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Since the day MannKind's (MNKD 1.98%) inhaled-insulin device Afrezza earned FDA approval just over two years ago, the company's stock has lost about 92.6% of its value. Now that MannKind's former marketing partner Sanofi has returned rights to commercialize Afrezza to the embattled company, a successful relaunch of the device is critical.
MannKind shareholders would love to see Afrezza succeed, but a quick glance at MannKind's balance sheet reveals at least five metrics that spell trouble for the company. Even if you're not entirely sure what a balance sheet is, I'll walk you through the issues one by one. Then you can decide for yourself how close the company is to the big "B" word.
1. A $2.9 billion accumulated deficit
In biotech, it's not unusual for companies to lose a lot of money before launching their first product. For example, Medivation had accumulated a deficit of about $291.5 million at the end of 2012, the year its prostate cancer therapy Xtandi earned FDA approval. Two years later, that deficit had been reduced to $57 million. More recently, Pfizer agreed to pay $14 billion for the company.
MannKind's first two years as a commercial-stage company haven't been quite as encouraging. For starters, I can't recall any company accumulating a 10-figure deficit ahead of its first product launch. MannKind's deficit passed the $2 billion mark well ahead of Afrezza's long-delayed FDA approval. More frightening is that two years after Afrezza's first launch, MannKind's accumulated deficit has risen to a stunning $2.9 billion.
2. A negative book value
Book value and shareholder equity are interchangeable terms measured by subtracting a company's liabilities from its assets. Even among clinical-stage biotechs without products to sell, negative book values are so uncommon that I can't recall a precedent.
Again, MannKind breaks the mold. At the end of June its liabilities outweighed its assets by a shocking $366.6 million. When companies go under, debt holders are first in line to receive any asset liquidation proceeds, and common shareholders are last. In other words, if the company folds while its book value is still negative, its shares will be worth absolutely nothing.
3. Low current ratio
On a balance sheet, assets that can be used as cash within a year are reported as "current assets," while liabilities to be paid within a year are reported separately as "current liabilities." Together, these two metrics make it easy for investors to assess a company's near-term liquidity.
The current ratio is the ratio of current assets to current liabilities, found by simply dividing the former by the latter. A ratio of one or higher indicates that the company probably won't need to sell more shares or take on more debt to pay its upcoming bills.
MannKind finished June with $90.76 million in current assets and $289.71 million in current liabilities. Its current ratio of just 0.31 is a warning that the company will need more financing soon just to keep the lights on. During the second-quarter earnings call, I think CEO Matthew Pfeffer was being a bit optimistic when he said financing efforts executed in May would see the company into the first quarter of next year.
4. Desperate financing
That financing Pfeffer was referring to was a desperate stock offering largely responsible for an 11% increase in shares outstanding from 429.1 million at the end of March to 477.7 million at the end of June.
To sell those 48.5 million shares, MannKind sweetened them with warrants that will likely dilute existing shares another 10.2% if MannKind stock rises above $1.50 per share. The "A" warrants allow the new shareholders to purchase another 36.4 million shares of common stock at $1.50 for two years following their issuance. The "B" warrants are an option to purchase up to 12.1 million shares at $1.50 beginning next May, and they expire 30 months later.
In return for the shareholder-value-destroying share dilution, the company received net proceeds of just $47.4 million, and it could get $72.75 million more if warrants are exercised.
5. "Between a rock and a hard place" financing
Before Afrezza earned FDA approval, MannKind arranged a complicated financing agreement with Deerfield. The terms have been amended more than once, and MannKind finished June owing $60 million at an exorbitant annual rate of 9.75%, and $20 million at 8.75% to be repaid by December 2019.
A feature of the complex agreement involves MannKind making payments to Deerfield that could reach $90 million if the company achieves specific commercialization milestones, but that's not even the worst part. It also requires MannKind to finish each quarter with at least $25 million in cash and cash equivalents, or Deerfield can declare all $80 million immediately due and payable. Such an action would almost certainly result in a default, unless Afrezza sales reverse their trajectory and begin rocketing upward.
Light at the end of the YouTube?
MannKind clearly can't afford a traditional marketing campaign and has taken to social media in hopes that some form of viral marketing success will suffice. Considering MannKind's liquidity crunch, it's not the worst idea, but it doesn't seem to be getting anywhere fast. At the time of this writing, MannKind's Facebook page had 727 likes, and its Twitter feed had 1,513 followers. Neither account had posted an update in over six weeks, suggesting that this strategy isn't panning out.
Recently, chief commercial officer Mike Castagna's personal Twitter account has been far more active than the corporate account, and a couple of YouTube channels created by enthusiastic Afrezza users have gained roughly 100 subscribers each. That's a start, but it's hardly the viral marketing frenzy the company needs to shore up its weak balance sheet and avoid bankruptcy in the quarters ahead.
