MannKind Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. The unaudited filing covers MannKind’s biopharmaceutical business, centered on Afrezza inhaled insulin and its Technosphere platform. Afrezza was the company’s only approved product.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $15.0 million | $3.9 million | +285% |
| Afrezza commercial sales, net | $6.1 million | $3.8 million | +62% |
| Collaboration and services revenue | $8.9 million | $0.1 million | +$8.9 million |
| Commercial product gross profit | $1.7 million | $(1.3) million | Improved $3.1 million |
| Operating loss | $(11.0) million | $(20.5) million | Improved $9.6 million |
| Net loss | $(12.4) million | $(22.7) million | Improved $10.3 million |
| Net loss per share | $(0.07) | $(0.16) | Improved |
For the six months ended June 30, 2019, revenue was $32.5 million versus $7.4 million in the prior-year period; net loss was $27.3 million versus $53.1 million; and operating loss was $24.5 million versus $47.3 million.
- Q2 commercial product gross margin was approximately 29%, compared with negative gross margin in Q2 2018. The improvement reflected higher Afrezza sales and lower cost of goods sold.
- Total Q2 operating margin was approximately negative 73%; the result remained loss-making despite substantial revenue growth.
- Q2 selling, general and administrative expense was $16.6 million, down from $21.7 million. Research and development expense declined to $1.6 million from $3.0 million.
- Collaboration revenue primarily reflected United Therapeutics arrangements: $7.8 million from the UT License Agreement and $1.1 million from the UT Research Agreement.
Cash Flow, Liquidity and Debt
| Balance sheet item | June 30, 2019 | December 31, 2018 |
|---|---|---|
| Cash and cash equivalents | $8.0 million | $71.2 million |
| Restricted cash | $5.3 million | $0.5 million |
| Short-term investments | $24.9 million | — |
| Total assets | $81.8 million | $107.7 million |
| Total debt, net carrying amount | $100.0 million | $102.5 million |
| Stockholders’ deficit | $(196.0) million | $(175.1) million |
- Cash, restricted cash and short-term investments totaled approximately $38.2 million at June 30, 2019.
- Operating cash use was $31.3 million for the first six months of 2019, compared with $48.8 million in the prior-year period.
- Investing cash use was $26.4 million, primarily for purchases of short-term U.S. Treasury investments and property and equipment.
- Financing cash use was $0.7 million, including a $2.5 million facility-financing principal payment, partly offset by $1.9 million of equity proceeds.
- Debt consisted primarily of the $72.0 million related-party note, $19.0 million of senior convertible notes and $9.0 million of facility-financing obligations. The filing states that the company had $99.2 million of outstanding borrowings at June 30, 2019, while the debt table reports a $100.0 million net carrying amount.
- Management stated that existing cash and financing sources were insufficient to meet anticipated requirements within one year and that substantial doubt existed regarding the company’s ability to continue as a going concern.
Material Changes Versus the Prior Comparable Period
- Afrezza gross sales increased 54% in Q2 and 56% for the first six months, driven by higher demand, price increases and a more favorable cartridge mix.
- Gross-to-net deductions were $4.3 million, or 41% of gross Afrezza sales, in Q2 2019 versus $2.9 million, or 44%, in Q2 2018.
- United Therapeutics collaboration revenue materially changed the revenue mix and accounted for most of the increase in total revenue. The company recognized $21.3 million from collaborations and services in the first half of 2019 versus $0.2 million in the first half of 2018.
- Six-month selling expense increased $4.7 million, primarily because of a $9.3 million Afrezza television campaign, despite lower personnel and other marketing costs.
- The company adopted new lease guidance in 2019, increasing assets and liabilities by approximately $5.2 million at adoption without a material earnings or cash-flow effect.
- Shares outstanding increased to 189.4 million at June 30, 2019 from 187.0 million at December 31, 2018, and additional dilution remained possible from convertible debt, warrants, options and restricted stock units.
Outlook, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance was provided. Management planned to seek additional equity or debt financing, collaborations, licensing arrangements, asset sales or other funding sources.
- The company had an accumulated deficit of approximately $3.0 billion and stated that it expected continued significant expenditures for Afrezza manufacturing, sales and marketing, collaboration work and pipeline development.
- The company had a remaining insulin purchase commitment liability of $93.6 million and remaining contractual insulin purchase commitments denominated in euros. The June 30 filing disclosed €82.3 million of remaining commitments under the then-current agreement.
- Milestone rights could require payments of up to $75.0 million upon achievement of specified milestones. Management expected a milestone in the third quarter of 2019 that would trigger a $5.0 million payment in the following quarter.
- Afrezza commercialization remained dependent on market acceptance, physician prescribing, payer coverage, reimbursement, manufacturing capacity and regulatory compliance. The FDA-required five-year pulmonary malignancy post-approval trial had not enrolled subjects as of the filing.
- A securities-related class-action certification proceeding in Israel remained pending; the company stated that no material loss was probable or estimable at June 30, 2019.
- Subsequent to quarter-end, the company completed debt exchanges and repayments, entered into a MidCap secured credit facility and drew $40.0 million under that facility. The facility permitted total borrowings of up to $75.0 million, subject to conditions and milestones, and included minimum cash and Afrezza revenue covenants.
- Subsequent transactions also exchanged or restructured the 2021 convertible notes and the Mann Group note, creating new 2024 convertible, 2020 and related-party obligations and issuing additional common shares.
- Management reported effective disclosure controls and procedures as of June 30, 2019, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the company’s post-quarter-end liquidity, including the $40.0 million MidCap borrowing, minimum cash covenant and availability of additional tranches.
- Assess whether Afrezza sales growth and commercial gross margin can continue without relying on nonrecurring collaboration revenue.
- Review the timing, terms and potential dilution from the 2024 convertible notes, 2020 notes, New Mann Group Loan Arrangement, warrants and other convertible securities.
- Reconcile the reported debt amounts and subsequent debt exchanges with current principal, accrued interest, maturities and collateral requirements.
- Evaluate the company’s ability to satisfy insulin purchase commitments, milestone payments and other contractual obligations.
- Monitor Afrezza reimbursement, product returns, rebate assumptions, regulatory requirements and the status of the required post-approval clinical trial.
- Follow the Israeli securities litigation and any related financial exposure or developments.