I'm hardly the first (nor likely the last) to write what amounts to a eulogy for MannKind (Nasdaq: MNKD) after this week's earnings report and conference call. With too little cash on hand, too much still to do with respect to clinical studies, and a great deal of uncertainty about funding or partnering opportunities, it is clearly dark times for this company and its ongoing survival is hardly a sure thing.
Looking At The Balance Sheet
First thing's first, the company's earnings report was in some respects typical for a biotech – that is, the concern was all about the cash on hand and the cash burn. To that end, the company ended the period with $70 million in cash and still has access to a further $98 million drawdown.
In order to minimize the cash consumption and stretch out survivability, the company is cutting 41% of its workforce. At this point, MannKind is pretty much just be keeping the so-called “essential personnel” for getting Afrezza through the clinic and is putting the cancer vaccine programs on the backburner.
The End Of Easy Money?
None of that is terribly surprising. More concerning, though, was founder Al Mann's unwillingness to publicly commit himself to further funding of the company. MannKind exists in large part only because of Al Mann's wealth and if that spigot is now off the company is clearly looking at much more onerous funding terms in the future.
Honestly, I'm not sure how anyone could really be surprised by this. Self-made billionaires don't get that way because they're stupid or because they routinely throw money down bottomless pits. More to the point, there has to be a point of pain for even the most avid believer and Al Mann likely has to face a difficult decision about whether he wants to risk any more of his wealth (and the money he can give to his foundations) on what may be a doomed idea.
The Path To Go Forward
So where does the company go now? Management should be commended for being quite clear about what they think needs to be done to secure approval, and how long those steps will take. To wit, management laid out a clear path of about 15 months for a new submission. Assuming a decent FDA review period (and no particularly ridiculous delays for labeling decisions and what not), that would put the decision date at around the end of 2012/beginning of 2013.
Can MannKind get there without more money? All of the analysts seem to say “no”, saying that the company has enough money to get through the end of 2011, but not beyond that. I think that may be a little too negative – I think its *possible* (but NOT probable) that the company could stretch their funding beyond that, but a lot of it will have to do with just how large these final trials have to be to appease the FDA. One way or another, though, the company will need more resources to survive to launch day.
Partners?
It was also interesting to hear the company continue to talk about partnering prospects; suggesting that there were multiple parties with at least some level of serious interest. Obviously, the company didn't name names, or was management very willing to talk specifics about what sort of deal they would find acceptable.
In terms of deals, MannKind is really over a barrel right now. It is unlikely that any Big Pharma CEO or VP would put his butt on the line and give a large upfront cash payment to MannKind when Afrezza has already been subject to two Complete Response Letters. At this point, then, MannKind investors should probably look at examples like Arena's (Nasdaq: ARNA) deal with Eisai for Lorqess or the deal between Orexigen (Nasdaq: OREX) and Takeda – deals that committed the larger partners to very little in the way of upfront cash and with all of the upside to the biotech on the back end.
That is not to say that nobody places any value on Afrezza. Even with past failures in inhaled insulin, I could see Sanofi-Aventis (NYSE: SNY), NovoNordisk (NYSE: NVO) and Lilly (NYSE: LLY) all being interested in Afrezza as a way of rounding out (and protecting) their diabetes franchises. The sticking point, though, is price and the structure of the deal. Any company that offers MannKind more upfront cash than is necessary to get Afrezza through the FDA is going to have to explain itself to an angry shareholder base if/when Afrezza fails again. Likewise, I cannot imagine that any company not currently engaged in diabetes is going to touch this drug – why build out a sales force for a drug that may not get approved or find much commercial acceptance?
What might a deal look like? If MannKind strikes a deal before FDA approval, I would expect a modest upfront cash payment – likely just enough to fund the remainder of the drug's development expenses, plus a milestone for approval – and a relatively large royalty on the backend. The sooner the company does the deal, the larger the upfront payment and presumably the smaller the backend royalty.
Unfortunately, the company does not have many other obvious options. The remainder of the company's pipeline is very early stage and likely not worth much in a sale. More to the point, I do not see any way that the company could sell its GLP-1 or cancer vaccine programs for enough cash to fully fund Afrezza through approval. So why bother? Why sell a future option for pennies on the dollar when those pennies won't really spell the difference between success and failure?
The Bottom Line
I've never been positive on inhaled insulin or MannKind and that's not changing today. I simply do not think the market is as large or promising as the bulls believe, and I base that on over a decade of following the diabetes market. Moreover, let's not forget that this is a company with a $500 million market cap and a $1 BILLION enterprise value. That is a pretty huge valuation for a very iffy product – Seattle Genetics (Nasdaq: SGEN) has what may be an incredible drug for lymphoma and trades at an EV of $1.3 billion,
I'm sure that anybody still owning MannKind today is not going to be easily swayed, and I don't really mean to change their mind. I just think that for me, MannKind does not make any sense as a stock when the company sports a billion-dollar valuation.
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