MannKind Corporation — Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on diabetes therapies. Its only approved product is Afrezza, an inhaled insulin. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparative periods ended June 30, 2015.
Sanofi’s license and supply agreements terminated effective April 4, 2016. MannKind assumed worldwide development and commercialization responsibility for Afrezza and began distributing MannKind-branded product to major U.S. wholesalers during the week of July 25, 2016. The company expected to begin recognizing previously deferred collaboration amounts, likely in the third quarter of 2016.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $19.1 million | $24.1 million | $39.1 million | $45.8 million |
| Loss from operations | $19.1 million | $24.1 million | $39.1 million | $45.8 million |
| Net loss | $30.0 million | $28.9 million | $54.8 million | $59.6 million |
| Net loss per share | $0.07 | $0.07 | $0.12 | $0.15 |
| Cash used in operating activities | Not separately provided | Not separately provided | $42.3 million | $14.8 million |
At June 30, 2016, cash and cash equivalents were $63.7 million, compared with $59.1 million at December 31, 2015. Total assets were $139.4 million and stockholders’ deficit was $366.6 million. Accumulated deficit was approximately $2.9 billion.
Six-month financing activities provided $48.1 million, primarily from the May 2016 offering of common stock and warrants, which generated approximately $47.4 million of net proceeds. Investing activities used $1.1 million, principally for property and equipment.
Total principal debt was $227.5 million at June 30, 2016, consisting of $27.7 million of 2018 convertible notes, $80.0 million of 2019 and Tranche B notes, $49.5 million under The Mann Group Loan Arrangement, and $70.3 million under the Sanofi Loan Facility. The company also had $30.1 million of available borrowing capacity under The Mann Group arrangement.
Material changes versus the prior comparable period
- Revenue remained zero because collaboration-related revenue recognition criteria were not met.
- Six-month net loss improved by $4.7 million, while second-quarter net loss increased by $1.0 million.
- Six-month operating expenses declined $6.7 million, primarily due to lower research and development and selling, general and administrative expenses following 2015 workforce reductions and the transition from development to commercialization.
- Research and development expense declined 45% to $9.4 million for the six months, reflecting reduced clinical and manufacturing process-development activity.
- Six-month product manufacturing expense increased to $11.2 million from $7.6 million as commercial manufacturing resumed in preparation for the Afrezza relaunch.
- Cash used in operations increased substantially to $42.3 million from $14.8 million, despite the lower net loss, partly because the prior-year period benefited from a $50.0 million Sanofi milestone payment.
- The May 2016 equity offering increased shares outstanding and created 48.5 million warrants. The Series A warrants were recorded as a liability; their fair value increase generated approximately $5.3 million of other expense.
Guidance, outlook, risks and unusual items
- Management expected research and development expense to decrease in 2016, while sales and marketing expense would increase in the second half of the year for MannKind’s U.S. Afrezza commercialization effort.
- The company stated that it will need additional capital to fund Afrezza commercialization, product development and debt obligations. Management disclosed substantial doubt about the company’s ability to continue as a going concern if additional financing is unavailable.
- The Deerfield Facility Agreement requires cash, cash equivalents and available Mann Group borrowings of at least $25.0 million at each fiscal quarter-end. Failure to satisfy this covenant could result in acceleration of debt. The 2019 notes were classified as current because of uncertainty regarding covenant compliance.
- The company had remaining insulin purchase commitments of approximately €95.1 million through 2019 and recorded cumulative purchase-commitment losses of $73.5 million at June 30, 2016.
- Sanofi’s loss-sharing and transition arrangements resulted in approximately $70.0 million owed under the Sanofi Loan Facility at quarter-end. Sanofi continued fulfilling U.S. orders during the transition period, and MannKind’s share of second-quarter profit was $0.3 million, applied as a subsequent prepayment.
- Pending litigation includes a consolidated U.S. securities class action, proposed Israeli class actions and a California shareholder derivative action related to alleged statements concerning Afrezza’s prospects. The company intends to defend the claims and recorded no litigation accrual.
- Management concluded that disclosure controls and procedures were ineffective as of June 30, 2016. Material weaknesses related to impairment and inventory review controls continued, and an additional weakness involved significant non-routine transactions.
- Foreign-currency exposure from euro-denominated insulin commitments is material; management estimated that a 10% exchange-rate change could affect pretax losses by approximately $10.9 million.
Important facts for investors to verify
- Whether the July 2016 relaunch and MannKind-led commercialization of Afrezza generate sustainable prescription volume, net sales and positive gross margins.
- The timing and accounting treatment of the $26.9 million of deferred collaboration sales, $22.7 million of deferred collaboration costs and $135.2 million of deferred collaboration payments.
- The company’s ability to raise capital and maintain the $25.0 million liquidity covenant while funding commercialization and meeting debt maturities.
- Near-term repayment requirements, including the $5.0 million 2019-note payment made in July 2016 and subsequent 2017–2019 maturities.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- Potential dilution from 48.7 million outstanding warrants, 28.2 million stock options, restricted stock units and convertible notes.
- Exposure to insulin purchase commitments, foreign-exchange movements, supply constraints, regulatory requirements and required post-approval Afrezza studies.