MannKind Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. MannKind is a biopharmaceutical company commercializing Afrezza inhaled insulin in the United States and developing Technosphere-based products. The interim financial statements are unaudited.
Business Context and Financial Position
- Afrezza is the company’s only approved product. MannKind promotes it through its own U.S. specialty sales force and is pursuing international distribution partnerships.
- In September 2018, MannKind signed licensing and research agreements with United Therapeutics covering inhaled treprostinil and related pulmonary hypertension research. The agreements became effective in October 2018.
- Cash and cash equivalents were $10.4 million at September 30, 2018, with $0.5 million of restricted cash, compared with $43.9 million and $4.4 million, respectively, at December 31, 2017.
- Accumulated deficit was $2.9 billion and stockholders’ deficit was $205.4 million.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $4.5 million | $2.0 million | $11.8 million | $7.2 million |
| Commercial product revenue | $4.4 million | $2.0 million | $11.5 million | $4.7 million |
| Cost of goods sold | $5.3 million | $4.6 million | $14.4 million | $12.2 million |
| Loss from operations | $(21.5) million | $(28.2) million | $(68.9) million | $(79.4) million |
| Net loss | $(24.2) million | $(32.9) million | $(77.2) million | $(84.5) million |
| Net loss per share | $(0.16) | $(0.31) | $(0.56) | $(0.84) |
| Operating cash flow | Not separately provided | Not separately provided | $(62.7) million | $(34.8) million |
- Gross margin was approximately negative 19% in Q3 and negative 22% for the nine-month period, based on reported revenue and cost of goods sold.
- Gross Afrezza sales increased 191% in Q3 and 184% for the nine months. Net commercial revenue increased 121% and 144%, respectively.
- Gross-to-net deductions increased substantially to $3.8 million, or 47% of gross product revenue, in Q3, and $8.6 million, or 43%, for the nine months. The increase primarily reflected rebates, higher wholesaler acquisition costs and product-return reserves.
- Research and development expense declined 53% in Q3 and 28% for the nine months, while selling expense increased 25% and 15%, respectively, as resources shifted toward Afrezza commercialization.
- Inventory write-offs were $1.0 million in Q3 and $1.8 million for the nine months.
- Stock-based compensation was $1.6 million in Q3 and $5.7 million for the nine months.
Debt, Liquidity and Capital Resources
- Total debt at carrying value was $105.5 million at September 30, 2018, compared with $156.8 million at December 31, 2017. Principal borrowings were approximately $104.7 million.
- Debt consisted primarily of $71.5 million owed under the Mann Group Loan Arrangement, $18.7 million of 2021 convertible notes, $12.0 million of 2019 notes and $2.5 million of Tranche B notes.
- The company used $62.7 million of cash in operating activities during the first nine months and generated $25.3 million from financing activities, principally from an April 2018 equity offering.
- MannKind issued 14.0 million shares with warrants in April 2018 and received approximately $26.4 million of net proceeds. Additional equity issuances and debt conversions increased common shares outstanding to approximately 159.5 million at September 30, 2018.
- The Deerfield facility agreement required minimum cash and cash equivalents of $20.0 million at October 31 and December 31, 2018 and $25.0 million after December 31, 2018. The company stated that its available cash and financing sources were insufficient for anticipated requirements and that substantial doubt existed regarding its ability to continue as a going concern.
- The company’s debt is secured in part by substantially all assets, including significant intellectual property. Failure to meet covenants or debt obligations could result in acceleration and enforcement remedies.
Material Changes Versus Prior Comparable Period
- Revenue growth was driven by higher Afrezza demand, price increases and a more favorable cartridge mix, but product revenue remained below cost of goods sold.
- Operating and net losses narrowed year over year, partly because of lower research and development spending and favorable foreign-currency effects; the company remained materially unprofitable.
- Operating cash usage increased from $34.8 million to $62.7 million for the first nine months, despite the lower net loss, reflecting working-capital movements and the absence of the prior-year Sanofi-related cash receipt.
- ASC Topic 606 was adopted on January 1, 2018 using the modified retrospective method. MannKind moved from a sell-through model to a sell-to model for wholesaler sales of Afrezza, resulting in a $1.9 million decrease to opening accumulated deficit.
- Deerfield debt was repeatedly amended and partially exchanged for common stock. In September 2018, $10.5 million of principal was converted into approximately 5.75 million shares.
- The company’s remaining restructuring obligation was paid by September 30, 2018.
Guidance, Outlook, Risks and Unusual Items
- MannKind expects continued significant spending on Afrezza manufacturing, sales and marketing, collaboration activities and pipeline development. No specific revenue or profitability guidance was provided.
- On October 16, 2018, United Therapeutics paid a $45.0 million upfront amount under the Treprostinil license agreement. On October 18, 2018, MannKind used $3.0 million of that amount to repay deferred 2019 notes.
- The United Therapeutics agreements also provide potential development milestones, additional option-related payments and low double-digit royalties, but no related license or research revenue had been recognized as of September 30, 2018.
- MannKind has remaining insulin purchase commitments with Amphastar totaling €85.8 million through 2023. The company also recorded a recognized loss on purchase commitments of $100.4 million at September 30, 2018.
- The company expects a milestone payment in the first quarter of 2019. Milestone rights provide for potential payments of up to $90.0 million, of which $75.0 million remained payable.
- Material risks include continued operating losses, inadequate liquidity, potential debt defaults, dilution from equity and convertible debt transactions, dependence on Afrezza commercialization, reimbursement and market acceptance, regulatory compliance, manufacturing and insulin supply, clinical and post-approval requirements, intellectual-property disputes and ongoing securities litigation.
- In October 2018, the FDA issued a warning letter concerning an Afrezza social-media post that allegedly failed to adequately disclose risks. MannKind deactivated its Afrezza social-media accounts and submitted a response plan.
- The company reported that disclosure controls and procedures were effective as of September 30, 2018, with no material change in internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Whether the $45.0 million United Therapeutics payment materially extends liquidity after the $3.0 million Deerfield repayment and ongoing operating cash burn.
- Whether Afrezza net sales growth can continue while rebates, returns and other gross-to-net deductions remain elevated.
- The timing and funding sources for 2019 debt maturities, minimum-cash covenants and other required interest and principal payments.
- The company’s ability to satisfy or renegotiate the €85.8 million Amphastar insulin commitment and related purchase-commitment liabilities.
- Whether United Therapeutics’ Treprostinil program achieves development milestones and generates future royalties or additional payments.
- The outcome and potential financial exposure of the Israeli securities class-action litigation and the FDA promotional-compliance matter.
- Potential dilution from outstanding convertible notes, stock warrants, equity offerings and debt-for-equity exchanges.