Could MannKind Corporation Be Running Out of Money?

Source: Flickr user Mike Poresky.

When investing in the biotech sector, there are a lot of metrics investors would be wise to pay close attention to. Perhaps none of those is more important than the cash balance of biotech companies.

A vast majority of biotech stocks are in the clinical stage of their development process or the early stage of product commercialization, which means they're likely to be losing money and burning through their cash on hand. Furthermore, it can take years, or even decades, for some biotech stocks to get to the point where they're operationally profitable. In simpler terms, running out of money is a genuine concern for investors within this sector.

With that in mind, let's take a closer look at MannKind (MNKD 1.34%) to analyze whether or not it could be one of those dreaded biotech stocks running out of money. In order to do so, we'll need to take a close look at what drives MannKind's pipeline, where it's current cash position stands, and what avenues are open for the company to reduce its cash burn or raise cash.

MannKind's business focus
MannKind's business focus is both a source of good news and bad news for investors.

Source: MannKind.

On the plus side, it's comprised entirely of Afrezza, an inhalable powder delivered via the Dreamboat inhaler to treat type 1 and type 2 diabetes. Having a single compound allows MannKind to devote its entire marketing focus to Afrezza. Conversely, having only one drug in its entire pipeline places all of MannKind's eggs in a single basket, which has resulted in unfavorable outcomes for other biotech companies and their shareholders in the past.

The allure of Afrezza is that as an inhalable powder, it's considerably more convenient than multiple insulin injections during the day, and far less painful. Keep in mind that Afrezza does have side effects, which can include cough and throat irritation, but from a convenience standpoint, it could hold an edge over an injection hands down. It should also be noted that the Food and Drug Administration did approve Affrezza with some warnings, including that it not be given to people who are smoking, or to people with chronic lung diseases like asthma or chronic obstructive pulmonary disorder, or COPD. 

MannKind's cash position
According to MannKind's second-quarter earnings report from August, the company had cash and cash equivalents of $41.2 million, up slightly from the $35.8 million reported in the sequential first quarter. Though the company continues to burn through its existing cash, MannKind did announce the receipt of $16.3 million in proceeds from warrants and stock options, as well as $20 million from tranche B notes from Deerfield.

The good news for existing shareholders is that MannKind has had a bounty of cash flow following the end of the second quarter. As the company also noted in its report, on July 18, 2014, Deerfield purchased $40 million in tranche 4 notes.

Source: MannKind.

In addition, and perhaps more importantly, MannKind forged a collaborative licensing pact with Sanofi (SNY 1.49%) for Afrezza during the third quarter. The resulting deal netted MannKind $150 million in upfront cash as of the end of September, and allows MannKind up to $175 million in advanced collaboration expenses from Sanofi. Not to mention, in addition to a revenue split of 65% for Sanofi and 35% for MannKind, MannKind is also eligible for as much as $775 million in additional milestone payments from Sanofi that are tied to total sales of Afrezza.

In other words, MannKind's actual cash position, inclusive of its $150 million payment and the tranche 4 purchase from Deerfield, should be closer to $230 million. With full-year profitability not forecast until 2017 (and even then, the current estimates call for just $0.01 per share in full-year profit), it's possible the company could burn through $130 million-$150 million in cash through 2016, by my estimate. It's also worth noting the company is carrying $186.2 million in debt as of June 30, 2014.

How MannKind can boost its cash position
The good news for MannKind shareholders is that the company has a number of ways it can raise cash. But as you might imagine, not all of those methods will necessarily favor shareholders.

Source: TaxCredits.net via Flickr.

The most favorable method to boost cash will be through the sale of Afrezza. MannKind and Sanofi are expected to launch Afrezza in the first quarter of 2015, and it's really anyone's guess how well it'll perform. Inhalers have been incredibly hit or miss when it comes to success because an unfavorably high price can scare away potential consumers who'd rather stick with cheaper insulin shots. Also, some patients simply prefer an insulin shot to the side effects that come with an inhaled powder. Still, there are 29.1 million people with diabetes in the U.S. according to the Centers for Disease Control and Prevention, and millions upon millions more with pre-diabetes, so the potential patient pool for MannKind is enormous.

Secondly, and expanding on the first point, MannKind can generate significant cash from hitting sales milestones associated with Afrezza. Similar to its $150 million upfront payment from Sanofi, these milestone payments could help fund plenty of additional research should MannKind choose to expand its pipeline beyond Afrezza.

Finally, MannKind can turn to the open market and sell its common stock, a method it's turned to on a number of previous occasions to raise cash. The downside of doing this is it dilutes existing shareholders and could further pressure a stock that's down 50% from its 52-week high hit this past spring. Since the end of 2011, for instance, MannKind's outstanding share count has ballooned from just 122 million to nearly 381 million as of the end of Q2 2014, though options and warrant exercising can also be partially blamed for this jump. 

Could MannKind be running out of money?
Now that we've had a chance to take a closer look at MannKind's core business, its current cash position, and how the company can raise money, we're more prepared to return to, and answer, our original question: Could MannKind be running out of money?

If this were a question posed prior to its Aug. 11 second-quarter earnings report, I'd probably have been waving two big yellow flags out on the tarmac and proclaiming that MannKind's time was running out. However, the Sanofi deal and its $150 million in upfront cash saved MannKind in a big way. Considering the various sales milestones built into its deal as well as the potential for reduced costs now that Afrezza is approved and readying for commercial sale, I'm fairly confident cash won't be a concern for MannKind for many, many years.

However, that doesn't necessarily make MannKind a great investment, even with the stock 50% off of its recent highs. The expanse of its patient pool should be a positive for Afrezza, but pricing and aversion due to possible side effects (regardless of how minor) could cap Afrezza's potential. Considering that MannKind gave up a lot of revenue (65%) to gain some peace of mind regarding its cash position, and that it's still sporting $186.2 million in debt, I'm all for waiting this out on the sidelines for a few more quarters to see how successfully the duo launches this new drug.