This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Give MannKind a boost
After watching their stock lose two-thirds of its market cap, there's no doubt about it: Investors in diabetes and cancer researcher MannKind (NAS: MNKD) had a rough year in 2011. But according to at least one Wall Street analyst, 2012's going to be different. Yesterday, the friendly folks at Piper Jaffray lent MannKind a hand. Predicting the shares will hit $4 within a year, Piper initiated the stock at "overweight," moving the shares 2% toward the analyst's ultimate goal.

What sparked Piper's sudden onset of enthusiasm for MannKind? Did rivals Novo Nordisk (NYS: NVO) , Eli Lilly (NYS: LLY) , or Sanofi (NYS: SNY) suddenly decide to abandon the market for injected insulin, despite its still being profitable? Did Pfizer (NYS: PFE) flub another attempt at debuting a rival inhaled insulin product? Did MannKind itself finally win approval from the FDA for its own Afrezza?

No. Nothing so dramatic as that. Instead, it appears that Piper's support for MannKind comes down to the most basic of reasons: money.

Last week, MannKind completed its previously announced share issuance, floating just under 36 million new shares (and an attached 21.5 million warrants to buy additional stock) at $2.40 per "unit." The issuance netted MannKind something under $86 million in new capital, which will help the researcher keep its doors open and the lights on for a bit longer. In the context of Piper's buy recommendation, though, what's most interesting about this share offering is the names of the bankers who helped the company sell the shares.

These lucky souls were Jefferies & Co., Cowen & Co., JMP Securities, and -- you guessed it -- Piper Jaffray.

"I'm shocked, shocked, to find conflict of interest going on in this establishment!"
And I'm certain you're shocked, too, to learn that a banker who just helped MannKind sell $86 million worth of stock to the public -- and got in on the firm's 4.7 million share "overallotment" as part of the offering -- now publicly recommends that investors run right out and load up on MannKind shares. But this is actually a bit more interesting than a run-of-the-mill "Wall Street stinks" story.

As big of a deal as "36 million shares" sounds like, it actually doesn't improve MannKind's financial situation much at all.

Consider: Before the offering, MannKind was a company facing entrenched, profitable competition in the form of Lilly, Novo, and Sanofi, multibillion-dollar businesses that vastly outweigh MannKind in scale of operation. A company with:

  • No revenues.
  • No profits.
  • Only about $23 million in cash, and more than $460 million in net debt.
  • And burning cash at the rate of more than $150 million a year.

Post-issuance, MannKind is a company that still has neither revenues nor profit. It still has about $380 million in net debt. And at the rate it's burning cash, the proceeds of last week's share issuance will suffice to keep it in business for only about another six months.

Yet despite all these strikes against it, Piper tells us MannKind is the kind of company you should buy? Pardon my skepticism, but that seems a bit difficult to believe. Remember that MannKind is not Pfizer. Pfizer could afford to field an inhalable insulin product, fail at the FDA, and survive just fine on the $67 billion in annual revenues from products it does have approval to sell. MannKind can't. If the FDA doesn't approve Afrezza, MannKind's very survival as a company could be at stake. And even if the FDA does ultimately approve Afrezza, analysts say this could take two years to happen.

What happens between now and then? The company's going to run out of money, for one thing. It will probably have to take on more debt and issue more shares, diluting today's shareholders even more in the process.

But don't worry. It's all good. When that happens, I'm sure Piper will be there to recommend buying the shares again.

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At the time this article was published Motley Fool newsletter services have recommended buying shares of Pfizer, but Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 381 out of more than 180,000 members. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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