Afrezza

Source: MannKind

MannKind (NASDAQ:MNKD) continues to cut its expenses in response to a slower-than-hoped ramp up in sales for its inhalable insulin Afrezza; however, the pace of cuts may not be steep enough to matter if sales don't begin to materialize soon.

Troubling launch

Leading up to its launch, expectations were sky-high for MannKind's Afrezza.

Afrezza, which is taken via a small inhaler prior to mealtime, offers an alternative to short-lasting insulin injections that led many people to conclude patients would flock to it once it became available this past February.

However, sales reported by its marketing partner Sanofi have been lackluster. In the first quarter, Sanofi reports just 1.1 million euros in Afrezza sales, and in the second quarter, Afrezza sales were about 2.2 million euros.

Bloated business

The anemic Afrezza sales have led to MannKind playing defense in order to protect the cash it received from Sanofi when Sanofi signed on to market Afrezza last year.

MannKind's latest lay-off comes on top of two prior lay-offs earlier in the year and while the number of people let go hasn't been reported by the company, seemingly untenable losses suggest that it's not a stretch to think that more employees could lose their jobs if sales don't pick up.

Despite cost savings programs shaving tens of millions of dollars in quarterly expenses in the past year, MannKind's operating expenses of $24.1 million still led to a loss of $28.9 million in the second quarter alone.

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Source: MannKind

Financially troubling

Execution missteps in the company's bid to win FDA approval led to unexpected trial costs and spending associated with management's overly enthusiastic sales projections have saddled MannKind with a troubling balance sheet.

Ultimately, without a pick-up in sales, MannKind's $107 million in cash on the books may not be enough to make good on its swelling liabilities.

Removing the $170 million in deferred payments tied to its collaboration with Sanofi that, for accounting reasons, shows up under short-term liabilities, MannKind's total liabilities still total nearly $300 million, including about $170 million that is categorized as current.

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Source: MannKind

This means that MannKind's current ratio, a quick-and-dirty calculation that shows how able a company is to make good on its short term obligations, is just 0.43, which is down from 0.66 earlier this year.

Can MannKind turn a corner?

Investors that remain optimistic over MannKind's future believe that sales should increase once more insurers ink favorable deals with the company that result in Afrezza getting placed on drug formularies.

Appearing on those formularies could reduce the burden on doctors and patients hoping to get approved for Afrezza reimbursement, in turn leading to prescription growth.

If so, then the next couple quarters will be critical. Typically, it can take six to nine months for a review that could result in permanent placement on a formulary, so those decisions are happening soon, if not already.

Looking ahead

A pickup in sales is critical to MannKind's survival given that it gave up 65% of the rights to Afrezza's profit (or loss) as part of its licensing deal with Sanofi. Also, MannKind's product losses on Afrezza are running at about $12 million per quarter and MannKind has been covering its share of those losses by borrowing the money from Sanofi. If Afrezza becomes profitable, MannKind will need to pay Sanofi back before any money tied to Afrezza before it can reward investors. If MannKind can't pay back Sanofi, then Sanofi can take over MannKind's pledged assets, which in turn could significantly impact the company.

"In the event of certain future defaults under the Sanofi Loan facility agreement for which the Company is not able to obtain waivers, the lender under the Sanofi Loan Facility may accelerate all of the Company's repayment obligations, and take control of the Company's pledged assets, potentially requiring the Company to renegotiate the terms of its indebtedness on terms less favorable to the Company, or to immediately cease operations" -- MannKind's second quarter 10-Q. 

If sales don't pick-up, then its unclear to me what the future will hold for the company. Sanofi has an option to exit its relationship with MannKind as early as next year, and although MannKind has said it's exploring the use of its inhalable technology for other medicine, it could be a long wait before any additional products make it to market. For those reasons, MannKind is far too risky of a bet for investors to own.

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.