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Post by matt on Aug 13, 2018 6:52:08 GMT -5
Harry: Forgot to mention that the endos at my clinic do not see pharma reps either. I'm not sure if that is standard practice with endos at other major health care facilities, but it sure as heck makes it more difficult to open their eyes to new treatment options when they wear blinders. It is a common practice in many parts of the country to prohibit sales calls during hours when physicians are seeing patients. That is a direct result of the "share of voice" selling model employed by some pharma companies in the past where they had multiple reps from the same company detailing the same product to the same physicians. Multiply that problem by ten or fifteen drug companies calling on your clinic. At the end of the day, it is the physician's job to treat their patient and not to talk to pharma reps so I think it is a perfectly acceptable practice. It is not fair to characterize it as the physicians having blinders on. They have plenty of opportunity to learn about new products at medical meetings (which also have an exhibitors floor), print advertising in medical journals, peer-reviewed articles in major journals, continuing education dinners held after office ours, monthly hospital based "drug fairs" where all reps are welcome to sell during a period of three to four hours, and many companies sponsor lunch at the clinic in exchange for having the physicians attention while they have a sandwich. Each of these approaches have merits and flaws, but to say that a clinic "no see" policy does not allow physicians to learn about new products is not accurate. The problem for MNKD is that an increasing number of offices have a "no see" policy during clinic hours. If the receptionist will not allow the salesman to see the physician, there is very little selling that can take place.
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Post by matt on Aug 6, 2018 14:38:06 GMT -5
If, and a big IF, MNKD was in the process of final negotiations with Amphastar on the distribution rights for China, would they put on a currency hedge if they were going to be paid a large sum in a foreign currency? And would it make sense to delay the insulin payments to Amphastar in cash or shares, thereby adding to accounts payable, until the negations were completed? It can make sense to hedge anticipated foreign currency exposures, but only if the contact is a done deal. If a hedge exists and the company does not get the foreign currency as expected, they will have an obligation to buy the currency on the spot market and deliver against the hedge contract or otherwise make the counterparty whole for any loss. As for the insulin payments, anything that preserves precious cash makes sense so long as Amphastar is willing to go along with it.
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Post by matt on Aug 6, 2018 14:00:09 GMT -5
Every 10-Q and 10-K must show the current share count as of the date of filing at the bottom of the cover page. That is always the best place to start. Then add financing transactions, splits, and other known stock transactions that happened after the report date. That will almost always yield a number that is 99% accurate, with most of the difference being option exercise by employees that are not officers or directors.
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Post by matt on Aug 5, 2018 14:40:32 GMT -5
As a data point, Matt (Matt_PK ?) mentioned BK as a possibility before, then Matt P. pulled out a rabbit from his hat - SNY settlement which many had thought not possible. Now, it’s Mike and Matt. Here we go again. I did think MNKD was nearing the end, and I am still surprised the Sanofi wrote such a big check to exit the relationship. Big companies do things they are not required to do at times to avoid unfavorable press, but the Sanofi deal was over the top by industry standards. No question Matt P. did a great job getting it done. However, you are again correct that I am concerned that MNKD will be forced into a situation that is not good for shareholders. Deerfield Partners is not Sanofi and they have let other companies they funded fail rather than recapitalize them (Dendreon for example, who had a product selling over $300 million a year with a 50% gross margin and more than $120 million in cash on their balance sheet when they went BK). If MNKD was debt-free it wouldn't matter if Afrezza took another six, twelve, or twenty-four months to catch fire in the marketplace, but the fact is that liabilities are $269 million while assets are $62 million. Even if the Mann Group pulled a Sanofi and forgave their debt entirely, the liabilities would still be $198 million and the cash would not increase a penny. Don't count on Deerfield Partners to be so understanding. Cash buys flexibility and business runway, lack of cash ties the company up in knots. There are lots, lots, of biotechs that exist for years without profitable sales or clean balance sheets, but they typically have cash resources several times larger than their annual burn rate. Cash keeps companies out of BK court, and more than one profitable company (by conventional accounting statements) found themselves in BK court because they ran short on cash to support profitable growth. That is the issue, plain and simple, when time runs out it runs out. I am sure management is well aware of where they stand, and if they aren't, then I am sure their auditors and board members have reminded them. The company needs to raise $30 million or so just to get to the end of the quarter, a bit less if both Deerfield and Amphastar take stock in lieu of debt. That is a tough order for a stock trading just above a dollar, and the challenge of pulling that off is why the stock took a hard fall last week; the market has seen this movie before. Fix the cash problem and Mike buys the runway he needs.
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Post by matt on Aug 4, 2018 15:41:01 GMT -5
Great info. Are we sure the Deerfield shares for equity was at a discount? I can't be 100% sure how the NASDAQ would look at that transaction, so no. However, I have dealt extensively with the Listing Qualifications Panel and they are a pretty tough crowd, not the sort you would want to have a beer with. It could be that Deerfield had enough of a heads up on the transaction that they were able to short the shares and deliver the new shares to close out the short, which is economically equivalent to shares issued at a discount to market, but I think NASDAQ would see through that. Even so, that would only give an extra 7 million shares to play with and that is only enough to cover the burn for about a month. Either Mike has a non-dilutive deal ready to close (I would assign an ultra-low probability to that), the company will have to get a waiver from NASDAQ, or else the company has to go back to the shareholders for authorization. The problem with getting shareholder authorization is that it would be tantamount to standing on the corner of Broad and Wall Streets with a bullhorn announcing that there will be a big dilutive financing, with the attendant effects on the stock price. Another option is to simply issue the shares, get spanked for violating the 20% rule, and accept a transfer to the OTCBB. It is not illegal to issue more than 20% of the shares at a discount; it is a violation of NASDAQ listing rules. However, there are a lot of index funds and others that are only allowed to own shares listed on a "national securities exchange" and NASDAQ is considered such an exchange, but OTCBB is not. Those shares would hit the market as the funds are forced to divest their holdings and that would not be positive for the share price, but it is not the end of the world either. The only other options involve loan sharks or courtrooms. Both are to be avoided at all costs.
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Post by matt on Aug 4, 2018 14:54:46 GMT -5
I think everyone understands the current financial situation. What isn't apparent is whether anyone understands how to get out of it without destroying the price of the stock. While I'm here, I may as well ask if anyone knows where MNKD stands with regards to the amount of stock that can be issued under current rules? I recall someone explaining some obtuse rule NASDAQ had about limiting the percent of stock in some fashion. The rule limits issuance of more than 20% of the outstanding shares at a discount in any six month period without shareholder approval. As of March 31, the number of shares outstanding was 126 million which means a limit of 25.2 million new shares. In early April the company issued 14 million shares and in July they issued 7 million to Deerfield in exchange for some debt. I believe both of those issuances would be considered having been made at a discount, which is why the warrants attached to the April offering had to have a six month waiting period or else they would have had the potential to trigger the 20% rule in combination with the original issuance. Since the company has issued 14+7 million shares since March 31, that leaves about 4 million that can be issued at a discount before October, and that clearly is not enough. Shares issued under the ATM are not considered issued at a discount so there is no limit there except for the authorized share limit. NASDAQ can waive application of the 20% rule is special circumstances, but I am not clear on what those circumstances would include. The penalty for issuing too many shares is delisting from NASDAQ, again subject to the discretion of the NASDAQ listing panel. Similarly, since the rule states "without shareholder approval" there is no limit to the shares that can be issued if the company calls a special meeting and a vote by shareholders to authorize such an action. However, it takes a minimum of 21 days to call a special meeting and solicit proxies and THEN the shares can be sold. So there are a bunch of dominos that have to fall in the right sequence in the coming eight weeks and there is not a lot of wiggle room in that schedule. If Mike truly has a non-dilutive funding rabbit to pull out of the proverbial hat, now is the time to do it.
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Post by matt on Aug 4, 2018 7:56:36 GMT -5
The bottom line is that after these results I think there is a big dilution coming and I am probably not the only one that thinks that judging by the stock price. It is the only realistic way to raise the money to get through the end of the year that I can see. Personally I would rather they did as much of this as possible through the ATM because I think that is where the best price is. Cash at the end of June was $26 million, cash burn during Q2 was $27 million. The math from there is pretty easy. There are things the company can do to delay the inevitable, like increasing accounts payable and limiting expenditures, but some items need to be paid with cash as they fall due (like payroll and employment taxes). While Mike likes to talk about non-dilutive financing sources, he is out of time to find one and the company will have to raise cash. There is no way around it. The ATM is a double-edged sword in that those shares hit the market the same day they are sold, and typically this creates a company initiated death spiral as the new shares hitting the bid reduce the price even more. Ditto obtaining a waiver on the Deerfield debt covenants since Deerfield has shown itself to be a very short term holder of the stock and possibly even shorting in anticipation of receiving stock. That too reduces the price, so it comes down to whether it is better to do a large PIPE and take all the pain at once, or dribble the shares out and risk death by a thousand cuts. Mike can say that he has no plans for bankruptcy, no management team ever does until they suddenly do, but I am not sure that is a responsible comment to make. The fact is that as of this 10Q, shareholder equity was a negative $207 million meaning the company meets one of the legal definitions for bankrupt in the State of Delaware (and has for years). So far the creditors have gone along with that but it only takes three disgruntled creditors owed an aggregate of $10K to put the company into bankruptcy court where the future course of action is not within management's control. Raising cash takes that risk off the table for a while.
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Post by matt on Aug 3, 2018 16:20:05 GMT -5
Hopefully they respond by selling rights for China or other large non US region for enough cash to continue operations until US becomes profitable. That deal needs to be 90% done as of today or it will not happen in time. The company is almost certainly below $20 million in cash as I write this, and will definitely be below the $20 million Deerfield covenant at the end of Q3 which is only eight weeks away. It takes time to find a licensee, negotiate a deal, draw up contracts, deal with the Amphastar rights to China, and close the transaction; with vacation season upon us that is unlikely to happen unless something is already well underway. The need for cash is immediate and the only way to settle the market is to remove the risk of insolvency. Long-term ideas for non-dilutive financings are great, but the company burned through $27 million in cash to finance operations in Q2 and they had only $26 million left on June 30. The only prudent thing to do is to get some more cash in the bank in the coming week or two, however that is accomplished.
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Post by matt on Aug 3, 2018 14:41:43 GMT -5
Cash has to come from somewhere. If there is not a pipe announced soon, then I would expect the share price to continue lower until a source of funding is announced or the loan rate rises signaling this is a short attack. Agree completely. Simple math tells you that if the company had $26 million in cash at June 30 and a Q2 burn rate of $9 million per month the company now has less than $20 million remaining on the balance sheet, which is certain to put them in violation of the Deerfield covenants at the end of Q3. That means either a significant financing or a renegotiation of the covenants is on the horizon, and we all know that Deerfield will take a pound of flesh for changing their loan terms. Mike keeps talking about non-dilutive financing sources, but unless he has a deal already in the final stages of legal review it will be almost impossible to consummate a deal in time. The longer he waits the less negotiation leverage he has. Which leads to the most likely conclusion that a PIPE is near. You don't need to be Nostradamus to figure that out so lots of market participants will be betting against MNKD and the downward pressure will continue until the deal is announced. A PIPE is not going to be easy or cheap, but the longer it takes to consummate a deal the more painful it will become as the price drifts lower. This is a case where ripping off the Band-Aid is a lot less painful than teasing it off in increments. Like Dennis said, cash has to come from somewhere and there are some expenses (like payroll) that cannot be delayed.
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Post by matt on Aug 3, 2018 10:15:11 GMT -5
The 10-Q says that cash now stands at just $26,178,000. At first I thought maybe they had deducted the 20 million they were supposed to have in cash for Deerfield. But upon further study, it's not clear to me whether that is the case. I can't find anything else in the 10-Q to clarify it. So is 26 million actually all they had at the end of the second quarter? Thanks. Cash and cash equivalents were $26 million, which would include the $20 million covenant for Deerfield. In other words, there is not $26+20=$46 in cash which I think was your question. Just have a look at the cash flow statement on the line "Cash and cash equivalents and restricted cash, end of period" which ties out to the balance sheet as it must. Given that this is now early August, the amount of cash is lower by around $7-9 million so the company will definitely be out of compliance with Deerfield at the end of September unless it raises money soon or renegotiates the covenants. As to the comment on "cash burn" it is normally thought of as the cash used in operations plus capital expenditures minus debt payments and stock transactions. On that metric the company burned cash of $27 million in Q2 or $9 million per month versus $21 million in Q1 or $7 million per month. The cash flow statement is a much better guide to the short-term financial health of a company than the income statement which is more of a long-term measurement.
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Post by matt on Aug 2, 2018 8:55:11 GMT -5
I have a question. Backing the money MNKD owes Deerfield are the MNKD patents correct? If MNKD pays of Deerfield COULD Mike and the board sell some of the patents? In theory, yes, but there are many other creditors to consider. When a company is highly solvent with many valuable assets (as evaluated at market price, not book value), then there is sufficient security to protect the various parties to which MNKD owes money. Any excess assets belong to the shareholders and can be sold. However, if the balance sheet is weak then the proceeds of any asset sales would have to be used to pay down creditor obligations. The actual ins and outs of what can and cannot be sold falls under the Uniform Fraudulent Conveyances Act which is an entire legal specialty. Suffice it so say that it is complicated. As I have stated before, I am not sure the patents have much value. A patent has little inherent value but becomes valuable only when it protects a successful product from competitors. If the product is in high demand and can command premium pricing in the market (like iPhones) then the patent is valuable, but if the product is a "me too" offering with poor sales (any generic smart phone) the associated patent is nearly worthless. Given the current state of the company it is hard to argue that the patent portfolio has significant value at present. The patents might have value in the future if sales suddenly start growing, but it is hard to monetize future value without those results. Also keep in mind that patents are a ticking time bomb; the longer the company goes without hypergrowth in sales and profits the less valuable the patents are. Many of the key patents are either expired or have short remaining lives, and few buyers will pay good money for a patent that grants less then five years of market exclusivity. Given the time it takes to bring a new medical product to market, in order to have five years of market exclusivity the patent needs to have something greater than ten years of remaining life when sold.
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Post by matt on Aug 2, 2018 7:17:16 GMT -5
What's wrong? It's not your business. Dexcom is a device manufacturer, not a venture capital company. That is a very important distinction. While CGM devices are used by diabetics, the device world is entirely, completely different from pharmaceutical manufacturing. It operates under a different regulatory structure that creates a rapid path to market, product life cycles are shorter, manufacturing is a different beast, and so on. Ultimately a device company is in business to sell devices; they don't play favorites when it comes to therapeutics. Glucose monitoring is their business and they really don't care if the user they sell to is using Mannkind product, Lilly product, or Novo Nordisk product just so long as they are buying the device from DexCom. At the end of the day, the market will dictate the winners and losers and DexCom will likely be one of the winners, at least in the short term. Unlike pharmaceuticals, there really is no long term in the device sector for products that are eligible for 510(k) registration.
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Post by matt on Jul 31, 2018 14:19:54 GMT -5
Thoughts on how much cash the company needs to raise? Sans any ATM funding going on as of late, there should be enough cash to last until early October. I remember ProBoards Matt saying no one raises money at the end of the year and I am assuming first few weeks of January are pretty quiet too. Also assuming it is never prudent to run the cash tank down below 8 weeks minimum. Fair to say enough cash is needed to get the company to mid-March? Eight weeks of cash is cutting it very, very close because unexpected things can happen that are entirely out of a company's control. These include a general economic meltdown (2008 housing crisis), unexpected world events (9/11 attack), or something else that effectively shuts down the financial markets for a few months. Loss of market access on reasonable terms is essentially game over for undercapitalized companies when it happens. That is why auditors are required to give a going concern opinion on any company that does not have at least six months of anticipated expenses on hand in freely available cash. As for how much, there is no easy answer. The more a company raises at once the larger the discounts and warrant coverage need to be since the market views that as new investors taking on more risk. The alternative is to do multiple small raises where the discounts are less, but if a company does dilutive raises too often that can be equally bad. Finally, Mike and his team know what projects they have in the queue that might cross the finish line sooner rather than later. If management expects a big win in the near term, they can use that news to raise more money and probably should. However, since only management knows what those projects are or how positive those developments might be there is really no way for shareholders to accurate forecast those events. You are likewise correct that there are dark periods for raising money, and as you might expect not a lot gets done after Thanksgiving. Some deals do get done in late November / early December especially when Thanksgiving comes early like it does this year, but the closer it gets to Christmas / New Years the harder it becomes (harder=bigger discounts and more warrants). A lot also depends on what management thinks Q3 is going to look like since those results hit around November 10 and will affect investor sentiment one way or the other; that can push the decision backward or forward a few weeks. Again, management will know how Q3 is shaping up by Labor Day and can plan accordingly. There is an old saying in biotech; take the money when you can get it and not when you need it.
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Post by matt on Jul 31, 2018 12:19:07 GMT -5
I believe, correct me if I’m wrong that growing bio’s are valued at 10 to 15 times earnings. SNY is no longer a growth stock, they pay a dividend, so you can’t compare the two. You can't look at it that simplistically. Virtually all biotechs with a promising drug in Phase III have substantial value despite zero sales and huge negative cash flows required to fund R&D to completion; a mathematically undefined multiple. That value increases further or declines toward zero at the moment FDA approves or rejects their drug application. Multiples in such cases aren't very useful. Most mature pharmaceuticals with a mix of marketed and pipeline products trade around 4X sales with a 30-40% debt to total capital. That assumes a normal growth rate for sales in the high single digits and a pretax operating profit greater than 20%. Biotechs can be more or less valuable depending on the mix of marketed to pipeline products, presumed growth rates for their marketed products, and profitability. Mannkind has high sales growth, albeit from a tiny number, but the company generates no operating profit and arguably is overleveraged by a few orders of magnitude. Other biotechs are all over the place depending on their metrics so it is very difficult to come up with any reliable rules of thumb; you have to tear apart the financials and do some analysis. When the market is not going crazy (like it has the past year or two) you are hard pressed to get more than 8X net cash flow for any pharma company that is not undergoing hypergrowth. DXCM is not a good comparator in any event. DXCM is a medical device company the operates with shorter life cycles for its products, a different regulatory regime, and far different manufacturing economics. You can compare pharma to pharma, or medical device to medical device, but when you combine them you are comparing apples and oranges.
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Post by matt on Jul 30, 2018 13:48:54 GMT -5
Current market cap is $205 mm. Any chance it gets taken private? Current market cap is $205 MM, but the cost to buy the company would be closer to $500 MM. Whenever there is a large change in control, it normally triggers a requirement to either obtain lender consent or to pay off the debt. Given how aggressive DF has been is pushing for a shorter duration on their payments, I would not expect them to agree to an equity acquisition without triggering the acceleration clause. The outstanding liabilities as of the last 10Q were about $300 MM, which are now reduced slightly by the DF conversions, but increased by cash usage (about a wash just eyeballing it). It will be hard to find a buyer willing to write a check that large, perhaps not impossible, but not very likely either.
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