MannKind Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on diabetes therapies and other products using its Technosphere inhalation platform. Afrezza, its only approved product, is an inhaled insulin approved by the FDA in 2014. The company assumed worldwide commercialization responsibility from Sanofi in April 2016 and began distributing MannKind-branded Afrezza in the United States in July 2016. This filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $3.0 million | $0 | New revenue streams |
| Afrezza commercial sales, net | $1.2 million | $0 | New revenue stream |
| Bulk insulin revenue | $1.75 million | $0 | New revenue stream |
| Collaboration revenue | $0.1 million | $0 | New revenue stream |
| Cost of goods sold | $2.5 million | $5.2 million | Down $2.6 million |
| Operating loss | $19.6 million | $20.0 million | Improved $0.4 million |
| Net loss | $16.3 million | $24.9 million | Improved $8.5 million |
| Net loss per share | $0.17 | $0.29 | Improved |
| Cash provided by operating activities | $8.5 million | $(30.8) million | Improved $39.3 million |
| Cash and cash equivalents at period end | $48.0 million | $27.7 million | Up $20.3 million |
Approximate margins in Q1 2017 were 15.3% gross, negative 651% operating, and negative 542% net, reflecting the company’s very limited revenue base and substantial operating expenses. Selling and marketing expense increased to $7.7 million from nominal expense in the prior-year quarter as MannKind brought its Afrezza sales force in-house. Research and development expense declined 39% to $3.1 million, while general and administrative expense increased 4% to $7.7 million.
The company reported total assets of $85.2 million, total liabilities of $283.9 million, and stockholders’ deficit of $198.7 million at March 31, 2017. Accounts receivable was $0.4 million and inventory was $3.7 million. Deferred revenue was $1.8 million, including product shipped into the channel but not yet dispensed to patients. Gross-to-net adjustments for Afrezza were approximately $0.4 million, or 27% of gross product revenue.
Debt, liquidity, and cash flow
- Principal debt outstanding at March 31, 2017 totaled approximately $152.1 million: $27.6 million of 2018 notes, $55.0 million of 2019 notes, $20.0 million of Tranche B notes, and $49.5 million under The Mann Group Loan Arrangement.
- Facility debt carried significant near-term maturities: $5.0 million of Tranche B notes was due in May 2017 and $15.0 million of 2019 notes was due in July 2017. The company disclosed uncertainty regarding its ability to make required principal and interest payments.
- The Deerfield facility requires at least $25.0 million of cash and cash equivalents or available borrowings at each quarter-end. The company had $30.1 million of available borrowings under The Mann Group Loan Arrangement.
- Q1 operating cash flow was positive primarily because of the $30.6 million cash payment received from Sanofi in January 2017. Investing cash flow of $16.7 million primarily reflected proceeds from selling Valencia, California property.
- The company states that it will need additional capital and that these circumstances raise substantial doubt about its ability to continue as a going concern. Management expects to pursue equity or debt financing, collaborations, licensing transactions, asset sales, or other funding sources.
Material changes versus the prior comparable period
- MannKind generated its first reported Afrezza commercial product revenue in the comparison presented, although net sales remained only $1.2 million.
- The company transitioned from Sanofi-supported commercialization to its own commercial organization, materially increasing selling and marketing costs.
- Sanofi’s January 2017 payment of $30.6 million and the February 2017 sale of property drove positive operating and investing cash flow, respectively; these are not recurring operating sources of cash.
- Net loss improved primarily because of a $6.6 million non-cash gain from the change in fair value of the warrant liability and lower interest expense following forgiveness of the Sanofi loan facility in 2016.
- The warrant liability declined from $7.4 million at December 31, 2016 to $0.8 million at March 31, 2017, principally due to the change in the company’s stock price.
- MannKind completed a one-for-five reverse stock split effective March 3, 2017 and regained Nasdaq’s $1.00 minimum bid-price compliance on March 16, 2017.
- After quarter-end, on April 18, 2017, the company repaid $4.0 million of Tranche B principal and exchanged $6.0 million of debt for common shares at $1.15 per share.
Outlook, management commentary, risks, contingencies, and unusual items
The filing provides no formal revenue, earnings, or cash-flow guidance. Management’s near-term strategy is to commercialize Afrezza in the United States through its internal sales organization, seek foreign regional partners subject to regulatory approval, and pursue additional Technosphere collaborations. The company expects continued substantial spending on Afrezza manufacturing, sales and marketing, and product development.
- Going-concern risk is substantial. The company has a $2.8 billion accumulated deficit, a $198.7 million stockholders’ deficit, recurring operating losses, significant debt maturities, and dependence on additional financing.
- Afrezza adoption, reimbursement, pricing, prescription demand, product returns, and the company’s ability to scale its commercial organization remain critical uncertainties.
- The company has an amended insulin supply agreement requiring aggregate purchases of approximately €93.0 million for 2017 through 2023, including annual minimum commitments. It had not purchased insulin under the amended agreement in 2017 as of March 31.
- The company estimates that a 10% change in the U.S. dollar/euro exchange rate would have affected pretax losses by approximately $9.9 million. It had no foreign-currency hedges.
- Afrezza is subject to an FDA-required five-year randomized trial involving 8,000 to 10,000 patients to assess pulmonary malignancy risk; the filing states that no subjects had been enrolled as of the filing date.
- A securities-related class-action matter remained pending in Israel concerning alleged misleading statements about Afrezza. One of two actions was dismissed without prejudice; the remaining matter had not yet been certified as a class action.
- The company recorded a $0.8 million restructuring accrual at March 31, 2017 and expected to substantially pay it by the third quarter of 2017.
Most important facts for an investor to verify
- Whether Afrezza prescriptions, net revenue, gross-to-net deductions, channel inventory, and product returns are increasing sufficiently to support the company’s commercial spending.
- Available cash after the April 2017 debt repayment and exchange, and the company’s ability to satisfy 2017 debt maturities, interest obligations, and the $25.0 million quarter-end liquidity covenant.
- Terms, timing, dilution, and accounting effects of subsequent equity or convertible-debt financings and the April 18, 2017 Deerfield exchange.
- Whether the company can obtain financing or strategic transactions on acceptable terms and avoid further restructuring or operating reductions.
- Progress and enrollment in the FDA-required pulmonary malignancy study and any related regulatory or labeling developments.
- Potential exposure under the €93.0 million insulin purchase commitments, including cancellation costs and foreign-currency effects.
- The status and potential financial impact of the Israeli securities litigation and any other legal or regulatory proceedings.