MannKind Corporation Form 10-Q Summary
Business Context and Reporting Period
MannKind is a development-stage biopharmaceutical company focused on diabetes therapies and its Technosphere inhalation platform. Its lead candidate, AFREZZA, is an ultra-rapid-acting inhaled insulin for adults with type 1 and type 2 diabetes. The filing covers the quarter and nine months ended September 30, 2013, with comparative periods ended September 30, 2012.
Two additional Phase 3 AFREZZA studies completed in May and June 2013 and met their primary efficacy endpoints and safety objectives. MannKind submitted the study results to the FDA on October 13, 2013. The FDA classified the submission as a complete Class 2 response and assigned an April 15, 2014 PDUFA goal date; approval remained uncertain.
Financial Metrics
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Revenue | $0 | $35 thousand | $0 | $35 thousand |
| Research and development expense | $27.3 million | $25.5 million | $80.7 million | $76.2 million |
| General and administrative expense | $17.5 million | $10.1 million | $42.1 million | $37.3 million |
| Loss from operations | $44.8 million | $35.5 million | $122.8 million | $113.5 million |
| Net loss | $50.8 million | $42.8 million | $137.9 million | $117.6 million |
| Net loss per share | $0.17 | $0.22 | $0.48 | $0.71 |
| Operating cash flow used | Not provided | Not provided | $94.7 million | $91.8 million |
All dollar amounts in the table are as reported; expense and cash-flow figures are in millions unless otherwise indicated. The company reported no product revenue and no operating profitability. Q3 interest expense was $6.1 million, compared with $5.1 million in the prior-year quarter. Stock-based compensation was $15.9 million in Q3 and $31.3 million for the first nine months, versus $3.8 million and $9.8 million, respectively, in comparable 2012 periods.
At September 30, 2013, cash and cash equivalents were $93.8 million, compared with $61.8 million at December 31, 2012. Total assets were $287.6 million, total liabilities were $455.3 million, and stockholders’ deficit was $167.7 million. Net property and equipment was $177.8 million.
Cash used in investing activities was $1.8 million, primarily for machinery and equipment. Financing activities provided $128.5 million, including $79.5 million from the first two Deerfield financing tranches and $49.2 million from warrant exercises. The company had $295.0 million of convertible debt principal outstanding at September 30, 2013, consisting of $115.0 million of 2013 notes, $100.0 million of 2015 notes, and $80.0 million of 2019 notes. It also had $119.6 million principal outstanding under the related-party Mann Group loan arrangement.
Material Changes Versus the Prior Comparable Period
- R&D expense increased 7% in Q3 and 6% for the first nine months, primarily because of substantially higher stock-based compensation, partly offset by lower clinical costs after completion of the two Phase 3 studies.
- G&A expense increased 74% in Q3 and 13% for the first nine months. The increase was driven mainly by performance-based stock compensation and higher professional fees; the 2012 period included an $8.6 million litigation settlement charge.
- Q3 net loss increased by $8.0 million, while the first-nine-month net loss increased by $20.3 million compared with 2012.
- Operating cash use increased by $2.9 million for the first nine months, primarily due to payments of accrued clinical-study and other expenses.
- MannKind entered into a Deerfield facility in July 2013 for up to $160.0 million of 9.75% 2019 notes in four $40.0 million tranches. The first two tranches closed, resulting in $80.0 million principal outstanding at September 30.
- Common shares outstanding increased to 309.99 million at September 30, 2013 from 286.04 million at December 31, 2012. Subsequent to quarter-end, shares outstanding rose to 357.31 million as of November 4, 2013.
Guidance, Outlook, Risks, and Unusual Items
Management expected R&D and G&A expenses to be higher for full-year 2013 than in 2012, largely because of increased stock compensation, although clinical and certain manufacturing costs were expected to decline after completion of the Phase 3 studies. Operating cash flow was expected to remain negative until AFREZZA received approval and was commercialized.
The filing states that substantial doubt existed about the company’s ability to continue as a going concern. The $115.0 million 2013 notes were due December 15, 2013, while cash at September 30 was insufficient to repay them. Management expected a $40.0 million third Deerfield tranche, together with available resources and subsequent warrant proceeds, to support repayment and planned operations into at least the first quarter of 2014. The filing provided no assurance that the tranche would fund or that additional capital would be available.
Subsequent events disclosed in the filing included $45.0 million of October 2012 warrant exercise proceeds and cancellation of $78.0 million of Mann Group principal through exercise of Mann Group warrants. On October 31, 2013, the Mann Group facility maturity was extended to January 5, 2020, the borrowing period was extended through December 31, 2019, and the facility size was increased to $370.0 million. These events occurred after the reporting date and are not reflected in the September 30 balance sheet except where required by the filing’s subsequent-event disclosures.
- AFREZZA remained subject to FDA review, and the FDA could require additional studies, impose restrictive labeling, or decline approval.
- The Deerfield financing is secured by substantially all material assets, including intellectual property and certain facilities. It includes restrictions on additional debt and a quarterly liquidity covenant requiring cash and available Mann Group borrowings of at least $25.0 million.
- The Deerfield agreement includes milestone rights requiring payments of up to $90.0 million upon specified AFREZZA strategic and sales milestones, including first commercial sale and specified net sales.
- MannKind had no product commercialization or established sales and marketing collaboration, and stated that it would need additional financing, collaboration proceeds, licensing, asset sales, or other funding sources.
- Key risks include regulatory approval and clinical sufficiency, manufacturing scale-up and inspections, competition, intellectual-property disputes, reimbursement and market acceptance, debt repayment and covenant compliance, and substantial potential dilution from warrants and convertible securities.
Important Facts for Investors to Verify
- Whether the FDA accepted the AFREZZA resubmission and the outcome of the April 15, 2014 PDUFA review.
- Whether the third and fourth Deerfield tranches funded, and the terms and timing of repayment or refinancing of the 2013 notes.
- Post-quarter-end warrant exercises, Mann Group warrant settlement, share count, and resulting dilution.
- Actual cash burn, liquidity covenant compliance, and availability under the amended Mann Group facility.
- Potential milestone obligations of up to $90.0 million and the conditions triggering those payments.
- Whether MannKind secured a commercialization partner and obtained sufficient capital to fund AFREZZA development and potential launch activities.