Source: MannKind.
MannKind (NASDAQ: MNKD) is set to report its third-quarter financial results on Nov. 9, but its marketing partner Sanofi (NYSE: SNY) has already issued its third-quarter update, and unfortunately for investors, its results don't bode well for MannKind.
Struggling to get a foothold
When Afrezza received FDA approval last year, expectations that it would become a commercial success were high, because the insulin market is worth billions of dollars annually and Afrezza's inhalable formulation had many people thinking diabetics would flock to it to avoid mealtime injections.
That thinking was bolstered when Sanofi signed on last summer to market Afrezza through its highly successful diabetes sales team, a team responsible for turning Sanofi's long-lasting insulin, Lantus, into a multibillion-dollar-per-year blockbuster.
However, hope that Afrezza would deliver a big win for MannKind investors have been mostly dashed, as sales have failed to materialize in any significant way since Sanofi began pitching it in February. In the first quarter, Afrezza sales were roughly $1.1 million, in the second quarter sales were just about $2.2 million, and last Thursday, Sanofi delivered additional bad news when it reported that Afrezza sales had stalled quarter over quarter at 2 million euros, or about $2.2 million at current exchange rates.
Mounting losses
Anticipating a flood of demand, MannKind invested heavily in infrastructure and personnel, and now those investments are taking a big toll on the company's balance sheet.
Last year, MannKind spent $100 million on R&D and $79.4 million on selling, general, and administrative costs, and despite significant layoffs and cutbacks so far this year, MannKind still reported total operating expenses of $24 million in the second quarter. Additional cost-cutting over the summer should allow for MannKind to report an additional decline in operating expenses for the third quarter, but given Afrezza's third-quarter performance, the company's losses probably continued mounting in Q3.
If so, then that's bad news for investors, because MannKind already owes a lot of money to bond investors, its founder, Al Mann, and Sanofi, which is lending MannKind money to cover its share of losses associated with Afrezza. In Q2, MannKind borrowed $15.4 million from Sanofi under that arrangement, bringing the total amount that it's borrowed from Sanofi to $28.4 million. Even after removing deferred payments from Sanofi that are tied to its collaboration deal that appear as liabilities for accounting purposes, overall, MannKind still has about $300 million in liabilities as of June 30.
Because MannKind owes a lot more to its lenders than the $107 million in cash on the books exiting June, the company boasts a worrisome current ratio of 0.43, and since that current ratio provides a quick look at how able a company would be to pay off short-term creditors, a reading below 1 makes me wonder how long MannKind can continue in its current form.
Looking ahead
Investors will get more color into MannKind's financial condition when it reports its own results next week, and if MannKind can't demonstrate that it's cutting expenses quick enough or can't convince investors that it has a good handle on how to overcome disappointing demand for Afrezza, then investors may see shares fall even further than they already have, especially if people begin thinking that Sanofi will exit its relationship with it. In any event, because MannKind's balance sheet isn't bulletproof and Afrezza has yet to catch on, this stock is too risky for new investors to consider buying.
