The MannKind Debt Situation Revisited 8/3/15- Nate's Notes
Aug 3, 2015 11:08:57 GMT -5
liane, BD, and 7 more like this
Post by sla55 on Aug 3, 2015 11:08:57 GMT -5
www.notwallstreet.com/the-mannkind-debt-situation-revisited-8315/
*** The following was published for subscribers of Nate’s Notes and The Wagmore Advisory Letter on 8/2/15 ***
I will be camping for the next four days (with limited internet access, if any, in the campground… but rest assured I will find some time each day to make sure I am keeping up with the story as it unfolds, even if it means making a short drive back to “civilization”), but before I leave, I wanted to post this short note to answer some of the questions that have come in over the past few days, as well as give you an update on my thoughts on the recent announcement from MannKind regarding the $100 million convertible notes that are due on August 15th.
First, to recap (as well as to include a subtle, but important, clarification to) the details of the situation…
As you know, MannKind has $100M worth of convertible notes that are due later this month. They pay 5.75% interest and are convertible into common stock at $6.80 per share, and with the stock currently trading well under that price as we head into the conversion date, it is obvious that most holders would opt to have their debt repaid in cash rather than stock under the current terms of the agreement.
In addition, as many of you have asked about, when the convertible notes were first issued, MannKind also agreed to loan 9M shares to Bank of America as part of the agreement, and the purpose of this loan was to allow holders of the convertible debt to hedge their position by shorting those loaned shares. Though these shares were not mentioned in the press release, based on what I’ve been able to track down, it appears that under terms of the original agreement, these 9M shares must be returned to the company within a specific period of time once the debt is retired (even if it is rolled over into a new agreement with similar terms).
As you know, it was announced last week that MannKind has negotiated new agreements with the holders of the notes. As part of the agreements, we know that $$15.4 million of the debt will be repaid on its due date, and $27.7 million of the debt will be rolled over into new convertible notes that essentially carry the same terms as the original notes, but mature in August 2018.
That leaves $56.9 million to be dealt with, and this is where I want to make a clarification to what was reported before. For the record, for a variety of reasons (most notably that I wanted to keep things simple for those of you who just want to understand the gist of the agreement but don’t really want to ponder all the minutiae and nuances of the language), I intentionally simplified the manner in which I presented the situation in my write-up a few days ago. However, now that I have had some more time to think about and ponder the situation, I feel compelled to revisit this component of the deal in order flesh it out in a little more detail for you after all so that you will be prepared for all possible outcomes.
In particular, I stated that this $56.9 million balance of the debt would be converted to stock over a 10-day period, though I believe it is worth noting after all that the press release actually states that “up to $56.9 million” of the debt will be converted to stock [my italics added for emphasis].
Because the press release nowhere states what will happen if holders decide to not exchange debt for equity, I assumed that the language was chosen to allow for a slight variation in the numbers in case a small handful of holders changed their minds at the last minute (i.e. it provided some “wiggle room” in terms of what the final numbers might look like).
However, given the circumstances (and especially in light of the manner in which the stock has acted following the announcement), I believe we do need to spend some time considering the possibility that perhaps a sizable portion of the holders of that $56.9 million worth of debt may not want stock after all (contrary to the implication I made in my write-up a few days ago).
At one extreme of the spectrum of possibilities, for example, none of the note holders may want to convert, which would mean that rather than just the $15.4 million currently slated to repaid, the number would actually be $72.3 million… and while the smaller number should not be difficult for the company to come up with, the larger number might prove to be more of a challenge based on how the company’s balance sheet currently looks (more on this below).
At the other extreme, however, all of the note holders may choose to convert, and if they do, under the terms of the agreement (which includes a “floor price”), it could result in up to roughly 13 million new shares of stock being issued (on top of the roughly 410 million currently outstanding)… though it should be noted that regardless of how the current debt issue is resolved, its resolution will also then require the 9M shares that were loaned as part of the original deal to be returned.
Either way (and regardless of whether one was including them in the shares outstanding number before), I consider any dilution that might occur under this circumstance to be “insignificant.”
Taking a bearish view of the situation, one could assume that no note holders will want to convert (after all, “it is a stock that is going to $0,” right?), and to support the bearish thesis, one would then ask “how is the company going to come up with that kind of money?”
To be sure, it is a fair question, but as best as I can tell, the company does, in fact, already have enough potential financing options lined up that it could raise that kind of money if necessary (with The Mann Group being the most obvious source of money). Yes, assuming the stock continues to trade below the current floor price, it would result in even more dilution than the proposed agreement represents… but not by much (unless, of course, the stock were to continue to fall dramatically in the days ahead – in which case, any financing that was done via a stock offering would be done at a correspondingly lower price).
In addition, though it seems to have been wrapped into the company’s income statements and balance sheets in a manner that makes it difficult to “get at,” I think it is worth remembering that the company has received $200 million in milestone payments so far from Sanofi, and though I am not enough of an “accounting jedi” to explain what the mechanics would look like, it seems reasonable to assume that the company could find a way to somehow utilize that money to cover its short-term obligation to repay the notes if absolutely necessary (but I could be wrong about that).
On the other hand, a bullish view of the situation would assume that all of the note holders will jump at the chance to convert their debt into equity in the mid-$4s rather than the high-$6s, especially given where we are at in terms of the rollout of Afrezza.
Unfortunately, while there is a chance the company will provide us with an interim update on how much (if any) of the debt is being converted to equity on each of the 10 days in which conversion is allowed, chances are that we will have to wait until the 10-day period is over to know the outcome (with the only certainty appearing to be the fact that once the original debt issue has been resolved, Bank of America will be required to return the 9M borrowed shares and they will cease to be a part of the equation).
As it stands (and admittedly based on the assumption that the company will be able to repay whatever portion of the notes end up not being converted to stock), I believe that once the issue is resolved – no matter what the final terms look like – it will represent the start of a new era for both the company and, knock on wood, the stock price as well.
Yes, there are quite a few more shares outstanding today than there were two years ago… but I want to remind you that those shares came into existence via the conversion of debt to equity (always a bullish turn of events in my book).
In addition, any new shares that are issued as part of resolving the convertible debt issue will presumably be issued to folks who actually want to own the stock at this stage of the game, whether they are purchased via conversion of the notes or via a private (or public) placement of stock in order to repay the notes… and, given that I believe Afrezza is, thus far, turning out to be all we hoped it would be in terms of how it is impacting patients’ lives, I cannot help but think that once the debt issue is resolved, the trend will slowly but surely continue to shift towards institutions wanting to buy the stock rather than sell it.
I know that the naysayers are pointing to the low prescription numbers so far as “proof that Afrezza is going to die on the vine,” but as mentioned above, all the feedback I have received so far suggests that it is actually on track (albeit at a very slow and deliberate pace) to disrupt not only the fast-acting insulin segment of the diabetes market, but possibly portions of the oral medication – and perhaps even the long-acting insulin – segments of the market as well (i.e. it truly is a “game-changer” that represents a tremendous threat to existing franchises).
Also, as a side note, while increasing capacity at a manufacturing facility in no way guarantees that additional sales will be made, despite the “low” script numbers so far, I believe it is worth noting that MannKind is continuing to scale-up production of Afrezza rather than scale it back (as one would expect them to do if they were getting ready to wind down the product and company).
Of course, Afrezza is just one piece of the puzzle, and though it is difficult to assign a specific value to future applications of the company’s Technosphere platform (and those on the short side like to claim it has no value – “it’s a ‘sham’ technology”), it is important to keep in mind that there is more to the MannKind story than just Afrezza.
In addition, while folks in the bearish camp like to point to the company’s “excessive” market cap of between $1.5 and $2 billion (depending when you look during the volatile trading sessions we’ve had lately!), I want to point out that IF Afrezza ends up delivering in the manner I believe it will, we will all be able to look back in a few years and kick ourselves for not buying even more while it was “so cheap.”
As I’ve mentioned before, no – the success of Celgene in no way guarantees the success of MannKind. However, I want to remind folks that after being recommended with a market cap of less than $100 million in 1995 (along with a product that ended up being given “the black box warning of all black box warnings” on its label, I might add), naysayers have been pointing to Celgene’s “insane” market cap every step of the way for the past twenty years – it was “overvalued” when it hit $250 million, $500 million, $1 billion, $2 billion, etc… and today, of course, it sports a market capitalization north of $100 billion!
Naturally, I can’t promise that things will turn out as well for us with our investment in MannKind; however, I can tell you that even though we are starting from a much higher market capitalization with MannKind ($700 million when the stock was first recommended in 2009, approximately $1.7 billion today), I feel more certain about Afrezza’s ability to disrupt the diabetes market than I did about thalidomide’s ability to capture a significant share of the cancer market… and, as you know, the global diabetes market is HUGE.
As pointed out in my write-up the other day, there is always a chance that my assessment is wrong… and thus, you are encouraged to make sure you are only investing what you are comfortable losing when it comes to this stock.
However, I also want to remind you that if I am right (and the very sizable number of short-sellers who still need to buy back stock in order to close out their trades are wrong), there is no reason at all that this stock can’t experience the same sort of muli-year appreciation that Celgene has experienced as its product portfolio has grown and matured as time has gone by.
Successful investing (vs. “trading”) often requires patience, and I would suggest that nobody knows this better than Al Mann himself. Yes, to many it appears that Sanofi might be “dragging its feet” when it comes to rolling out Afrezza, but I would counter with an observation that some of you have seen me make in various other forums on the internet, namely that “when you have a chance to ‘run the table,’ there is absolutely no reason to rush any of your shots”… and whether it takes one year or three years for Afrezza to become the treatment option of choice for diabetics (and pre-diabetics) in a variety of circumstances, at the end of the day, I believe investors will want to own a piece of that pie (the question, of course, is when the stock price will finally start to reflect that anticipation versus the current gloom-and-doom outlook).
Along with the above commentary, I also want to point out that while I am under the impression that the company will be reporting earnings and holding a conference call on August 10th (and said so in my most recent write-up), this date is merely what is being reported on various sites around the internet, and it has not actually be set by the company yet… so we cannot count on it as a certainty in terms of knowing when we might get an official update on how the exchange of debt for equity actually went (or didn’t go, as the case may be).
Having said all that, know that the stock is likely to be quite volatile over the next week or two, so please remain disciplined about buying (or selling, if you’re so inclined) in several small pieces over a period of time rather than making your entire trade “in one fell swoop.”
As mentioned the other day, this has been a long, arduous journey to endure so far… but, knock on wood, we may finally be reaching a turning point in the story in terms of both cleaning up the balance sheet as well as possibly seeing an acceleration in prescriptions being written as Sanofi’s direct-to-consumer advertising kicks into gear and word slowly starts to spread in the medical community about the results that are being obtained by the early adopters of Afrezza.
Stay tuned!
*** The following was published for subscribers of Nate’s Notes and The Wagmore Advisory Letter on 8/2/15 ***
I will be camping for the next four days (with limited internet access, if any, in the campground… but rest assured I will find some time each day to make sure I am keeping up with the story as it unfolds, even if it means making a short drive back to “civilization”), but before I leave, I wanted to post this short note to answer some of the questions that have come in over the past few days, as well as give you an update on my thoughts on the recent announcement from MannKind regarding the $100 million convertible notes that are due on August 15th.
First, to recap (as well as to include a subtle, but important, clarification to) the details of the situation…
As you know, MannKind has $100M worth of convertible notes that are due later this month. They pay 5.75% interest and are convertible into common stock at $6.80 per share, and with the stock currently trading well under that price as we head into the conversion date, it is obvious that most holders would opt to have their debt repaid in cash rather than stock under the current terms of the agreement.
In addition, as many of you have asked about, when the convertible notes were first issued, MannKind also agreed to loan 9M shares to Bank of America as part of the agreement, and the purpose of this loan was to allow holders of the convertible debt to hedge their position by shorting those loaned shares. Though these shares were not mentioned in the press release, based on what I’ve been able to track down, it appears that under terms of the original agreement, these 9M shares must be returned to the company within a specific period of time once the debt is retired (even if it is rolled over into a new agreement with similar terms).
As you know, it was announced last week that MannKind has negotiated new agreements with the holders of the notes. As part of the agreements, we know that $$15.4 million of the debt will be repaid on its due date, and $27.7 million of the debt will be rolled over into new convertible notes that essentially carry the same terms as the original notes, but mature in August 2018.
That leaves $56.9 million to be dealt with, and this is where I want to make a clarification to what was reported before. For the record, for a variety of reasons (most notably that I wanted to keep things simple for those of you who just want to understand the gist of the agreement but don’t really want to ponder all the minutiae and nuances of the language), I intentionally simplified the manner in which I presented the situation in my write-up a few days ago. However, now that I have had some more time to think about and ponder the situation, I feel compelled to revisit this component of the deal in order flesh it out in a little more detail for you after all so that you will be prepared for all possible outcomes.
In particular, I stated that this $56.9 million balance of the debt would be converted to stock over a 10-day period, though I believe it is worth noting after all that the press release actually states that “up to $56.9 million” of the debt will be converted to stock [my italics added for emphasis].
Because the press release nowhere states what will happen if holders decide to not exchange debt for equity, I assumed that the language was chosen to allow for a slight variation in the numbers in case a small handful of holders changed their minds at the last minute (i.e. it provided some “wiggle room” in terms of what the final numbers might look like).
However, given the circumstances (and especially in light of the manner in which the stock has acted following the announcement), I believe we do need to spend some time considering the possibility that perhaps a sizable portion of the holders of that $56.9 million worth of debt may not want stock after all (contrary to the implication I made in my write-up a few days ago).
At one extreme of the spectrum of possibilities, for example, none of the note holders may want to convert, which would mean that rather than just the $15.4 million currently slated to repaid, the number would actually be $72.3 million… and while the smaller number should not be difficult for the company to come up with, the larger number might prove to be more of a challenge based on how the company’s balance sheet currently looks (more on this below).
At the other extreme, however, all of the note holders may choose to convert, and if they do, under the terms of the agreement (which includes a “floor price”), it could result in up to roughly 13 million new shares of stock being issued (on top of the roughly 410 million currently outstanding)… though it should be noted that regardless of how the current debt issue is resolved, its resolution will also then require the 9M shares that were loaned as part of the original deal to be returned.
Either way (and regardless of whether one was including them in the shares outstanding number before), I consider any dilution that might occur under this circumstance to be “insignificant.”
Taking a bearish view of the situation, one could assume that no note holders will want to convert (after all, “it is a stock that is going to $0,” right?), and to support the bearish thesis, one would then ask “how is the company going to come up with that kind of money?”
To be sure, it is a fair question, but as best as I can tell, the company does, in fact, already have enough potential financing options lined up that it could raise that kind of money if necessary (with The Mann Group being the most obvious source of money). Yes, assuming the stock continues to trade below the current floor price, it would result in even more dilution than the proposed agreement represents… but not by much (unless, of course, the stock were to continue to fall dramatically in the days ahead – in which case, any financing that was done via a stock offering would be done at a correspondingly lower price).
In addition, though it seems to have been wrapped into the company’s income statements and balance sheets in a manner that makes it difficult to “get at,” I think it is worth remembering that the company has received $200 million in milestone payments so far from Sanofi, and though I am not enough of an “accounting jedi” to explain what the mechanics would look like, it seems reasonable to assume that the company could find a way to somehow utilize that money to cover its short-term obligation to repay the notes if absolutely necessary (but I could be wrong about that).
On the other hand, a bullish view of the situation would assume that all of the note holders will jump at the chance to convert their debt into equity in the mid-$4s rather than the high-$6s, especially given where we are at in terms of the rollout of Afrezza.
Unfortunately, while there is a chance the company will provide us with an interim update on how much (if any) of the debt is being converted to equity on each of the 10 days in which conversion is allowed, chances are that we will have to wait until the 10-day period is over to know the outcome (with the only certainty appearing to be the fact that once the original debt issue has been resolved, Bank of America will be required to return the 9M borrowed shares and they will cease to be a part of the equation).
As it stands (and admittedly based on the assumption that the company will be able to repay whatever portion of the notes end up not being converted to stock), I believe that once the issue is resolved – no matter what the final terms look like – it will represent the start of a new era for both the company and, knock on wood, the stock price as well.
Yes, there are quite a few more shares outstanding today than there were two years ago… but I want to remind you that those shares came into existence via the conversion of debt to equity (always a bullish turn of events in my book).
In addition, any new shares that are issued as part of resolving the convertible debt issue will presumably be issued to folks who actually want to own the stock at this stage of the game, whether they are purchased via conversion of the notes or via a private (or public) placement of stock in order to repay the notes… and, given that I believe Afrezza is, thus far, turning out to be all we hoped it would be in terms of how it is impacting patients’ lives, I cannot help but think that once the debt issue is resolved, the trend will slowly but surely continue to shift towards institutions wanting to buy the stock rather than sell it.
I know that the naysayers are pointing to the low prescription numbers so far as “proof that Afrezza is going to die on the vine,” but as mentioned above, all the feedback I have received so far suggests that it is actually on track (albeit at a very slow and deliberate pace) to disrupt not only the fast-acting insulin segment of the diabetes market, but possibly portions of the oral medication – and perhaps even the long-acting insulin – segments of the market as well (i.e. it truly is a “game-changer” that represents a tremendous threat to existing franchises).
Also, as a side note, while increasing capacity at a manufacturing facility in no way guarantees that additional sales will be made, despite the “low” script numbers so far, I believe it is worth noting that MannKind is continuing to scale-up production of Afrezza rather than scale it back (as one would expect them to do if they were getting ready to wind down the product and company).
Of course, Afrezza is just one piece of the puzzle, and though it is difficult to assign a specific value to future applications of the company’s Technosphere platform (and those on the short side like to claim it has no value – “it’s a ‘sham’ technology”), it is important to keep in mind that there is more to the MannKind story than just Afrezza.
In addition, while folks in the bearish camp like to point to the company’s “excessive” market cap of between $1.5 and $2 billion (depending when you look during the volatile trading sessions we’ve had lately!), I want to point out that IF Afrezza ends up delivering in the manner I believe it will, we will all be able to look back in a few years and kick ourselves for not buying even more while it was “so cheap.”
As I’ve mentioned before, no – the success of Celgene in no way guarantees the success of MannKind. However, I want to remind folks that after being recommended with a market cap of less than $100 million in 1995 (along with a product that ended up being given “the black box warning of all black box warnings” on its label, I might add), naysayers have been pointing to Celgene’s “insane” market cap every step of the way for the past twenty years – it was “overvalued” when it hit $250 million, $500 million, $1 billion, $2 billion, etc… and today, of course, it sports a market capitalization north of $100 billion!
Naturally, I can’t promise that things will turn out as well for us with our investment in MannKind; however, I can tell you that even though we are starting from a much higher market capitalization with MannKind ($700 million when the stock was first recommended in 2009, approximately $1.7 billion today), I feel more certain about Afrezza’s ability to disrupt the diabetes market than I did about thalidomide’s ability to capture a significant share of the cancer market… and, as you know, the global diabetes market is HUGE.
As pointed out in my write-up the other day, there is always a chance that my assessment is wrong… and thus, you are encouraged to make sure you are only investing what you are comfortable losing when it comes to this stock.
However, I also want to remind you that if I am right (and the very sizable number of short-sellers who still need to buy back stock in order to close out their trades are wrong), there is no reason at all that this stock can’t experience the same sort of muli-year appreciation that Celgene has experienced as its product portfolio has grown and matured as time has gone by.
Successful investing (vs. “trading”) often requires patience, and I would suggest that nobody knows this better than Al Mann himself. Yes, to many it appears that Sanofi might be “dragging its feet” when it comes to rolling out Afrezza, but I would counter with an observation that some of you have seen me make in various other forums on the internet, namely that “when you have a chance to ‘run the table,’ there is absolutely no reason to rush any of your shots”… and whether it takes one year or three years for Afrezza to become the treatment option of choice for diabetics (and pre-diabetics) in a variety of circumstances, at the end of the day, I believe investors will want to own a piece of that pie (the question, of course, is when the stock price will finally start to reflect that anticipation versus the current gloom-and-doom outlook).
Along with the above commentary, I also want to point out that while I am under the impression that the company will be reporting earnings and holding a conference call on August 10th (and said so in my most recent write-up), this date is merely what is being reported on various sites around the internet, and it has not actually be set by the company yet… so we cannot count on it as a certainty in terms of knowing when we might get an official update on how the exchange of debt for equity actually went (or didn’t go, as the case may be).
Having said all that, know that the stock is likely to be quite volatile over the next week or two, so please remain disciplined about buying (or selling, if you’re so inclined) in several small pieces over a period of time rather than making your entire trade “in one fell swoop.”
As mentioned the other day, this has been a long, arduous journey to endure so far… but, knock on wood, we may finally be reaching a turning point in the story in terms of both cleaning up the balance sheet as well as possibly seeing an acceleration in prescriptions being written as Sanofi’s direct-to-consumer advertising kicks into gear and word slowly starts to spread in the medical community about the results that are being obtained by the early adopters of Afrezza.
Stay tuned!
