MannKind Corporation 2011 Q2 Form 10-Q Summary
Business context and reporting period
MannKind is a development-stage biopharmaceutical company focused on diabetes and cancer therapies. Its lead candidate, AFREZZA, is an inhaled ultra-rapid-acting insulin using the Technosphere platform. The filing covers the quarter and six months ended June 30, 2011, and was filed August 4, 2011.
AFREZZA had not received FDA approval. Following a January 2011 Complete Response letter, the FDA requested two additional Phase 3 studies using the next-generation inhaler, including comparative pulmonary-safety data. MannKind expected to meet with the FDA on August 10, 2011 regarding final study protocols.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 | |
| Revenue | $0.0 million | $0.1 million | $0.1 million | $0.1 million |
| Research and development expense | $30.3 million | $26.2 million | $56.6 million | $56.7 million |
| General and administrative expense | $8.9 million | $11.2 million | $20.7 million | $21.3 million |
| Loss from operations | $(39.2) million | $(37.3) million | $(77.2) million | $(77.9) million |
| Net loss | $(44.5) million | $(42.3) million | $(86.0) million | $(87.0) million |
| Net loss per share | $(0.37) | $(0.37) | $(0.71) | $(0.77) |
| Net cash used in operations | Not separately provided | Not separately provided | $(67.4) million | $(74.8) million |
Revenue-based margins are not meaningful because the company generated essentially no revenue. Cumulative net loss since inception was $1.9 billion, including a historical $151.4 million goodwill impairment charge, and cumulative negative operating cash flow was $1.4 billion.
- Cash and cash equivalents were $24.8 million at June 30, 2011, compared with $66.1 million at December 31, 2010.
- Marketable securities were $0.5 million, resulting in total cash, cash equivalents and marketable securities of $25.3 million.
- Total assets were $228.4 million and stockholders’ deficit was $245.4 million.
- Senior convertible notes had a carrying value of $210.0 million, consisting of $115.0 million due in 2013 and $100.0 million due in 2015.
- Debt owed under the related-party loan arrangement was $242.2 million, with $80.0 million of additional borrowing capacity available. The loan matures December 31, 2012 and bears interest based on one-year LIBOR plus 3%.
- Cash interest paid during the first six months was $10.1 million.
Material changes versus the prior comparable period
- Second-quarter research and development expense increased 16% to $30.3 million, primarily because of $8.0 million paid under the Organon settlement, including $4.3 million for insulin and $3.7 million for a contract cancellation fee.
- Six-month research and development expense was essentially unchanged because higher manufacturing and restructuring costs were offset by lower stock compensation, salary costs and other spending.
- Second-quarter general and administrative expense declined 21% to $8.9 million; six-month expense declined 3% to $20.7 million.
- Interest expense increased by $1.6 million for the quarter and $3.2 million for the six-month period, primarily due to the August 2010 issuance of $100.0 million of 5.75% senior convertible notes due 2015.
- Operating cash burn improved to $67.4 million in the first six months from $74.8 million in the prior-year period, but cash declined by $41.3 million during the period.
- In February 2011, the company reduced its workforce by approximately 41% to 257 employees. Six-month restructuring costs were approximately $6.4 million, and $0.9 million remained accrued at June 30.
- During the first quarter, MannKind sold 1.4 million shares to Seaside for $9.7 million and issued 1.4 million shares to The Mann Group, reducing related-party debt by $11.1 million. No such shares were sold in the second quarter.
Guidance, outlook, risks and unusual items
- Management expected existing capital resources, including available related-party borrowings, to fund planned operations into the first quarter of 2012. Management stated that substantial additional financing would be required and that failure to obtain it would create substantial doubt about the company’s ability to continue as a going concern.
- Management expected research and development expense to increase in 2011 as additional FDA-requested AFREZZA trials were initiated, while general and administrative expense was expected to decline because of the smaller workforce.
- MannKind had not reached a strategic collaboration agreement for AFREZZA despite discussions with pharmaceutical companies. Potential funding sources included equity or debt issuance, collaborations, licensing, asset sales and additional related-party borrowings.
- The Organon settlement required aggregate payments of $16.0 million in two installments. The second $8.0 million installment, including a $3.9 million contract-cancellation component accrued at June 30, was paid in July 2011.
- Material regulatory risk remains: the FDA could reject MannKind’s proposed protocols or require additional studies, delaying or preventing approval of AFREZZA.
- The company disclosed securities class actions, shareholder derivative actions and an employment-related arbitration. Damages sought in the shareholder matters were unspecified, and the company stated that it intended to defend the claims vigorously.
- Potential dilution remains from convertible notes, stock awards, the share-lending arrangement and the Seaside and Mann Group stock purchase agreements.
Important facts for investors to verify
- Whether the FDA accepted the proposed designs for the additional AFREZZA Phase 3 studies and what further regulatory requirements were imposed.
- Actual cash burn, available borrowing capacity and financing completed after June 30, 2011.
- Whether AFREZZA development and manufacturing plans remained adequately funded beyond the stated first-quarter 2012 cash runway.
- The status and potential financial exposure of the securities class actions, derivative litigation and employment arbitration.
- Payment and accounting treatment of the remaining Organon settlement obligation.
- Potential dilution from the $210.0 million of senior convertible notes, stock-based awards and remaining equity-sale commitments.