MannKind Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on inhaled therapies for diabetes and orphan lung diseases. Afrezza is its only approved product, marketed primarily in the United States. Biomm began commercializing Afrezza in Brazil in January 2020; partners in India and Australia had not yet begun commercialization. The filing covers the three months ended March 31, 2020, and was filed May 6, 2020.
Financial highlights
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $16.2 million | $17.4 million | Down 7% |
| Afrezza commercial product revenue | $8.0 million | $5.1 million | Up 58% |
| Collaboration and services revenue | $8.2 million | $12.4 million | Down 33% |
| Commercial product gross profit | $3.8 million | $1.1 million | Up $2.8 million |
| Commercial product gross margin | 48% | 21% | Up 27 percentage points |
| Loss from operations | $(7.1) million | $(13.5) million | Improved $6.4 million |
| Net loss | $(9.3) million | $(14.9) million | Improved $5.6 million |
| Net loss per share | $(0.04) | $(0.08) | Improved |
| Cash used in operating activities | $(11.2) million | $(11.6) million | Improved $0.4 million |
Gross Afrezza sales increased 70%, driven by higher demand, pricing, cartridge mix and a favorable comparison with Q1 2019. However, gross-to-net deductions increased to $5.9 million, or 43% of gross sales, from $3.1 million, or 38%, primarily due to higher estimated returns and patient co-pay assistance. Management stated that some Q1 demand may have reflected prescription stockpiling related to COVID-19 and should not be viewed as indicative of the remainder of 2020.
Operating expenses declined 25% to $23.4 million. Selling expense decreased 56%, mainly because television advertising costs fell by $9.3 million. General and administrative expense declined 12%. These improvements were partly offset by a $1.5 million impairment of a MidCap funding commitment asset, a $0.5 million inventory write-off, and higher collaboration-service costs.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $38.9 million at March 31, 2020, plus $0.3 million of restricted cash; total cash, cash equivalents and restricted cash were $39.2 million.
- Accounts receivable were $5.0 million and inventory was $3.2 million. Three wholesale distributors represented approximately 91% of accounts receivable.
- Total debt principal was $120.3 million, with net carrying debt of $119.0 million. Major obligations included $70.1 million of Mann Group promissory notes, $40.0 million under the MidCap facility, $5.2 million of 2020 notes and $5.0 million of 2024 convertible notes.
- The 2020 notes include $2.6 million due June 30, 2020 and $2.6 million due December 31, 2020. The MidCap facility matures in August 2024, with principal payments beginning in September 2021.
- The MidCap facility requires minimum unrestricted cash of $15.0 million and includes a trailing twelve-month Afrezza revenue covenant. The company was in compliance as of March 31, 2020, but stated that access to the remaining $25.0 million tranche is unlikely because required Afrezza revenue and collaboration milestones may not be achieved.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing a $3.0 billion accumulated deficit, continuing operating losses, limited capital resources and significant debt obligations.
Material changes, outlook and unusual items
- COVID-19 caused approximately 70% of the workforce to work from home beginning the week of March 16, 2020. Management expected near-term Afrezza revenue, productivity, clinical development, regulatory activities and commercialization efforts to be negatively affected.
- The company implemented cost-saving measures and, on April 27, 2020, announced a 20% pay reduction for certain employees earning more than $100,000, including executives, expected to last at least 10 weeks.
- On April 10, 2020, the company received a $4.9 million Paycheck Protection Program loan bearing 0.98% interest and maturing April 9, 2022. All or part of the loan may be forgiven subject to eligibility and documented use of proceeds; the filing warns that forgiveness, eligibility and potential regulatory review remain uncertain.
- Revenue from the United Therapeutics research agreement declined by approximately $4.5 million because the work was substantially completed by Q2 2019. United Therapeutics license revenue was $8.0 million in Q1 2020 and is being recognized through December 2021.
- The company has remaining insulin purchase commitments of approximately €82.0 million through 2026 and a recognized loss liability related to those commitments of approximately $90.2 million at March 31, 2020.
- The company estimated a $5.0 million Milestone Rights payment may be required in Q1 2021 if the next Afrezza sales milestone is reached, although the timing remains subject to actual performance.
- No formal full-year revenue or earnings guidance is provided in the filing. Management’s outlook emphasizes continued losses, cash needs, potential covenant pressure and the need for additional financing or strategic transactions.
Principal risks and contingencies
- Liquidity and solvency risk are critical: the company may need additional equity, debt, licensing proceeds, collaborations or asset sales, and may be unable to obtain financing on acceptable terms.
- Failure to meet MidCap revenue covenants could result in an event of default and acceleration of secured debt, potentially exposing substantially all assets, including intellectual property, to creditors.
- Afrezza demand, reimbursement, pricing, gross-to-net deductions, manufacturing capacity, regulatory compliance and physician adoption remain uncertain.
- COVID-19 may disrupt sales-force access to healthcare providers, prescriptions, supply chains, manufacturing, clinical trials and partner development programs.
- The company faces ongoing securities litigation in Israel related to allegations concerning statements about Afrezza; management believes the matter will not have a material adverse effect, but the plaintiff appealed a January 2020 denial of an amended claim.
- Potential dilution exists from equity fundraising, convertible notes, warrants, stock options and restricted stock units. Approximately 38.8 million potentially dilutive shares were excluded from Q1 2020 loss-per-share calculations.
Investor verification checklist
- Verify Afrezza prescription trends and whether Q1 sales benefited from temporary COVID-19 stockpiling.
- Reconcile gross-to-net deductions, product-return reserves and patient-assistance costs with subsequent revenue.
- Monitor compliance with the MidCap minimum Afrezza revenue and cash covenants and the availability of the remaining $25.0 million tranche.
- Confirm repayment, refinancing or conversion plans for the $5.2 million of 2020 notes and other near-term obligations.
- Track PPP loan forgiveness, SBA review risk and any related MidCap consent or covenant implications.
- Assess cash burn, financing activity and management’s ability to address the disclosed going-concern uncertainty.
- Review insulin purchase commitments, milestone payments, litigation developments and the operational impact of COVID-19.