The second-quarter earnings season has produced plenty of shockers, and pharmaceutical company MannKind (NASDAQ:MNKD) is one of them. Unfortunately, I don’t mean that in a good way. After posting a disastrous miss on the top-line, and financial metrics that implied a viability concern, MNKD stock tanked more than 23%.

How bad was the shortfall against expectations? The only real positive was the paring of losses in the profitability department. The consensus target called for an earnings-per-share loss of 20 cents. Instead, EPS came in at a 16-cent loss, representing a 20% positive surprise. In the year-ago quarter, MannKind posted a 35-cent EPS loss.

The top line, however, was a glaring miss. Analysts expected to see $4.8 million in revenue. MannKind could only manage $3.89 million, or nearly a 19% miss. According to Zacks Equity Research, MNKD had only beaten top-line sales targets just once in the last four quarters.

However, the biggest issue, and the one that threatens to make the above points moot, is the company’s cash account. In order to stay afloat, management entered into a loan agreement with Deerfield Private Design Fund. The specific terms of the deal have been renegotiated several times. Prior to the Q2 release, MannKind agreed to keep on-hand cash above a minimum $20 million threshold.

The bad news is that cash fell to $26.7 million at last count. The really bad news is that management reported nearly $22.7 million in net losses. Unless a miracle occurs, MannKind will violate its liquidity covenant by Q3, if it hasn’t already done so. Investors saw the writing on the wall, and dumped out of MNKD stock.

Those who are still holding onto hope should strongly consider what the markets are saying.

Why MNKD Stock Is a Failed Bet

Pharma is always a tough sector to call. Several firms have poor financials and negative earnings. They’re essentially a binary bet on their drug pipeline. If for whatever reason the drugs fail clinical trials, the underlying company tanks. The surprising efficacy of the placebo effect has long stymied promising therapies.

Of course, if the opposite happens, you have a winning lottery ticket. That’s the allure and pitfall of pharma investments.

MNKD stock was even more pronounced as a speculative bet. MannKind only had one product, the inhaled-insulin formulation called Afrezza. As an inhaled therapy, Afrezza sidelines the painful insulin injections that diabetes patients must suffer frequently. To this day, medical experts are exploring ways to ease this process.

With this context in mind, it’s easy to understand why early investors overlooked the critical product-mix vulnerability. According to the American Diabetes Association, over 30 million Americans, or 9.4% of the total population, have diabetes. Additionally, 25% of seniors, or 12 million people, suffer from the disease. Every year, 1.5 million Americans are diagnosed with diabetes.

Those were the “promising” numbers that buoyed MNKD stock, at least on paper. The reality, though, was that Afrezza never took off. Yes, management reported the highest-ever sales for the insulin therapy. Percentage-wise, the year-over-year lift looks incredibly massive. But nominally, Afrezza sales are meaningless.

This is a company that only brought in less than $12 million last year. So a million here and a million there isn’t going to do anything. That’s especially the case when free cash flow is awash in red ink.

For MNKD stock to prevent becoming a literal penny stock, management had to deliver astounding, paradigm-altering sales. Actually, it did do just that, but in the wrong direction.

It’s Time to Give Up on MNKD Stock

Analysts have always regarded MNKD stock as a gamble. Obviously, that gamble failed to pay off. Plus, the sorry numbers can no longer offer even a thinly crafted contrarian argument. MannKind execs have attempted to paint as rosy a picture as possible, but that’s their job.

Objectively, Afrezza and MannKind are fried. Even if the liquidity covenant didn’t exist, the company would face an uphill battle. The issue of course is that it does exist, and it severely limits management’s options. A bankruptcy notice in the near future isn’t at all out of the question.

I suppose that if you really wanted to speculate, MNKD stock fell on top of a technical support line. Further support is located around 70 cents. You could buy here with the idea that shares have surprised in the past.

But if you go this route, I need you to treat this as a leveraged fund: quick in, quick out. For the conservative investor, the numbers say it all. That’s one small step for man, one giant leap (backwards) for MannKind.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.