MannKind Corporation Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. MannKind remained a development-stage biopharmaceutical company focused on AFREZZA, an inhaled insulin product candidate, and its Technosphere platform. AFREZZA was not approved or commercialized, and the company reported no product revenue.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $35,000 | $0 | $35,000 | $50,000 |
| Research and development expense | $25.5 million | $23.1 million | $76.2 million | $79.7 million |
| General and administrative expense | $10.1 million | $9.6 million | $37.3 million | $30.3 million |
| Net loss | $42.8 million | $38.4 million | $117.6 million | $124.4 million |
| Loss per share | $0.22 | $0.31 | $0.71 | $1.02 |
| Operating cash flow used | Not separately provided | Not separately provided | $91.8 million | $103.5 million |
Revenue was immaterial relative to expenses, so conventional revenue margins were not meaningful. The company had an operating loss of $35.5 million in the quarter and $113.5 million for the nine months. Cumulative net loss since inception was $2.1 billion, including a historical $151.4 million goodwill impairment charge, and cumulative negative operating cash flow was approximately $1.6 billion.
At September 30, 2012, cash and cash equivalents were $1.8 million, with a $350,000 certificate of deposit, for approximately $2.1 million of immediately reported cash and restricted liquidity. Total assets were $210.3 million, total liabilities were $486.6 million, and stockholders’ deficit was $276.2 million.
Debt included $211.7 million of senior convertible notes, consisting of $115.0 million due December 2013 and $100.0 million due August 2015, net of issuance costs, plus $223.1 million owed under the related-party loan arrangement. The related-party facility had approximately $21.9 million of remaining availability at quarter-end.
Material changes versus the prior comparable period
- Quarterly net loss increased by $4.4 million, while the nine-month net loss improved by $6.8 million, primarily because 2011 included non-recurring costs associated with terminating the Organon insulin supply agreement.
- Quarterly R&D expense increased 10% to $25.5 million, driven by a $7.0 million increase in clinical-trial costs for studies 171 and 175. Nine-month R&D expense declined 4% because of the absence of approximately $16.0 million of 2011 Organon-related costs, partly offset by higher clinical spending.
- Nine-month general and administrative expense increased 23% to $37.3 million, primarily due to an $8.6 million litigation settlement charge and higher stock-based compensation.
- Nine-month operating cash use declined by $11.7 million to $91.8 million, but the company continued to rely on financing activities to fund operations.
- In February 2012, MannKind raised approximately $80.6 million net through an offering of common stock and warrants. The Mann Group subsequently acquired $77.2 million of restricted common stock in June in exchange for cancellation of related-party debt.
- The company recorded a $12.0 million gain during the nine months from remeasurement of a related-party forward purchase contract. It also recorded an immaterial out-of-period warrant accounting adjustment that increased additional paid-in capital by $7.6 million and reversed a $4.9 million warrant liability.
Guidance, outlook, risks and unusual items
Management expected studies 171 and 175 to be completed in the second quarter of 2013 and anticipated submitting results as an amendment to the AFREZZA NDA in the third quarter of 2013. These timelines were subject to clinical results, FDA requirements and potential requests for additional studies. The FDA had previously issued a Complete Response letter requiring additional clinical studies involving the Dreamboat inhaler.
Management stated that existing resources, including the October 2012 financing proceeds, were expected to fund planned operations at least into the third quarter of 2013. The October offering generated approximately $86.0 million net from 46.0 million shares and warrants to purchase up to 34.5 million shares. The warrants have a $2.60 exercise price and expire 53 weeks after issuance.
The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. MannKind expected to require additional equity or debt financing, strategic collaboration, licensing transactions, asset sales or additional related-party borrowings. Failure to obtain funding could require delays or reductions in AFREZZA development and other operations.
- AFREZZA remained subject to clinical, regulatory, manufacturing and commercialization risks and had not received marketing approval.
- The company had no product sales and had not reached a strategic commercialization collaboration despite discussions with pharmaceutical companies.
- Pending securities and derivative litigation settlements were subject to court approval. The settlements contemplated insurer-funded cash payments of $16.0 million and $800,000, respectively, plus issuance of approximately 3.0 million shares and a possible additional 1.0 million shares if the stock price condition was met.
- The related-party loan maturity was extended after quarter-end to January 1, 2014, with borrowing availability extended through September 30, 2013. The interest rate on outstanding principal was scheduled to change beginning January 1, 2013.
- Potential dilution was substantial from convertible notes, warrants, stock awards, settlement shares and proposed related-party equity transactions.
Important facts for investors to verify
- Whether AFREZZA clinical studies met statistical, safety and efficacy requirements and whether the FDA accepted the planned NDA amendment.
- The company’s post-quarter-end cash balance, financing runway and actual use of the approximately $86.0 million October offering proceeds.
- The status and final terms of the securities and derivative litigation settlements, including required share issuances.
- The closing and stockholder approval status of the proposed $107.4 million related-party equity and warrant transaction and the resulting debt balance.
- Upcoming maturity and repayment requirements for the $115.0 million 2013 convertible notes and the related-party loan.
- Whether MannKind secured a commercialization partner or additional financing before available liquidity was exhausted.