MannKind Migrates to Israel to Stave Off Bankruptcy
MannKind (MNKD) - Get Report is doing something smart.
I'm often criticized for having nothing positive to say about MannKind, so let the record reflect that I believe the company going to Israel to raise money is a wise move.
When Sanofi (SNY) - Get Report bails next year on the financial sinkhole otherwise known as the Afrezza inhaled insulin partnership -- and that scenario looks more likely than ever -- MannKind will need every penny it can find to stave off bankruptcy.
Remarkably, MannKind's market value today remains above $1 billion.
As disclosed Monday night, MannKind will sell "up to" 50 million shares of its common stock directly to Israeli-managed index funds. These exchange-traded funds are required to buy MannKind shares because the stock is now dual listed on the Tel Aviv Stock Exchange. Instead of putting MannKind shares on the open market, MannKind offered to sell new, unissued stock to the TASE ETF funds directly at a 3% discount.
The amount of money that will be raised in this offering isn't known yet, but will hinge on MannKind's weighting in the various TASE indices, which will then dictate how many shares the Israeli ETFs need to acquire.
As anyone spying a stock chart lately knows, MannKind wasn't finding demand for its falling shares from U.S. investors, so dual-listing on the TASE and raising money from "forced" buyers in the Israeli investment community is a heads-up survival move.
Note: An Israeli newspaper is reporting Tuesday that stock regulators there are warning ETFs against buying MannKind shares because of the company's deteriorating financial condition. It's not clear, however, if Israeli regulators can prohibit the sales from going through if they are found to be legal.
The bad news for MannKind is the money raised from Israel, if allowed, won't last it very long. Let's take a look at the numbers, excluding the new Israeli financing.
MannKind ended the third quarter with only $8 million in available cash on hand. "Available" means cash MannKind can actually spend to keep the company operating. The company is required to keep $25 million in restricted cash on its books as collateral for an existing loan agreement with Deerfield Capital Management. At the end of the third quarter, MannKind reported $33 million in cash, according to its quarterly report filed Monday. Subtracting the $25 million restricted leaves $8 million.
MannKind used $20 million in cash to fund operations in the third quarter. The company avoided insolvency because it raised $12 million in the third quarter by selling stock through its at-the-market (ATM) equity facility.
A quarterly burn rate of $20 million is slightly higher than normal for MannKind, but figure the company needs about $15 million to $20 million per quarter to fund operations. How does it do that?
MannKind can tap the ATM for an additional $38 million. Founder Al Mann can also lend the company $30 million. These funds could keep MannKind afloat for about one year, but only as long as Sanofi stays with the money-losing Afrezza partnership.
When Sanofi bails, MannKind will be forced to market Afrezza on its own. (Finding a new marketing partner willing to front a large share of the Afrezza marketing costs seems very unlikely.)
MannKind's 35% share of the Afrezza joint venture loss in the third quarter was $15 million. Without Sanofi, the loss in the quarter attributed to the inhaled insulin product would have been $43 million -- all on MannKind's books.
Look ahead to the likely scenario that Sanofi ditches Afrezza. The MannKind cash forecast to last a year will disappear much faster. The Israeli cash, however much is raised, will be spent just as quickly.
MannKind executives were asked repeatedly Monday night about contingency plans for if (when) Sanofi pulls the plug on its Afrezza association. Contractually, Sanofi cannot inform MannKind about an Afrezza exit until Jan. 1, 2016.
MannKind CEO Hakan Edstrom said he wasn't aware of any intentions by Sanofi to ditch Afrezza, adding the two companies were discussing budgets for next year.
Edstrom's optimism is admirable but futile. Last Friday, Sanofi outlined a massive corporate restructuring plan, much of it focused on its vitally important diabetes franchise. Afrezza was basically a footnote in the hours-long investor presentation. Sanofi has already lowered near- and medium-term sales growth forecasts in its diabetes franchise, a move blamed partly on Afrezza's disappointing commercial launch.
Another tell that Sanofi is drifting away from MannKind: The pharma giant has not committed to funding a five-year, 8,000-patient lung safety study of Afrezza required by the FDA. This costly, post-approval study should have started by now if Sanofi was truly committed to staying with Afrezza for the long haul. It hasn't, and on Monday's call, MannKind admitted the study was slow to get started.
Sanofi's lack of enthusiasm about Afrezza was so evident to everyone paying attention to last Friday's call that the pharma analyst at Leerink Partners removed all Afrezza revenue from his Sanofi model for 2016 and beyond.
Bravo to MannKind for raising new money creatively, but if the company's present reality wasn't bleak enough, the future looks worse -- and lonely.
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.