MannKind Corporation 2011 Form 10-K Summary
Business context and reporting period
MannKind is a development-stage biopharmaceutical company focused primarily on AFREZZA, an ultra-rapid-acting inhaled insulin using its proprietary Technosphere technology and Dreamboat inhaler. The filing covers the fiscal year ended December 31, 2011; fourth-quarter data are provided for the quarter ended December 31, 2011.
AFREZZA was not approved or commercialized during the period, and the company had no product sales or commercial sales and distribution capabilities. The FDA had issued a second Complete Response letter in January 2011 requesting two additional clinical studies using the Dreamboat inhaler.
Financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $50,000 | $93,000 | Down $43,000 |
| Research and development expense | $100.0 million | $112.3 million | Down 11% |
| General and administrative expense | $40.6 million | $40.3 million | Up 1% |
| Total operating expenses | $140.6 million | $152.6 million | Down 8% |
| Loss from operations | $140.5 million | $152.5 million | Improved $12.0 million |
| Net loss | $160.8 million | $170.6 million | Improved $9.8 million |
| Net loss per share | $1.32 | $1.50 | Improved $0.18 |
| Cash used in operating activities | $123.8 million | $148.7 million | Improved $24.8 million |
Margins were not economically meaningful because revenue was only $50,000 and the company remained pre-commercial. The 2011 operating loss was substantially larger than revenue.
- Other income was $1.5 million, primarily from a $1.3 million realized gain on terminating foreign-exchange hedges.
- Interest expense totaled approximately $21.8 million, including $10.9 million on the related-party loan and $10.9 million on senior convertible notes.
- Cash, cash equivalents and marketable securities declined to $3.2 million at December 31, 2011, from $70.4 million at December 31, 2010.
- Working capital declined to a deficit of $19.5 million from positive working capital of $55.8 million.
- Total assets were $199.6 million, total liabilities were $513.2 million, and stockholders’ deficit was $313.7 million.
- Debt included $277.2 million outstanding under the related-party loan arrangement and $210.6 million in carrying value of senior convertible notes.
- The company had $45.0 million of remaining availability under the related-party loan arrangement at year-end. The loan bore interest at the one-year LIBOR rate plus 3% and was unsecured.
Fourth-quarter and year-over-year changes
- Fourth-quarter 2011 net loss was $36.4 million, compared with $38.3 million in the fourth quarter of 2010.
- Fourth-quarter 2011 basic and diluted loss per share was $0.30, compared with $0.33 in the prior-year quarter.
- R&D expense declined primarily because insulin purchases fell to $8.4 million from $16.3 million and other manufacturing and research costs decreased. These savings were partly offset by higher clinical-trial spending.
- The company recorded $6.3 million of restructuring costs in 2011, consisting of $4.7 million in R&D and $1.6 million in general and administrative expense, after reducing its workforce by approximately 41%.
- General and administrative expense increased mainly because of $2.1 million in higher legal fees, including costs related to securities and derivative litigation.
- Interest expense increased because the 2010 convertible-note issuance was outstanding for a full year and borrowings under the related-party facility increased.
- Cash used in investing activities decreased to $2.9 million from $11.7 million, while cash provided by financing activities decreased to $63.4 million from $196.4 million.
Guidance, outlook, commentary and risks
- The two FDA-requested Dreamboat studies, one in type 1 diabetes and one in type 2 diabetes, were enrolling. Management expected to complete them by or near the end of 2012 and submit the results as an NDA amendment during the first half of 2013, subject to enrollment, results and FDA acceptance.
- Management expected R&D expense to increase in 2012 because of the additional clinical trials and expected general and administrative expense to decline following the restructuring.
- The company expected negative operating cash flow to continue until AFREZZA received regulatory approval and was commercialized.
- Management stated that year-end resources, available related-party borrowings and the February 2012 financing were expected to fund operations into the fourth quarter of 2012. The filing nevertheless states that substantial doubt existed about the company’s ability to continue as a going concern.
- On February 8, 2012, the company raised approximately $80.6 million of net proceeds in a public offering of common-stock-and-warrant units. The Mann Group also agreed to purchase $77.2 million of restricted shares through cancellation of related-party debt, subject to stockholder approval.
- The related-party loan maturity was subsequently extended to March 31, 2013, with further borrowing permitted through June 30, 2012.
- Key risks include failure to obtain FDA approval, additional clinical or regulatory requirements, unfavorable trial results, inability to secure a commercialization partner, limited manufacturing and supply capacity, competition, patent disputes, litigation, dilution, and the need for additional financing.
- The company was defending securities class actions and shareholder derivative litigation related to alleged misleading statements about AFREZZA. The potential loss could not be reasonably estimated.
- The Organon insulin-supply dispute was settled in 2011 for $16.0 million, allocated between $8.4 million of insulin inventory and a $7.6 million contract-cancellation fee.
- Deloitte & Touche issued an unqualified audit opinion but included an explanatory paragraph regarding substantial doubt about the company’s ability to continue as a going concern. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Current AFREZZA regulatory status, results of the Dreamboat clinical studies, and whether the FDA accepted or approved the NDA amendment.
- Actual cash consumption, remaining borrowing availability, debt maturities and the company’s ability to obtain additional capital.
- Terms, stockholder approval status and dilution effects of the February 2012 equity and warrant financings.
- Progress toward securing a commercialization or development partner and the cost of establishing independent sales and marketing capabilities if no partner is obtained.
- Potential exposure from securities class actions, derivative litigation and any other legal proceedings.
- Availability and regulatory qualification of insulin, inhaler and cartridge suppliers, as well as the readiness of the Danbury manufacturing facility for commercial production.