MannKind Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on inhaled therapies. Afrezza, its only approved product, is an inhaled insulin marketed primarily in the United States through the company’s specialty sales force. The filing covers the three months ended March 31, 2018, and was filed May 9, 2018. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $3.5 million | $3.0 million | 15% increase |
| Commercial product revenue | $3.4 million | $1.2 million | 184% increase |
| Cost of goods sold | $4.0 million | $2.5 million | 57% increase |
| Operating expenses | $26.2 million | $20.1 million | Increase |
| Loss from operations | $(26.8) million | $(19.6) million | Loss increased |
| Net loss | $(30.4) million | $(16.3) million | Loss increased |
| Net loss per share | $(0.25) | $(0.17) | Worsened |
| Cash used in operations | $(21.7) million | $8.5 million provided | Adverse change |
Gross margin was approximately negative 16% in Q1 2018, compared with approximately negative 113% in Q1 2017. Operating and net margins remained deeply negative because the company’s commercial, research, administrative, financing and foreign-currency costs substantially exceeded revenue.
- Gross Afrezza product sales were $5.2 million, reduced by approximately $1.8 million of discounts, rebates, chargebacks, co-pay assistance and estimated returns.
- Research and development expense declined 16% to $2.6 million, while selling expense increased 29% to $11.0 million and general and administrative expense increased 40% to $9.6 million.
- A $0.6 million inventory write-off was recorded in cost of goods sold.
- Foreign-currency translation loss increased to $3.0 million, primarily because insulin purchase commitments are denominated in euros.
- Cash and cash equivalents were $26.7 million at March 31, 2018; including restricted cash, total cash was $27.2 million, down from $48.4 million at December 31, 2017.
- Total liabilities were $285.1 million and stockholders’ deficit was $223.2 million. Accumulated deficit was approximately $2.9 billion.
- Debt had a net carrying amount of $140.3 million and included $23.7 million of 2021 convertible notes, $45.0 million of Deerfield facility notes and $71.5 million of Mann Group related-party debt on a principal basis.
Material changes versus the prior comparable period
- Afrezza commercial revenue increased substantially, reflecting higher cartridge volumes, a price increase and the adoption of ASC Topic 606. The new standard changed wholesale revenue recognition from a sell-through model to a sell-to model.
- ASC Topic 606 was adopted using the modified retrospective method. The company recorded an approximately $1.9 million favorable adjustment to opening accumulated deficit, eliminated deferred revenue, and established product-return and related reserves.
- Total revenue increased only 15% because Q1 2017 included $1.75 million of other revenue from bulk insulin sales that did not recur.
- Operating losses widened as the company expanded its in-house sales force and administrative organization and incurred higher foreign-currency losses.
- Operating cash flow deteriorated from $8.5 million provided in Q1 2017 to $21.7 million used in Q1 2018. The prior period benefited from a $30.6 million cash receipt from Sanofi and did not represent normal recurring operating cash generation.
- During Q1 2018, MannKind issued shares to exchange or repay debt, including $3.2 million of 2019 notes and $5.0 million of Tranche B notes. The Mann Group also purchased 3.0 million shares through cancellation of $8.2 million of related-party debt principal.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue, earnings or cash-flow guidance. Management expects continued significant expenditures for Afrezza manufacturing, sales and marketing, required post-marketing studies and other pipeline development.
- Management states that current cash and financing sources are insufficient for anticipated requirements and that substantial doubt exists regarding the company’s ability to continue as a going concern.
- The Deerfield facility agreement requires at least $25.0 million of cash and cash equivalents or qualifying available borrowings at quarter-end. The company was close to this threshold at March 31, 2018.
- Near-term debt maturities include $15.0 million of 2019 notes due in July 2018 and additional 2019 and Tranche B maturities in 2019. The company states that it may not have sufficient resources to make required principal or interest payments.
- The company has an insulin supply commitment totaling €90.3 million for 2018–2023 and a recorded liability of $112.3 million for recognized losses on insulin purchase commitments at March 31, 2018.
- Afrezza remains dependent on market acceptance, physician adoption, reimbursement, manufacturing execution and completion of required clinical and post-marketing studies. The FDA-required pulmonary malignancy study had not enrolled subjects as of the filing.
- A securities class-action matter related to statements concerning Afrezza remained pending in Israel; the company said it would vigorously defend the claims and had not recorded an accrual.
- After quarter-end, the company completed an offering of 14.0 million shares and warrants for net proceeds of approximately $26.3 million. The warrants cover 14.0 million shares, are exercisable at $2.38 per share beginning six months after issuance and expire six months thereafter.
- Also after quarter-end, MannKind entered into an exclusive India marketing and distribution agreement with Cipla, including a $2.2 million upfront payment, potential milestones, minimum-purchase revenue and royalties, subject to the agreement’s terms and regulatory approvals.
Most important facts for investors to verify
- Whether Afrezza prescription volume, net pricing and gross-to-net deductions can support sustained revenue growth.
- The company’s post-quarter-end cash balance after the April equity and warrant offering and the rate of ongoing cash burn.
- Compliance with the Deerfield cash covenant and the company’s ability to fund upcoming debt maturities and interest payments.
- The status, enrollment and costs of FDA-required Afrezza post-marketing studies, particularly the pulmonary malignancy study.
- The economic impact and enforceability of the €90.3 million insulin purchase commitment and related loss liability.
- The dilution potential from convertible debt, debt exchanges, warrants, options and additional equity financing.
- The terms, regulatory status and commercial progress of the Cipla and other international distribution arrangements.