So Much Insulin, So Little Use for It

After MannKind (Nasdaq: MNKD) received its second complete response letter from the Food and Drug Administration, it canceled its supply agreement with Merck (NYSE: MRK). There isn't much need for insulin when the FDA won't let you sell the product.

In a Securities and Exchange Commission filing yesterday, we found out how much it's going to cost MannKind to end the contract: $16 million. The payment will be made in two installments after MannKind accepts delivery of an undisclosed amount of insulin. Not that the company appears to really need any extra insulin. It also has a supply agreement with Pfizer (NYSE: PFE).

The punishment could have been worse. When MannKind announced that it was canceling the deal, it said the penalty could potentially be $22.7 million if Merck wasn't able to offload the insulin to someone else.

Still, $16 million is a lot of money for a company that had less than $50 million in the bank at the end of the first quarter. To satisfy the FDA, the company still needs to run two clinical trials that will cost $25 million apiece.

MannKind does have some options for funding other than diluting shareholders through secondary offerings. There's always the potential for a partner for Afrezza, but I don't know who would touch it at this point. Pfizer, Eli Lilly (NYSE: LLY), and Novo Nordisk (NYSE: NVO) all dropped inhaled-insulin programs. Even if they or someone else were interested in getting into inhaled insulin, they'd likely be better off waiting until after the next FDA decision. MannKind likely needs an approval in hand to get decent terms from any potential partner.

A better solution would probably be for MannKind to sell off its oncology assets, but I don't know how much it'll be able to get up front for drugs that have been stalled as the company focused on its lead product.

An FDA approval is still possible -- I'd go so far as to say probable -- but investors will need to be very patient and tolerate some dilution if MannKind can't work some additional magic raising cash.

Interested in small companies? Grab this free report from Motley Fool analysts: "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke."