MannKind Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 4, 2020. MannKind is a biopharmaceutical company focused on inhaled therapies. Afrezza is its only approved product, and the company also develops and commercializes its Technosphere platform through collaborations.
Business Context and Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $15.4 million | $14.6 million | $46.7 million | $47.0 million |
| Afrezza commercial product revenue | $7.3 million | $6.4 million | $22.3 million | $17.5 million |
| Collaboration and services revenue | $8.1 million | $8.2 million | $24.4 million | $29.5 million |
| Net loss | $11.3 million | $10.4 million | $30.8 million | $37.6 million |
| Loss per share | $0.05 | $0.05 | $0.14 | $0.20 |
| Net cash used in operations | Not separately provided | Not separately provided | $28.4 million | $83.4 million |
Margins: Afrezza commercial gross margin was 51% in Q3 and 49% for the first nine months, compared with negative 11% and 12%, respectively, in the comparable 2019 periods. Derived total operating margins were approximately negative 59% in Q3 and negative 52% for the nine-month period; derived net margins were approximately negative 73% and negative 66%, respectively.
- Gross Afrezza revenue increased 11% in Q3 and 29% for the nine months. Net revenue growth was partly reduced by gross-to-net deductions of $5.1 million in Q3 and $16.0 million for the nine months.
- Q3 operating expenses were $24.5 million, up 5% year over year, primarily because of a $3.9 million foreign-currency loss versus a $3.8 million gain in Q3 2019. Selling and general and administrative expenses declined.
- Nine-month operating expenses declined 12% to $70.9 million, reflecting lower selling and general and administrative spending, partly offset by a $1.9 million impairment related to expected future MidCap funding.
- Cash and cash equivalents were $52.4 million at September 30, 2020, versus $29.9 million at December 31, 2019. Including restricted cash, total cash was $52.7 million.
- Total assets were $95.7 million, total liabilities were $282.1 million, and stockholders’ deficit was $186.4 million. Accumulated deficit was approximately $3.0 billion.
Debt, Liquidity and Capitalization
- Principal borrowings totaled approximately $122.6 million at September 30, 2020; net carrying value of debt was $121.8 million.
- Debt included $40.0 million under the secured MidCap Credit Facility, $70.1 million of Mann Group promissory notes, $5.0 million of 2024 convertible notes, a $2.6 million December 2020 note and a $4.9 million PPP loan.
- The balance sheet classified $45.4 million as current debt, including the $40.0 million MidCap facility, because of a probable future covenant violation, even though scheduled MidCap principal payments were not otherwise due until 2021.
- The company used $28.4 million in operating cash flow, generated $19.7 million from investing activities primarily through treasury-bill sales, and received $31.2 million from financing activities. Financing inflows included $15.1 million from at-the-market equity sales, $11.6 million from warrant exercises and $4.9 million from the PPP loan.
- Shares outstanding increased to 230.9 million at September 30, 2020 from 211.8 million at December 31, 2019. As of October 26, 2020, 232.6 million shares were outstanding.
Material Changes Versus the Prior Comparable Period
- Afrezza net revenue increased $0.9 million, or 14%, in Q3 and $4.7 million, or 27%, for the nine months, driven by higher demand, product mix and pricing.
- Collaboration revenue declined $5.1 million, or 17%, for the nine months, principally because the United Therapeutics research agreement was substantially completed in 2019. United Therapeutics license revenue remained the principal collaboration source.
- Commercial product gross margin improved substantially because of lower manufacturing costs and the absence of a $2.8 million insulin-supply agreement amendment fee recorded in 2019.
- Interest expense declined versus 2019, but the company no longer benefited from the $3.5 million debt-extinguishment gain recognized in 2019.
- The company raised capital through equity issuance, warrant exercises and the PPP loan, while debt remained concentrated and significant relative to cash resources.
Outlook, Management Commentary, Risks and Unusual Items
- Management stated that COVID-19 restrictions limited sales-force access to physicians and are expected to continue negatively affecting near-term Afrezza revenue. The pandemic may also delay clinical development, collaboration activities and access to capital.
- The filing states that the company is not profitable, has rarely generated positive operating cash flow and has substantial doubt about its ability to continue as a going concern. Management may need additional equity or debt financing, collaborations, licensing transactions or asset sales.
- The company expected it would likely be unable to satisfy the Afrezza revenue conditions needed to draw the remaining $25.0 million under the MidCap facility. An August 2020 amendment temporarily avoided covenant breaches through November 30, 2020 if unrestricted cash remained at least $40.0 million; after that period, a covenant breach was considered probable.
- The company had approximately $94.8 million recorded for losses on insulin purchase commitments and remaining aggregate insulin purchase commitments of approximately €80.9 million. Foreign-currency movements produced a $3.9 million Q3 loss; management estimated that a 10% exchange-rate change could affect pretax loss by approximately $9.5 million.
- Milestone rights could require payments of up to $70.0 million upon specified strategic and sales milestones. Management estimated a $5.0 million milestone payment could become payable in the second quarter of 2021 following achievement of the related milestone.
- The $2.6 million December 2020 note was prepaid on October 9, 2020 through issuance of 1,377,356 common shares. The PPP loan could be forgiven in whole or in part, but the filing provides no assurance that forgiveness will be obtained.
- A securities class-action matter related to historical Afrezza disclosures remained pending in Israel. Management stated that ordinary-course legal matters were not expected to have a material adverse effect, and no litigation accrual was recorded.
Most Important Facts for Investors to Verify
- Whether MannKind obtained an amendment or other relief for the expected MidCap Afrezza revenue covenant violation after November 30, 2020.
- Actual cash burn, Afrezza prescription and net-revenue trends, and whether the company accessed the remaining MidCap borrowing capacity.
- Status and ultimate forgiveness amount of the $4.9 million PPP loan.
- Timing and funding source for debt maturities, milestone payments and insulin purchase commitments.
- Progress of United Therapeutics programs, the remaining $12.5 million license milestone, and the effect of deferred collaboration revenue recognition.
- Impact of COVID-19 on physician access, Afrezza demand, clinical programs, manufacturing and capital-market access.
- Potential dilution from equity financing, convertible notes, warrants, stock awards and the October 2020 note repayment.