No worries here

No worries here

To be perfectly honest accounting has never been our strong suit. Heck if it wasn’t for the guys in the frat we would have never passed our freshman accounting classes at the University of Illinois, a school well known for accounting. But then again, we did teach these guys how to party like rock stars, so it was a fair trade.

Yet even a non-accountant can do simple math which is all you need when looking at the earnings released by MannKind (NASDAQ: MNKD) yesterday. Per the earnings release;

“For the third quarter of 2017, Afrezza net revenue of $2.0 million grew 28% vs. the second quarter of 2017 and 246% vs. the third quarter of 2016 (the first quarter for MannKind sales and commercial support of Afrezza after the termination of the Sanofi agreement). As of September 30, 2017, the amount of Afrezza shipped to the wholesale and retail channels, but not yet recognized as revenue, was $3.0 million, an increase of $0.4 million from June 30, 2017. A reconciliation of gross to net revenues can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Form 10-Q for the quarter ended September 30, 2017.

Cost of goods sold was $4.6 million in the third quarter of 2017 compared to (i) $5.1 million in the second quarter of 2017, a decrease of $0.5 million primarily related to a write-down of inventory in the second quarter, and (ii) $4.4 million in the third quarter of 2016, an increase of $0.2 million.”

Ok let’s see if we’ve got this straight – the company sold $2 million of Afrezza yet it cost them $4.6 million to make it. Even if you add in the $3 million of unrecognized revenue, i.e. stuffing the channel, the numbers aren’t all that great and there is no guarantee this revenue will go from unrecognized to real revenue. Again, you don’t need an advanced degree in accounting to recognize playing fast and lose with the numbers.

On a year to date basis the company has sold $7.2 million of Afrezza which cost $12.2 million to make.

Now we may not be the sharpest tool in the shed, but it seems like MannKind is making Afrezza for dollars and selling it for pennies; something our professors at Illinois said wasn’t so good. And yes, we did go to the business classes…. Sometimes.

But wait it gets better. During the quarter the company spent … wait for it …. $17.7 million on SG&A, and no that is not a misprint. Ok let’s review just for a second these super sales people sold $2 million of Afrezza which cost nearly $5 million to make and based on the SG&A number were paid handsomely. If this seems slightly off kilter you have common sense and should be nowhere near the wacky world of diabetes. Only in this wacky world could this business model of making something for dollars and selling it for pennies be considered a good idea.

Hey but no worries here even with the company burning almost $24 million a quarter they have almost $60 million sitting in cash. Yep after all the financial maneuvering the company has done they have almost $60 million sitting in the bank. Think about that just for a moment as it just boggles the mind.

So, what did the company say about all this, well of course everything is great and my goodness the future looks even better. And oh, by the way we want to issue another 140 million shares, so we can dilute this sucker even more.

To be honest we did not listen to the call, but we did read the transcript and reviewed the slides. Something we would not recommend doing as this is where you need an advanced accounting degree. Now we don’t want to say that the company is using fuzzy math to put lipstick on a pig, let’s just say we’re big fans of red lipstick. Perhaps the best slide was the one entitled “Wholesaler Shipments by Quarter Q4 estimate based on first 5 week shipment average” which using some crazy math projected sales of Afrezza if annualized would have reach $20 million in the 4th quarter of 2017. Please do not ask us to explain how they came up with this number as it’s early and we haven’t had a drink yet.

Listen we’re all for companies providing detail but what we’re against is using fuzzy math. This is akin to a device company using self-reported data and then claiming this data is valid. As my frat brothers used to tell me, and these guys did go to class, with the right set of variables and assumptions they could make the numbers come out any way they want.

The reality is nothing unfortunately has changed since MannKind started. MannKind is all about the promise of tomorrow and nothing to do with the realities of today. For years we’ve been listening to how one-day Afrezza, this wonder drug, would be a billion-dollar product. For years we’ve been hearing how Afrezza would revolutionize the treatment of diabetes.

What we haven’t heard or seen is any evidence that anything will change. The company cannot explain in simple terms, without the fuzzy math, how they are going to solve some very real issues. How for example they are going to get Afrezza into a formulary position that doesn’t hurt sales. How they can do this without either heavily discounting or rebating the product. They cannot explain why this wonder drug isn’t being used by more patients when it’s supposedly easier to use than plain old injectable insulin.

Could it be that Afrezza isn’t a wonder drug? Could it be that payors do not see any reason to provide better formulary position or premium reimbursement when they have cheaper options that work just as well? Could it be that yes there is a place for Afrezza that it does have a place in the treatment regimen, that it is a good drug just one with a limited market potential? Of course not, as the late Al Mann, the company’s founder used to say Afrezza is the best thing to happen to diabetes since the discovery of insulin.

Yet MannKind goes merely along. They continue to raise money and they sure know how to spend it too. Reality TV shows, television ads, well compensated sales reps and of course a well-paid management team who have boatloads of options they will cash in when the roller coaster is on the upswing.

In situations like this, when nothing seems to make any sense. When logic and reason have been replaced by fuzzy math and chutzpah Momma Kliff had some great advice. “My son there will be times in life when you’ll look around and think that everyone around you has lost their mind. That there is no way rational people could not see past the hype, the story, the promise of tomorrow. That these people would look at the reality which is right in front of them and understand with all the hype, the sexy story and the promise of tomorrow there is no there, there. Yet what you will learn is that you are not like most people because you see things for the way they are not what they might be. In other words, I did not raise you to be stupid.”