MannKind Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015; filed May 11, 2015. MannKind is a biopharmaceutical company focused on diabetes therapies. Its only approved product, AFREZZA inhaled insulin, became available by prescription in U.S. pharmacies in February 2015. Sanofi is responsible for commercialization, while MannKind manufactures the product.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $9.4 million | $26.2 million | Down 64% |
| General and administrative expense | $10.5 million | $15.2 million | Down 31% |
| Product manufacturing expense | $1.9 million | $0 | New commercial-production expense |
| Operating loss | $21.7 million | $41.4 million | Improved $19.7 million |
| Net loss | $30.7 million | $52.1 million | Improved $21.4 million |
| Net loss per share | $0.08 | $0.14 | Improved |
| Net cash from operating activities | $3.0 million | $(37.0) million | Improved $40.0 million |
| Cash and cash equivalents at period-end | $120.8 million | $35.8 million | Up $85.1 million |
Revenue remained zero because AFREZZA product shipments to Sanofi, totaling $7.1 million, and collaboration consideration were recorded as deferred rather than recognized as revenue. Deferred collaboration payments totaled $185.1 million at March 31, 2015, and deferred product costs were $6.3 million.
The company had an accumulated deficit of $2.5 billion and stockholders’ deficit of $97.0 million. Total assets were $360.0 million and total liabilities were $457.1 million. Inventory increased to $16.8 million from $9.7 million at December 31, 2014, reflecting commercial manufacturing activity.
Debt and liquidity
- Principal debt outstanding was approximately $232.5 million at March 31, 2015, excluding subsequent borrowings under the Sanofi facility.
- The $100.0 million 5.75% senior convertible notes mature August 15, 2015. MannKind expected to refinance them or obtain conversion into common stock, but stated it could not assure either outcome.
- Other principal debt included $60.0 million of 9.75% 2019 notes, $20.0 million of 8.75% Tranche B notes, and $49.5 million under the 5.84% related-party Loan Arrangement.
- The Loan Arrangement provided approximately $30.1 million of additional borrowing capacity.
- The Sanofi Loan Facility provided up to $175.0 million to fund MannKind’s share of collaboration losses. $3.0 million was borrowed at March 31, 2015; an additional $12.4 million was borrowed after quarter-end, bringing the reported amount owed to Sanofi to approximately $15.5 million as of May 11, 2015.
- The Deerfield Facility Agreement requires cash, cash equivalents and available Loan Arrangement borrowings of at least $25.0 million at each quarter-end.
Material changes versus Q1 2014 and prior year-end
- R&D expense fell primarily because affinity trials were completed, manufacturing process development shifted toward commercial production, and performance-based stock compensation declined.
- G&A expense declined mainly because of lower stock-based compensation, partly offset by higher consulting and legal fees.
- Product manufacturing expense began as AFREZZA commercial production increased.
- Operating cash flow improved from a $37.0 million use to $3.0 million provided, largely because of the $50.0 million Sanofi milestone payment earned in 2014 and received in Q1 2015.
- Cash was essentially unchanged during the quarter at $120.8 million after $4.2 million of capital expenditures and $1.2 million of net financing cash inflows.
- The February 3, 2015 AFREZZA commercial launch triggered a $10.0 million payment to Deerfield and a $5.8 million interest expense remeasurement related to milestone rights.
- Shares outstanding increased to approximately 409.1 million at March 31, 2015 from 406.1 million at December 31, 2014; financing activities included $6.2 million from warrant and stock-option exercises.
Guidance, outlook, risks and unusual items
- Management expected R&D and G&A expenses to decline during 2015, while continuing to incur significant costs for AFREZZA manufacturing and other product candidates.
- Management expected AFREZZA’s 12-unit cartridge, approved by the FDA in April 2015, to launch through Sanofi in the second half of 2015.
- Worldwide AFREZZA profits and losses are allocated 65% to Sanofi and 35% to MannKind. MannKind’s Q1 share of collaboration losses was $12.4 million.
- MannKind stated that, assuming it could convert or refinance the 2015 notes, existing cash would fund operating expenses and capital requirements for at least the next 12 months. The filing nevertheless expressed substantial doubt about the company’s ability to continue as a going concern because of the near-term note maturity, continued losses and uncertain access to financing.
- Additional potential funding included up to $50.0 million under at-the-market equity agreements, approximately $14.9 million from warrant exercises, and available related-party borrowings. No shares had been sold under the ATM agreements as of the filing.
- Key risks include dependence on AFREZZA and Sanofi, uncertain market acceptance and reimbursement, manufacturing scale-up and supplier concentration, required post-marketing studies and regulatory compliance, substantial debt and covenant requirements, future dilution, and the possibility that additional capital will not be available on acceptable terms.
- MannKind had a contractual minimum insulin purchase commitment of approximately €120.1 million for 2015 through 2019 under its Amphastar supply agreement.
- The filing reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were considered effective, with new controls implemented for the product sales cycle.
Important facts for investors to verify
- Whether the $100.0 million 2015 notes were converted, refinanced or repaid by August 15, 2015.
- AFREZZA prescription volume, net sales, reimbursement coverage and Sanofi’s commercialization performance.
- Whether AFREZZA collaboration revenue and deferred product costs began being recognized in subsequent periods.
- The pace and cost of commercial manufacturing, including capacity expansion and insulin supply availability.
- Borrowings and repayment terms under the Sanofi Loan Facility, including the effect of continued collaboration losses.
- Compliance with the Deerfield cash covenant and other debt covenants.
- Progress and results of FDA-required post-marketing studies, including the long-term pulmonary malignancy study.