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Blame MannKind's Fall on its Bloated Balance Sheet

MannKind (MNKD) shares are bouncing a bit Wednesday but the stock is down significantly since Monday's announcement that Sanofi (SNY - Get Report) has signed on to sell the inhaled, rapid-acting insulin device Afrezza. Why? Because even in biotech where the "blue sky" potential for experimental drugs so often sends stock prices soaring, no company can escape the gravitational pull of balance sheets and income statements. The slump in MannKind's valuation since Afrezza's approval is a great example of why biotech investors can't ignore fundamental financial metrics forever.

A chart of MannKind's performance this week relative to the biotech sector:

MNKD Price Chart 

Here's MannKind's performance since FDA approved Afrezza on June 27:

MNKD Chart

MannKind bulls have blamed the stock's underperformance on bear raids by short sellers and market manipulation -- anything to distract from the real problem: MannKind's lousy balance sheet, which makes it almost impossible to justify owning the stock. 

J.P. Morgan analyst Cory Kasimov believes MannKind did well landing Sanofi as the Afrezza partner. He called the deal a positive for MannKind. But...

However, even with SNY, we remain skeptical that the commercial potential of Afrezza is enough to warrant its current valuation, especially considering the perceived lower relative efficacy vs. injected insulin, potential limitation of use to certain patient subgroups, and lingering safety concerns. Indeed, we estimate that Afrezza has to match the leading mealtime insulin in the world just to justify MNKD’s  current valuation let alone offer upside potential. [Emphasis his.]

And here are the numbers from Kasimov's MannKind model fleshing out the challenge ahead:

Running different scenarios through our models (both a rNPV and multiple based scenario analysis), we find it noteworthy that Afrezza peak sales need to match those of the leading insulin analogs Novolog and Humalog (generated $3B and $2.6B in sales last year, respectively) to generate a value to MNKD of $6-7/share (on a FD basis). Thus, the drug needs to be significantly larger to justify material upside from current levels based on our assumptions.

Think about Kasimov's model for a second: Even if Afrezza generates $3 billion in sales, MannKind's stock is still not worth any more than where it trades today. In fact, MannKind might be worth even less! 

The blame, of course, lies with MannKind. The path to Afrezza's approval was long and expensive. FDA rejected it two times previously and each setback required MannKind to saddle shareholders with more debt and dilutive financings. Today, MannKind has 450 million shares outstanding on a fully diluted basis. That's an amazingly high denominator against which any net profit from Afrezza needs to be measured. 

Here's one more chart, more encouraging for MannKind shareholders. Despite the recent downturn, the stock is still up for the year:

MNKD Chart

 If Afrezza can't generate blockbuster sales, however, don't expect even this consolation prize for MannKind shareholders to last deep into next year.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.


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