MannKind Corporation 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2014. MannKind was a development-stage biopharmaceutical company focused on diabetes therapies. AFREZZA, its lead inhaled insulin product, received FDA approval on June 27, 2014, but had not yet been commercialized.
The Sanofi license and collaboration agreement became effective on September 23, 2014. Sanofi assumed global commercial, regulatory and development responsibilities, while MannKind retained manufacturing responsibilities and a 35% share of worldwide AFREZZA profits and losses.
Financial Metrics
| Metric | Q3 2014 | Q3 2013 | Nine Months 2014 | Nine Months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $38.3 million | $44.8 million | $149.5 million | $122.8 million |
| Net loss | $36.5 million | $50.8 million | $161.9 million | $137.9 million |
| Net loss per share | $0.09 | $0.17 | $0.42 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $39.8 million | $(94.7) million |
No revenue or meaningful operating margin was generated. The nine-month operating loss was $149.5 million, equivalent to an operating margin that is not meaningful because revenue was zero. The cumulative net loss since inception was $2.5 billion.
- Research and development expense was $19.2 million in the quarter, down 30%, and $82.7 million for the nine months, up 2%. The nine-month increase reflected commercial-readiness and manufacturing spending, partly offset by completed Phase 3 clinical studies.
- General and administrative expense was $19.1 million in the quarter, up 9%, and $66.8 million for the nine months, up 59%, driven primarily by Sanofi transaction-related professional fees and stock-based compensation.
- Cash and cash equivalents were $172.5 million at September 30, 2014, compared with $70.8 million at December 31, 2013.
- Total assets were $386.8 million and stockholders’ deficit was $40.7 million at September 30, 2014.
- Property and equipment, net, was $190.9 million, including $36.2 million of construction in progress.
Debt and Liquidity
- The $100.0 million principal amount of 5.75% senior convertible notes was classified as current and matures August 15, 2015; its carrying value was $99.1 million.
- Outstanding principal under the Facility Agreement totaled $80.0 million: $60.0 million of 2019 notes at 9.75% and $20.0 million of Tranche B notes at 8.75%. The carrying value of the facility financing obligation was $72.6 million.
- The related-party Mann Group loan had $49.5 million outstanding, with $30.1 million available for future borrowings.
- The Sanofi Loan Facility provided up to $175.0 million of secured financing at 8.5% interest, payable in kind, to fund MannKind’s share of Sanofi-related losses. No borrowings had been made as of September 30, 2014.
- Management believed existing cash and available debt financing would fund operating needs for at least the next twelve months, but stated that additional capital may be required. Operating cash flow is expected to remain negative until AFREZZA commercialization.
Material Changes Versus Prior Period
- Cash increased by $101.7 million from year-end 2013, primarily reflecting the $150.0 million Sanofi up-front payment, debt and equity financing, and warrant and option exercises, partially offset by operating and investing uses.
- Nine-month operating cash flow improved by $134.5 million from the prior year, but this was primarily a non-recurring working-capital benefit from recording the Sanofi payment as deferred consideration. MannKind also paid a $15.0 million deposit for 2015 insulin quantities.
- Investing cash use increased to $9.9 million from $1.8 million, primarily because of $19.1 million of manufacturing equipment purchases, partly offset by $9.3 million from an intellectual-property sale.
- Deerfield converted $100.0 million of 2019 notes into 18.6 million common shares. Common shares outstanding increased to approximately 405.5 million at September 30, 2014 from 369.4 million at year-end 2013.
- Quarterly net loss improved largely because of credits related to the settlement of modified performance-based stock awards and $7.9 million of net income from the intellectual-property sale. Nine-month net loss increased because of higher operating expenses and commercial-readiness spending.
Outlook, Unusual Items, and Risks
- The $150.0 million Sanofi up-front payment was recorded as a deferred liability rather than revenue because the consideration was not considered fixed and determinable under the loss-sharing arrangement. No Sanofi milestones had been achieved by September 30, 2014; potential milestone payments totaled up to $775.0 million.
- Management expected AFREZZA commercialization to begin in the first quarter of 2015 and anticipated higher 2014 research and development expenses due to launch preparation and stock compensation.
- MannKind entered into a supply agreement requiring annual minimum insulin purchases totaling approximately €120.1 million for calendar years 2015 through 2019. Certain termination scenarios could require accelerated payment of unpaid purchase commitments.
- The first Deerfield milestone event was triggered by the Sanofi agreement. A $5.0 million payment was made after September 30, 2014, and the company recorded $1.9 million of incremental interest expense.
- Key risks include dependence on successful AFREZZA commercialization, Sanofi performance and continuation of the collaboration, manufacturing scale-up, supply availability, reimbursement and market acceptance, post-marketing safety studies, patent challenges, substantial debt, potential dilution, and the need for additional financing.
- The Facility Agreement requires cash and available Mann Group borrowings of at least $25.0 million at each quarter-end and is secured by significant company assets. Defaults could permit acceleration and enforcement against pledged assets.
- Management stated that failure to achieve planned results or obtain financing could require reduced expenditures and could create substantial doubt about the company’s ability to continue as a going concern.
Important Facts for Investors to Verify
- Timing and commercial execution of the planned first-quarter 2015 AFREZZA launch.
- Whether AFREZZA achieves physician, patient, payer and regulatory acceptance, including required post-marketing safety studies.
- Recognition and eventual economic value of the $150.0 million deferred Sanofi payment and potential milestone payments.
- Cash burn after commercialization begins, use of the Sanofi Loan Facility, and the company’s ability to refinance or repay the $100.0 million notes due in August 2015.
- Ability to satisfy the €120.1 million insulin purchase commitment and scale Danbury manufacturing capacity.
- Compliance with debt covenants, including the $25.0 million minimum liquidity requirement, and the potential impact of additional equity issuance or debt conversion on dilution.