In January, Sears announced that it was divesting its Craftsman brand to Stanley Black & Decker for what seems like a measly $900 million, plus a 15-year royalty payment of between 2.5 percent and 3.5 percent. Estimates last year had suggested that Sears could net up to $2 billion for its Craftsman brand. The issue is that even with this cash infusion, Sears ended the quarter with only $238 million in cash and $4.2 billion in long-term debt. Even closing stores and cutting employees may not save Sears, which is burning through its capital at an incredibly fast rate.
According to Fitch Ratings, Sears is expected to burn through $1.8 billion in cash in 2017, and this includes an assumption of $250 million in cost savings from store closures and fewer inventory purchases. Even with a recent $500 million real estate loan, a debt restructuring deal, and the initial $525 million received from Stanley Black & Decker following its Craftsman divestment, Sears may not have enough capital to make it through 2017.
Even if Sears manages to survive 2017, it doesn't have a turnaround strategy that's inspiring confidence on Wall Street. It's looking to divest its most valued assets, and consumers are no longer very loyal to the Sears brand. It's probably the most likely of these three companies to meet its demise before 2019.
Finally, we'll end as we began: with a troubled drugmaker. The third company I suspect may have a hard time making it till 2019 is small-cap MannKind.
On paper, MannKind looked like it had a winner with Afrezza, a Food and Drug Administration-approved inhalable diabetes medication for type 1 and 2 patients. According to the Centers for Disease Control and Prevention, there are more than 29 million people suffering from diabetes (mostly type 2) in the U.S., meaning there was an ample market opportunity for Afrezza. Most importantly, it was a fast-acting medication that metabolized through the body faster, and it was inhalable, which meant no needles. It had all the hallmarks of a drug capable of $1 billion or more in annual sales.
Unfortunately, Afrezza's actual results fell laughably short of expectations. After partnering with Sanofi in 2014, Afrezza sales struggled to cross the $2 million mark per quarter. Sanofi had a clause in its licensing deal that allowed it to walk away if Afrezza wasn't considered economically viable—and, needless to say, $5 million to $6 million in annual sales wasn't viable for Sanofi. In January 2016, Sanofi walked away from MannKind, leaving the company to market Afrezza by itself.
MannKind responded by utilizing external marketing representatives to sell Afrezza, but announced just weeks ago that it would abandon that idea and begin training in-house sales representatives. It's also managed get Afrezza on the formularies for Aetna and Express Scripts. In some respects, MannKind is doing a lot more than Sanofi ever did.
But there's a major concern: cash. MannKind's decision to use in-house marketing representatives will likely mean an acceleration of its cash usage, since the company continues to lose money. It ended the third quarter with $35.5 million in cash, $30.1 million in credit line access from The Mann Group, and $50 million in at-the-market common stock issuances it could tap. Additionally, it had received a $30.6 million payment from Sanofi and netted $16.7 million from the sale of real estate.
Despite all of this capital added together, there's little assurance that Afrezza sales will ramp up. Its higher cost compared to needle-based insulins remains a concern, and it's going to be incredibly difficult to get physicians and consumers to switch from trusted brand-name insulin products.
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