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Drug Backers Feel Queasy

MannKind Corp. hasn’t made enough money from its one commercial drug to pay off $100 million in debt coming due this month, so the company agreed to sell shares at a discounted price to help refinance that debt. The Valencia biotech announced a stock-for-debt swap July 29 in which it will give up to $84.6 million in new stock and debt to help pay off a total of $100 million in convertible senior notes that would have come due Aug. 15. Institutional investors hold the notes. According to the deal, MannKind will sell discounted shares for up to $56.9 million and issue $27.7 million in new debt for the refinance. The offer started July 29 and will last through Aug. 11. During that period, the price for the new shares will be set by a formula but the amount will be deeply discounted from the share’s trading price. A floor price also will be determined. The new $27.7 million in senior notes will carry the same 5.75 percent interest rate, but they won’t have to be paid off until mid-August 2018. Deals that cause more stock to enter the market at reduced prices are sometimes referred to as “death-spiral financing” because a company is selling stock when the price is low. In the case of MannKind, the deal has a limited time span and a price floor, limiting damage. However, there’s no question the deal dilutes the investment of current shareholders, said Mick Swartz, associate professor of finance at the USC Marshall School of Business, who reviewed the deal for the Business Journal. “In the conversion, you’re creating more and more shares of stock,” Swartz said. “Whoever put money in before is discounted; new money is more valuable.” Markets have reacted accordingly. After the deal was announced, shares lost 15 percent of their value, closing Aug. 5 at $4.19. But the slide also stems from slow sales of Afrezza, an inhalable insulin that is MannKind’s only commercial product. The company, founded in 1991 by billionaire entrepreneur Alfred Mann, has never been profitable, and has been sustained by investments from Mann and other shareholders who are betting that diabetics would prefer to inhale their medication rather than take injections. Afrezza gained regulatory approval last year and U.S. sales began in February, with Sanofi U.S., the domestic subsidiary of French drug firm Sanofi S.A., handling sales and marketing. But so far, sales have been underwhelming. The drug generated only $7 million in revenue for MannKind in the first quarter. MannKind did not respond to requests for comment. “Afrezza is well-received by patients who are able to get it, but access is a limiting step,” Dr. Joshua Schimmer, an analyst at investment firm Piper Jaffray, wrote in a note to investors May 8. “MannKind is optimistic that measures to improve access and initiating therapy without hassle will lead to an acceleration of uptake.” Despite Afrezza’s lackluster sales, MannKind seems optimistic about potential sales. The company announced July 31 that it is expanding capacity to make Afrezza. MannKind will fill more than 300 million insulin cartridges a year, an increase over its previous capacity of 100 to 120 million cartridges. Swartz said he was hesitant to categorize MannKind’s situation as a death spiral because if sales improve, the arrangement could prove inconsequential. “If you have a good product and it’s selling, a company might be able to get out of a death spiral,” Swartz said.

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