MannKind Corporation — Form 10-Q Summary
Business Context and Reporting Period
MannKind filed a quarterly report for the period ended June 30, 2015. The company is a biopharmaceutical developer focused on diabetes therapies. Its only approved product, AFREZZA inhaled insulin, became available in U.S. pharmacies in February 2015. Sanofi is responsible for global commercialization, regulatory, and development activities, while MannKind manufactures AFREZZA.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2015 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $24.1 million | $45.8 million |
| Loss from operations | $24.1 million | $45.8 million |
| Net loss | $28.9 million | $59.6 million |
| Net loss per share | $0.07 | $0.15 |
| Net cash used in operating activities | Not separately provided | $14.8 million |
- AFREZZA product shipments to Sanofi were $5.9 million in the quarter and $13.0 million year to date, but were recorded as deferred product sales because revenue-recognition requirements were not met.
- Cash and cash equivalents were $107.2 million at June 30, 2015, down from $120.8 million at December 31, 2014.
- Total assets were $352.6 million, compared with $394.4 million at year-end 2014. Stockholders’ deficit increased to $115.5 million from $73.8 million.
- Inventory increased to $19.8 million from $9.7 million, while collaboration receivables declined to $4.7 million from $50.4 million following collection of amounts due from Sanofi.
- Product manufacturing expense was $5.7 million in the quarter and $7.6 million year to date; no comparable expense was recorded in 2014 because pre-commercial manufacturing costs were classified as research and development.
- Research and development expense declined 79% to $7.7 million in the quarter and 73% to $17.1 million year to date, primarily due to lower stock-based compensation, reduced clinical activity, and the shift toward commercial production.
- General and administrative expense declined 67% to $10.6 million in the quarter and 56% to $21.1 million year to date, primarily due to lower stock-based compensation.
- Cash used in investing activities was $8.7 million, principally for property and equipment. Financing activities provided $9.9 million, including $2.1 million of net ATM equity proceeds.
Debt, Liquidity, and Capital Resources
- Principal debt outstanding at June 30, 2015 was approximately $244.9 million, including $100.0 million of 5.75% convertible notes due August 15, 2015; $60.0 million of 9.75% 2019 notes; $20.0 million of 8.75% Tranche B notes; $49.5 million owed under the related-party Loan Arrangement; and approximately $15.4 million borrowed under the Sanofi Loan Facility.
- The Deerfield Facility Agreement requires cash, including available Loan Arrangement borrowings, of at least $25.0 million at each quarter-end. A covenant breach could permit acceleration of secured debt.
- The company had $30.1 million of additional borrowing capacity under the Loan Arrangement at June 30, 2015.
- Management stated that substantial doubt existed regarding the company’s ability to continue as a going concern because of recurring losses, negative operating cash flow, debt maturities, and the need for additional financing. The financial statements contain no going-concern adjustment.
Material Changes, Outlook, and Unusual Items
- In April 2015, the FDA approved a 12-unit AFREZZA cartridge; MannKind expected Sanofi to launch it in the second half of 2015.
- MannKind’s share of Sanofi collaboration losses was $12.8 million for the second quarter. After quarter-end, MannKind borrowed $12.8 million under the Sanofi Loan Facility to finance this amount.
- A $5.8 million interest expense charge in the first quarter resulted from remeasurement of a Deerfield milestone liability following AFREZZA’s commercial launch. MannKind also paid a $10.0 million milestone amount in the first quarter.
- After quarter-end, the company exchanged $27.7 million of 2015 notes for 2018 notes and exchanged $8.0 million of 2015 notes for approximately 1.9 million common shares. As of August 10, 2015, $64.3 million of 2015 notes remained outstanding.
- Management expected research and development and general and administrative expenses to decline in the second half of 2015 versus the second half of 2014, but expected continued significant spending on AFREZZA manufacturing and other product candidates.
- MannKind has an insulin supply commitment totaling approximately €120.1 million for minimum purchases during 2015 through 2019.
- The company remains dependent on Sanofi’s commercial execution, AFREZZA market acceptance, regulatory approvals outside the United States, manufacturing capacity, and access to additional capital.
Key Risks and Contingencies
- AFREZZA is the company’s only approved product, and failure to achieve market acceptance or adequate reimbursement could materially impair revenue and cash generation.
- AFREZZA is subject to ongoing FDA requirements, including long-term post-marketing studies addressing pulmonary malignancy, cardiovascular risk, pulmonary function, and pediatric use.
- Manufacturing is concentrated at the Danbury facility, and the company relies on Amphastar as the only approved insulin supplier identified in the filing.
- Debt agreements impose financial and operating covenants and grant secured creditors rights over significant assets, including intellectual property and facilities.
- The company may need substantial additional debt or equity financing, potentially on unfavorable terms or with significant dilution. Failure to obtain financing could require expense reductions, project delays, or cessation of operations.
- Legal proceedings were reported as none, and management stated that ordinary-course claims were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether the remaining 2015 notes were repaid, converted, or otherwise refinanced after August 15, 2015.
- AFREZZA prescription demand, net sales, reimbursement coverage, Sanofi’s commercialization spending, and the timing of the 12-unit cartridge launch.
- Quarterly cash burn, borrowing under the Sanofi Loan Facility, and compliance with the $25.0 million Deerfield liquidity covenant.
- Whether revenue-recognition conditions for Sanofi payments and AFREZZA shipments were subsequently satisfied.
- Progress and results of FDA-required post-marketing studies and regulatory submissions outside the United States.
- Future funding needs, potential equity dilution, remaining authorized shares, and the company’s ability to meet insulin purchase commitments and debt obligations.