Earnings season for the third quarter is wrapping up. The reports tend to be pretty boring for companies that don't have a product on the market yet. Occasionally, you get an update on when to expect clinical trial data, but for the most part, the financial GAAP disclosures can be ignored.

Except for one number, of course: how quickly a company is burning through its current nest egg of cash.

No biotech that I know of has been able to take its IPO cash through to the launch of a drug. Every company has to raise additional capital at some point. The secret to successful investing in biotech is to find companies that have enough cash to get to their next value inflection point. If a company doubles or triples in value because of positive clinical trial data or an approval by the Food and Drug Administration, then the next raise of capital doesn't affect shareholders nearly as much.

Inhale deeply
Approval of MannKind's (Nasdaq: MNKD ) inhaled insulin Afrezza has been a long time coming. The company received FDA rejections in 2010 and in 2011. It's on track to complete the necessary studies for its new Dreamboat inhaler next year.

MannKind ended the quarter with just $2.1 million, but don't freak out just yet. In the last month, it raised $92 million in a secondary offering. And it has a $120 million line of credit with its billionaire founder, CEO, and namesake Al Mann.

The company is burning through about $25 million per quarter, which is expected to accelerate as it completes the clinical trials and prepares for a launch. But it should be able to fund operations into 2014, perhaps even lasting long enough to get through the FDA approval.

Blah blah blah blah blah, then

Getting to the next inflection point
Investors don't have to look for biotechs that have enough cash to get them to profitability; the companies just need to have enough cash on hand to get to the next value-increasing point, where they can raise additional funds without diluting shareholders more than necessary. Owning a slightly smaller portion of a much larger pie is perfectly acceptable.

Of the three companies profiled here, Exelixis looks like it's in the best shape. Sarepta will be fine if the FDA allows it to seek an accelerated approval. Al Mann won't let MannKind go bankrupt, but investors could get another substantial dilution if the biotech has to raise cash again before the approval of Afrezza. The best hope might be that the valuation runs up in anticipation of an approval; shares are substantially lower than where they were before the last two FDA decisions.

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http://www.fool.com/investing/general/2012/11/15/3-biotechs-burning-cash-to-keep-the-lights-on.aspx