MannKind Corporation 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and nine months ended September 30, 2016. MannKind is a biopharmaceutical company focused on Afrezza, its FDA-approved rapid-acting inhaled insulin, and related product candidates and Technosphere technology. Following Sanofi’s termination of its license and supply agreements effective April 4, 2016, MannKind assumed worldwide commercialization responsibility and began distributing MannKind-branded Afrezza in the United States in July 2016.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $162.4 million | $0 | $162.4 million | $0 |
| Collaboration revenue | $161.8 million | $0 | $161.8 million | $0 |
| Commercial product revenue | $0.6 million | $0 | $0.6 million | $0 |
| Net income (loss) | $126.5 million | $(31.9) million | $71.7 million | $(91.4) million |
| Operating income (loss) | $118.2 million | $(26.0) million | $79.1 million | $(71.8) million |
| Basic EPS | $0.26 | $(0.08) | $0.16 | $(0.23) |
| Cash flow from operations | Not separately provided | Not separately provided | $(65.3) million | $(34.7) million |
The collaboration revenue recognized in Q3 consisted principally of the $150.0 million upfront payment and two $25.0 million milestone payments, offset by $64.8 million of Sanofi loss sharing, plus $17.4 million of Afrezza sales and $9.2 million of raw-insulin sales to Sanofi. Management concluded that remaining costs and obligations were reasonably estimable and that no future obligations to Sanofi remained.
- Q3 operating margin was approximately 72.8%; nine-month operating margin was approximately 48.7%. These margins are not representative of ongoing commercial performance because they were dominated by previously deferred Sanofi-related revenue.
- Q3 expenses were $44.1 million, including $22.7 million of collaboration product costs, $4.3 million of cost of goods sold, $3.9 million of research and development, and $13.1 million of selling, general and administrative expense.
- Commercial Afrezza revenue was only $0.6 million, based on prescriptions dispensed to patients. Gross-to-net adjustments were approximately $0.3 million, or 31.8% of gross product sales.
- Cash and cash equivalents were $35.5 million at September 30, 2016, down from $59.1 million at December 31, 2015. Total assets were $96.1 million and stockholders’ deficit was $238.7 million.
- Cash used in investing activities was $1.1 million and cash provided by financing activities was $42.9 million for the nine months. Financing included approximately $47.3 million of net proceeds from the May 2016 equity and warrant offering.
Debt and liquidity
- Total principal debt was approximately $222.5 million, consisting of $27.7 million of 2018 convertible notes, $55.0 million of 2019 notes, $20.0 million of Tranche B notes, $49.5 million owed under The Mann Group Loan Arrangement, and approximately $70.3 million borrowed under the Sanofi Loan Facility.
- The Company had approximately $30.1 million of additional borrowing capacity under The Mann Group Loan Arrangement and $8.6 million of accrued unpaid interest under that arrangement.
- The Facility Agreement requires cash, cash equivalents and available Mann Group borrowings of at least $25.0 million at each quarter-end. Due to uncertainty regarding future resources, the 2019 and Tranche B notes were classified as current liabilities.
- Management stated that additional capital is required to fund Afrezza commercialization, product development and debt obligations. The filing states that failure to obtain additional funding would create substantial doubt about the Company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Sanofi’s collaboration ended and MannKind transitioned to direct U.S. commercialization of Afrezza.
- Revenue and reported profitability shifted from losses in 2015 to substantial income in 2016, primarily because deferred Sanofi consideration was recognized in Q3.
- Nine-month operating cash use increased to $65.3 million from $34.7 million, despite reported net income, largely because of a $135.1 million reduction in deferred collaboration payments and other working-capital movements.
- Research and development expense declined 43% for the nine months, while selling, general and administrative expense declined 3% overall but included a $9.4 million increase in Afrezza sales and marketing costs.
- In September 2016, the Company initiated a restructuring that reduced its workforce by approximately 18% to 155 employees and generated approximately $1.5 million of charges.
- The fair value of the Series A warrant liability declined, producing a $13.2 million Q3 benefit and a $7.9 million nine-month benefit. This non-cash item materially increased reported earnings.
- Accounts receivable increased to $3.1 million from $0.02 million, inventory increased to $5.1 million from zero, and deferred revenue was $2.0 million at quarter-end, including product shipped but not yet dispensed to patients.
Outlook, commentary, risks and unusual items
No quantitative revenue or earnings guidance is provided. Management expects continued significant expenditures for manufacturing, sales and marketing of Afrezza and development of product candidates and expects to seek additional equity, debt, collaboration, licensing or asset-sale financing.
- Afrezza commercial success is uncertain because of limited sales history, market acceptance, reimbursement and formulary access, competition, sales-force execution and the need to maintain regulatory compliance.
- FDA approval requires a five-year randomized trial involving approximately 8,000 to 10,000 patients to assess potential pulmonary malignancy risk; the filing states that no subjects had been enrolled as of the filing.
- The Company has firm insulin purchase commitments totaling approximately €120.1 million, with approximately €92.4 million remaining at September 30, 2016. Recognized losses on purchase commitments totaled $71.6 million.
- The Company reported material weaknesses in internal control over financial reporting relating to impairment and inventory testing and significant non-routine transactions. Management concluded disclosure controls were not effective as of September 30, 2016 and described ongoing remediation.
- A federal securities class action was dismissed without leave to amend, but the lead plaintiff appealed. Israeli class-action proceedings remained pending. The filing states that no accrual was recorded and that management believes ordinary-course matters will not materially affect the Company.
- NASDAQ notified the Company that its bid price had been below $1.00 for 30 consecutive business days. The Company had until March 13, 2017 to regain compliance.
- The Company’s exposure to euro-denominated insulin commitments creates foreign-exchange risk; a 10% exchange-rate change was estimated to affect pretax losses by approximately $10.4 million.
Investor verification checklist
- Verify the sustainability of Afrezza prescription demand, net pricing, gross-to-net deductions, channel inventory and product returns.
- Separate recurring commercial revenue and cash generation from the one-time recognition of Sanofi-related deferred payments.
- Review projected cash burn, financing needs and compliance with the $25.0 million quarter-end liquidity covenant.
- Confirm upcoming principal and interest obligations, including 2017 maturities of the 2019 and Tranche B notes.
- Assess the remaining insulin purchase commitments, recognized purchase-commitment losses and potential cancellation costs.
- Monitor remediation of material weaknesses and the effect of accounting estimates on collaboration revenue, warrants, inventory and deferred revenue.
- Track FDA post-approval study requirements, Afrezza safety and regulatory developments, litigation appeals and NASDAQ listing compliance.