MannKind Corporation — FY2018 Form 10-K Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on inhaled therapies. Its only approved product is Afrezza, an inhaled rapid-acting insulin marketed in the United States. The company also develops the Technosphere inhalation platform and related candidates, including inhaled treprostinil (TreT). This Form 10-K covers the fiscal year ended December 31, 2018; quarterly data identifies the fourth quarter ended December 31, 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $27.9 million | $11.7 million | Up 137% |
| Afrezza net product revenue | $17.3 million | $9.2 million | Up 88% |
| Collaboration and services revenue | $10.6 million | $0.3 million | Up $10.3 million |
| Loss from operations | $76.6 million | $108.2 million | Improved $31.6 million |
| Net loss | $87.0 million | $117.3 million | Improved $30.4 million |
| Net loss per share | $0.60 | $1.13 | Improved |
| Cash used in operating activities | $37.7 million | $64.8 million | Improved $27.0 million |
Reported fourth-quarter 2018 revenue was $16.0 million and net loss was $9.7 million. Fourth-quarter revenue was substantially higher than the first three quarters, principally reflecting collaboration-related revenue and the United Therapeutics arrangements.
Gross revenue from Afrezza sales was $30.2 million, reduced by $13.0 million of distribution fees, rebates, chargebacks, returns and other discounts. Cost of goods sold was $19.4 million, and collaboration-services costs were $1.1 million. On a consolidated basis, revenue less these costs was approximately $7.4 million, or approximately 26.5% of revenue; the filing does not present this as a formal consolidated gross margin.
Cash and cash equivalents were $71.2 million at December 31, 2018, with restricted cash of $0.5 million. Total assets were $107.7 million, total liabilities were $282.8 million, and stockholders’ deficit was $175.1 million. Accumulated deficit was approximately $2.9 billion.
Principal outstanding debt totaled $101.7 million, consisting primarily of $18.7 million of 5.75% senior convertible notes due 2021, $11.5 million of Facility Financing Obligation notes due in 2019, and $71.5 million under The Mann Group Loan Arrangement due in 2021. The company also reported $98.3 million of remaining insulin purchase commitments and up to $75.0 million of contingent milestone payments.
Material changes versus the prior comparable period
- Afrezza net product revenue increased 88%, driven by higher demand, price increases and product mix. Gross product revenue increased 141%.
- The company adopted ASC Topic 606 using the modified retrospective method and changed Afrezza wholesale revenue recognition from a sell-through model to a sell-to model. The adoption reduced opening accumulated deficit by $1.7 million and eliminated net deferred revenue related to commercial product sales.
- Collaboration and services revenue increased primarily from United Therapeutics and Cipla arrangements. The company recognized $6.4 million under the United Therapeutics license agreement and $3.8 million under the related research agreement.
- Operating loss narrowed as total expenses declined 13% to $104.5 million. Research and development expense declined 38% to $8.7 million, while selling expense increased 3% to $47.4 million and general and administrative expense increased 12% to $32.3 million.
- Foreign-currency results improved from a $13.6 million loss in 2017 to a $4.5 million gain in 2018, primarily due to the U.S. dollar/Euro exposure under the insulin supply agreement.
- The company raised substantial equity capital, including approximately $26.4 million of net proceeds in an April 2018 offering and approximately $37.5 million in a December 2018 offering. It also issued shares to convert or reduce debt.
- Shares outstanding increased from approximately 119.1 million at December 31, 2017 to 187.0 million at December 31, 2018, indicating significant dilution.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. Management expects continued spending on Afrezza manufacturing, sales and marketing, collaboration work and pipeline development, and states that additional capital will be required.
The audited financial statements include an explanatory paragraph stating that available cash resources and continuing cash needs raise substantial doubt about the company’s ability to continue as a going concern. Management expects to pursue equity or debt financing, collaborations, licensing transactions, asset sales or other funding sources. Failure to obtain financing could require reduced commercialization activities, delayed or curtailed development programs, asset sales, restructuring, bankruptcy protection or cessation of operations.
Afrezza commercialization remains the principal operating dependency. Risks include limited market acceptance, reimbursement and pricing pressure, competition from injectable and other inhaled insulin products, manufacturing and single-source insulin supply risk, regulatory compliance, and the required FDA post-approval trial evaluating potential pulmonary malignancy. The company had not enrolled subjects in that long-term trial as of the filing date and had not finalized the study design with the FDA.
In September 2018, United Therapeutics obtained global development, regulatory and commercial responsibility for TreT. MannKind received a $45.0 million upfront payment, may receive up to $50.0 million of development milestones, and is entitled to low double-digit royalties on net sales. A separate United Therapeutics research agreement included a $10.0 million upfront payment. Much of these upfront payments remained deferred at year-end.
Other unusual items include a $2.2 million inventory write-off, a $2.0 million fee for amending the insulin supply agreement, $6.9 million of stock-based compensation, and a $0.7 million loss on extinguishment of debt. The FDA issued an October 2018 warning letter concerning an Afrezza social-media post that allegedly failed to adequately disclose risks; MannKind deactivated its Afrezza social-media accounts and responded to the FDA.
The company is defending an Israeli securities class-action certification proceeding related to statements concerning Afrezza. Management believes ordinary-course legal matters will not materially affect financial position, results or cash flows, but an adverse outcome in the securities litigation could materially affect the company.
Investor verification checklist
- Verify the company’s near-term liquidity, financing plans and compliance with the Deerfield cash covenant requiring at least $25.0 million of cash and cash equivalents after December 31, 2018.
- Assess Afrezza prescription growth, gross-to-net deductions, reimbursement access, inventory levels and the sustainability of the reported revenue increase.
- Review the timing and funding requirements for the FDA-mandated pulmonary malignancy trial and any resulting regulatory or labeling consequences.
- Confirm the maturity, conversion terms and secured status of the debt, particularly the $11.5 million Facility Financing Obligation due in 2019 and the $71.5 million Mann Group obligation due in 2021.
- Evaluate dilution from the 2018 equity offerings, outstanding warrants, convertible debt, options and additional shares potentially issuable under related-party debt.
- Review deferred collaboration payments, United Therapeutics milestone conditions, manufacturing obligations and the related royalty economics.
- Monitor the $85.8 million Euro-denominated insulin purchase commitment, foreign-exchange sensitivity and dependence on Amphastar as the only qualified insulin supplier.
- Follow the FDA warning letter, securities litigation and any future regulatory, product-liability or intellectual-property developments.