label change in place before I'd say that MannKind is truly headed in the right direction. We should know a lot more about whether or not the company's debt bomb is about to explode by mid-2018.
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