Shareholders of MannKind (MKND) should have taken flight long before nearly half of the drug maker's market cap vanished in Tuesday's selloff.
The writing has been on the wall for more than a year.
After announcing the departure of marketing partner Sanofi (SNY), an instrumental component in MannKind's hopes to develop its inhalable insulin drug Afrezza, shares tanked roughy 48% Tuesday, and were down another 13% in premarket trading Wednesday.
Aside from the fact that Pfizer (PFE) had a similar disaster with an insulin inhaler in 2007 -- when Exubera's flop cost the pharmaceutical giant $2.8 billion -- investors should have taken caution that Sanofi long wanted out of this cash-burning enterprise.
But the licensing agreement between the companies forced Sanofi to wait until Jan. 1 to file for termination: a serious test of one's patience given MannKind's high leverage, shallow cash reserves, and poor infrastructure to get Afrezza off the ground, TheStreet's Adam Feuerstein wrote Monday.
And MannKind has so far only taken on a small share of the Afrezza disaster, according to Feuerstein. It's 35% stake in the venture netted a $15 million third-quarter loss, which would have been closer to $43 million without Sanofi.
"The most likely end game for MannKind is bankruptcy," Feuerstein wrote. "If the company is lucky, its Afrezza assets could be picked up by an opportunistic acquirer for pennies on the dollar. Even if that rosy scenario unfolds, MannKind's creditors will receive the proceeds. Equity holders will be left with nothing."
Feuerstein is not alone in his dire views on MannKind; Royal Bank of Canada (RY) analyst Adnan Butt downgraded his price target $1.00 to $0.15, citing the improbability of finding a new partner for the pricey Afrezza venture.
"Since Afrezza is an approved product and one that should be convenient and patient friendly, we do not completely rule out a partnership but the bar would be high after Sanofi's experience," he wrote. "MannKind did not provide details and at this stage likely the best opportunity would be for MannKind to sell the drug itself, if that were a viable prospect."
That could prove challenging given MannKind's limited access to liquidity and high debt burden, especially because supporting Afrezza is expected to require about 1,000 sales representatives and a research and development infrastructure to meet FDA commitments, according to RBC estimates.
"These expenses alone could run into the $100 million or more range and MannKind (or a partner) would also need to advertise as that is the best way to make prospective patients aware of Afrezza," the analyst wrote.