Yesterday, shares of MannKind Corporation (MNKD) surged up to 27% as news broke that the small-cap biopharmaceutical company was actively exploring options for a sale. The MNKD stock price had been absolutely hammered over the past year, plunging from a high of $7.88 to a low of just 64 cents this month.
Today, shares opened at 96 cents, up 5% from its close at 92 cents on Tuesday.
Once a compelling speculative play with a blockbuster billion-dollar diabetes product, Afrezza, under its belt, investors have dramatically scaled back their expectations after disastrous sales out of the gate caused Sanofi SA (ADR) (SNY) to terminate its partnership agreement with MNKD, leaving the company to market and distribute the product itself.
That, at this point in time, is simply not feasible.
Why a MannKind Sale Makes Sense
For anyone who owns MannKind stock, a sale of the company seems like an admission of defeat. In fact, it pretty much is an admission of defeat: If a sale is reached soon, the vast majority of MNKD investors will exit their positions with losses … big losses.
Remember that in acquisitions, a popular way to price the buyout value is to use the stock’s price the day before news of a potential buyout hits the wires. MNKD stock traded closed at 75 cents per share on Monday, the day before Reuters broke the news that it was exploring a sale.
A generous 40% premium to that day’s closing price would imply a buyout price of $1.05/share.
Unfortunately, I believe that may be the best MannKind shareholders can hope for.
That’s because the company is woefully short on cash, deeply indebted and losing Sanofi’s tremendous marketing resources. To give some idea of just how desperate the situation has become, MNKD is now seriously floating the idea of raising awareness of Afrezza through its Twitter Inc (TWTR) account.
MannKind, at its current cash-burn rates, will run out of money in the second half of the year. MannKind needs cash now, which requires:
A) An acquisition by a more cash-rich company;
B) The issuance of additional shares of MNKD stock, which at these depressed levels will be incredibly dilutive;
C) Another loan, which will not only be hard to secure but will almost surely be high-interest. This just kicks the can down the road and raises the question of how MNKD will pay back that debt; or
D) Another partnership deal similar to Sanofi’s, where MannKind receives a large, up-front cash payment.
As you can see, choices B and C are not ideal. And for what it’s worth, both have already been done over and over again, only to bring us to this point. Choice D would be the optimal one in a vacuum, but time is running out to reach an agreement like this, and any potential partner would know that, giving them leverage in negotiations.
That leaves option A as both the most likely and most merciful of choices. Even option A gives all the leverage to the acquiring company, which could just as easily offer 85 cents as $1.05. If MNKD shareholders reject the offer, the acquirer can just return in the fall and make an even lower offer.
I used to be a believer in MannKind myself, so it’s tough to see this happen. But it’s happening, and investors should honestly assess the situation before doubling down on the stock in hopes of a buyout at $2/share.
The company will be holding a conference call at 5 p.m. Feb. 3, which will no doubt provide more information for investors to work with.
As of this writing, John Divine had no position in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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