MannKind Corporation 10-Q Summary — Q3 2015
Business context and reporting period
MannKind is a biopharmaceutical company focused on diabetes therapies. Its only approved product, AFREZZA inhaled insulin, was commercialized by Sanofi in the United States beginning February 2015. MannKind manufactures AFREZZA and shares worldwide profits and losses with Sanofi 35%/65%, respectively. The filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $26.0 million | $38.3 million | $71.8 million | $149.5 million |
| Net loss | $31.9 million | $36.5 million | $91.4 million | $161.9 million |
| Net loss per share | $0.08 | $0.09 | $0.23 | $0.42 |
| Cash used in operating activities | Not separately provided | Not separately provided | $34.7 million | Cash provided of $39.8 million |
Reported margins are not meaningful because no revenue was recognized. AFREZZA product shipments to Sanofi were $4.1 million in the third quarter and $17.1 million for the first nine months, but were deferred because revenue-recognition criteria were not met. Deferred product sales were $17.5 million and related deferred product costs were $13.5 million at September 30, 2015.
- Cash and cash equivalents were $32.9 million, down from $120.8 million at December 31, 2014.
- Total assets were $278.0 million, compared with $394.4 million at year-end 2014.
- Stockholders’ deficit was $124.6 million, compared with $73.8 million at year-end 2014; accumulated deficit was approximately $2.6 billion.
- Inventory increased to $23.4 million from $9.7 million, primarily reflecting commercial manufacturing requirements.
- Principal debt was $185.4 million at September 30, 2015, consisting primarily of the 2018 notes, 2019 notes, Tranche B notes, the Mann Group loan, and the Sanofi Loan Facility.
- Net cash decreased by $87.9 million during the first nine months of 2015, ending at $32.9 million. Investing cash use was $9.9 million and financing cash use was $43.3 million.
Material changes versus the prior comparable period
- Operating expenses declined 32% in the third quarter and 52% for the first nine months, primarily because clinical and manufacturing-process development spending declined and 2014 included unusually high stock-based compensation and Sanofi-related professional fees.
- Research and development expense decreased 67% in Q3 and 72% year to date. General and administrative expense decreased 40% in Q3 and 51% year to date.
- Product manufacturing expense was $8.1 million in Q3 and $15.7 million year to date, compared with zero in 2014, as manufacturing shifted from development activities to commercial production.
- Net loss improved year over year, but cash flow deteriorated because 2014 benefited from Sanofi’s $150.0 million upfront payment and 2015 included substantial debt repayment and inventory spending.
- MannKind settled the remaining 2015 notes through cash repayment, stock exchanges, and issuance of $27.7 million of 2018 notes. The transactions resulted in a $1.0 million loss on debt extinguishment.
- In September 2015, the company reduced its workforce by approximately 26% to 198 employees and recorded $3.2 million of restructuring charges.
- MannKind raised $12.2 million net through its at-the-market equity program during the quarter.
Guidance, outlook, commentary, risks and unusual items
- Management expects research and development and general and administrative expenses to continue declining in the fourth quarter compared with the prior-year period, while operating cash flow is expected to remain negative until AFREZZA becomes profitable.
- Sanofi reported year-to-date AFREZZA sales of €5 million through September 30, 2015. The 12-unit AFREZZA cartridge was launched in the third quarter.
- MannKind disclosed substantial doubt about its ability to continue as a going concern because it expects significant ongoing expenditures and will need additional capital. The financial statements contain no adjustment for this uncertainty.
- The Deerfield facility agreement requires cash, including available Mann Group borrowings, of at least $25.0 million at each quarter-end. Failure to satisfy this covenant could trigger acceleration of secured debt.
- After quarter-end, MannKind borrowed $14.7 million under the Sanofi Loan Facility to fund its share of third-quarter collaboration losses. Sanofi-related borrowings totaled $43.7 million as of November 6, 2015, including paid-in-kind interest.
- The company had approximately €99.0 million remaining under minimum insulin purchase obligations through 2019. It also faces scheduled debt repayments beginning in 2016.
- Key risks include limited AFREZZA market adoption, Sanofi’s ability or willingness to continue commercialization, regulatory and post-marketing requirements, manufacturing and supplier concentration, reimbursement and pricing pressure, patent disputes, substantial leverage, dilution, and the need for additional financing.
- Sanofi may terminate the collaboration under specified circumstances beginning January 1, 2016, including if it determines that U.S. commercialization is no longer economically viable.
Most important facts for an investor to verify
- Whether AFREZZA sales and prescription trends are sufficient to support eventual recognition of deferred collaboration revenue and profitability.
- Available cash, remaining borrowing capacity, and compliance with the $25.0 million quarter-end liquidity covenant.
- Timing and funding sources for scheduled 2016–2019 debt maturities and the growing Sanofi Loan Facility balance.
- Whether Sanofi continues funding and commercializing AFREZZA after the January 2016 termination provisions become exercisable.
- Progress toward regulatory approvals and required post-marketing studies, including the long-term pulmonary malignancy trial.
- Ability to satisfy the approximately €99.0 million remaining insulin purchase commitment and maintain reliable AFREZZA manufacturing.
- Potential dilution from additional equity issuance, convertible notes, warrants, and limited authorized shares.