MannKind Corporation — Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on inhaled therapies. Its only approved product is Afrezza, an inhaled insulin marketed in the United States through its specialty sales force. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
The company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method, changing Afrezza wholesale revenue recognition from a sell-through model to a sell-to model. The adoption increased opening accumulated deficit by approximately $1.9 million.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $3.9 million | $2.2 million | $7.4 million | $5.2 million |
| Afrezza commercial sales | $3.8 million | $1.5 million | $7.2 million | $2.7 million |
| Cost of goods sold | $5.1 million | $5.1 million | $9.1 million | $7.6 million |
| Research and development | $3.0 million | $3.1 million | $5.6 million | $6.3 million |
| Selling, general and administrative | $21.7 million | $18.6 million | $42.3 million | $34.0 million |
| Loss from operations | $(20.5) million | $(31.6) million | $(47.3) million | $(51.2) million |
| Net loss | $(22.7) million | $(35.3) million | $(53.1) million | $(51.7) million |
| Net loss per share | $(0.16) | $(0.35) | $(0.41) | $(0.53) |
| Operating cash flow | Not separately provided | Not separately provided | $(48.8) million | $(11.5) million |
Q2 Afrezza sales increased 142% year over year, while six-month Afrezza sales increased 161%. Gross-to-net deductions were substantial: approximately 44% of gross product sales in Q2 and 40% for the six-month period. Based on reported revenue and cost of goods sold, gross margin was approximately negative 31% in Q2 and negative 24% for the six months. Operating margins were approximately negative 527% and negative 643%, respectively.
At June 30, 2018, cash and cash equivalents were $26.2 million, restricted cash was $0.5 million, and total assets were $62.2 million. Total liabilities were $268.8 million and stockholders’ deficit was $206.6 million. Principal debt was approximately $129.2 million, with net carrying value of total debt of $129.4 million. The company had an accumulated deficit of approximately $2.9 billion.
Financing activities provided $27.2 million during the first six months, including approximately $26.4 million of net proceeds from an April registered offering of common stock and warrants. Cash and restricted cash declined from $48.4 million at December 31, 2017 to $26.7 million at June 30, 2018.
Material changes versus the prior comparable period
- Commercial Afrezza revenue increased significantly, driven by higher demand and price increases, but gross-to-net deductions also increased due primarily to rebates, chargebacks, wholesaler discounts and estimated product returns.
- Total revenue increased 80% in Q2 and 42% for the six months. The comparison benefited from the absence of 2017 one-time other revenue, including bulk insulin sales and a $0.6 million intellectual-property sale.
- Q2 net loss improved by $12.7 million, primarily because of favorable foreign-currency effects and lower interest expense. Six-month net loss increased by $1.4 million, reflecting sharply higher operating cash use and the absence of a 2017 warrant fair-value gain.
- Selling, general and administrative expense increased 17% in Q2 and 25% for the six months, including higher headcount, relocation, consulting and stock-based compensation costs.
- Research and development expense declined 5% in Q2 and 10% for the six months.
- Debt was reduced through equity exchanges. In May 2018, $5.0 million of 2021 notes was exchanged for 2.25 million shares. In June, $6.0 million of Deerfield notes was exchanged for approximately 3.1 million shares.
- Common shares outstanding increased to 145.6 million at June 30, 2018 from 119.1 million at December 31, 2017, with additional dilution possible from convertible debt, warrants, options and equity offerings.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. The company expects continued spending on Afrezza manufacturing, sales and marketing, and development of its pipeline, including Treprostinil Technosphere. It expects to seek foreign commercialization partners and entered into an exclusive India distribution agreement with Cipla in May 2018, receiving a $2.2 million nonrefundable license fee recognized over 15 years.
Management states that current cash and financing sources are insufficient for current and anticipated requirements. The filing includes substantial doubt about the company’s ability to continue as a going concern. Additional capital may be pursued through equity or debt offerings, collaborations, licensing transactions, asset sales or other funding arrangements, but availability and terms are uncertain.
- The Deerfield facility agreement required at least $20.0 million of cash and cash equivalents at quarter-end through 2018 and $25.0 million thereafter. The company reported compliance at June 30, 2018.
- On July 12, 2018, after quarter-end, Deerfield received 7.4 million shares in exchange for cancellation of $12.0 million of notes and the deferral of an additional $3.0 million payment to August 31, 2018. The amendment reduced the conversion price floor from $2.01 to $1.80 per share and reduced the maximum remaining conversion shares to 5.75 million.
- The company has remaining insulin purchase commitments of €85.8 million through 2023 under its Amphastar agreement, including €4.4 million for 2018. A recognized loss on purchase commitments was $101.5 million at June 30, 2018.
- The company estimates that up to $75.0 million remains payable under milestone rights tied to specified commercialization and sales milestones; approximately $8.8 million was recorded as the liability at June 30, 2018.
- Afrezza remains subject to post-approval regulatory obligations, including an FDA-required long-term trial evaluating potential pulmonary malignancy risk. The filing states that no subjects had been enrolled in this trial as of the filing date.
- Risks include limited cash, high leverage, potential defaults or acceleration, dependence on Afrezza commercialization, pricing and reimbursement pressure, regulatory requirements, manufacturing and insulin supply dependence, product liability, intellectual-property disputes and potential equity dilution.
- A securities class-action matter in Israel remains pending on jurisdictional issues; management believes existing legal matters are not expected to have a material adverse effect, although no assurance is provided.
Facts investors should verify
- Afrezza prescription and demand trends, gross-to-net deductions, pricing, reimbursement and product-return assumptions.
- Cash burn, capital-raising plans and compliance with the Deerfield minimum-cash covenant.
- Ability to meet or refinance 2019 and 2021 debt obligations and the effect of further debt-for-equity exchanges.
- Potential dilution from convertible notes, warrants, options, equity sales and related-party debt conversions.
- Progress and enrollment in the required Afrezza post-approval safety trial and foreign regulatory submissions.
- Amphastar insulin purchase commitments, foreign-exchange exposure and the $101.5 million recognized purchase-commitment loss.
- Timing and probability of Afrezza-related milestone payments and any material developments in the Israeli securities litigation.