MannKind Corporation Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 11, 2014. MannKind remained a development-stage biopharmaceutical company with no product revenue. Its lead product, AFREZZA inhaled insulin, received FDA approval on June 27, 2014, but commercialization had not begun by June 30.
Financial Results and Position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $37.3 million | $27.1 million | $63.5 million | $53.5 million |
| General and administrative expense | $32.5 million | $14.5 million | $47.8 million | $24.6 million |
| Total operating expenses | $69.8 million | $41.6 million | $111.3 million | $78.0 million |
| Net loss | $73.4 million | $46.1 million | $125.4 million | $87.1 million |
| Net loss per share | $0.19 | $0.16 | $0.33 | $0.31 |
| Cash used in operating activities | Not separately provided | Not separately provided | $60.4 million | $61.8 million |
Because revenue was zero, gross and operating margins were not meaningful. Cumulative net loss since inception was $2.4 billion, including $1.8 billion of cumulative negative operating cash flow.
- Cash and cash equivalents were $41.2 million at June 30, 2014, down from $70.8 million at December 31, 2013.
- Total assets were $236.3 million, including $183.5 million of net property and equipment.
- Stockholders’ deficit was $46.4 million, compared with a $30.7 million deficit at year-end 2013.
- Accounts payable and accrued liabilities totaled $25.7 million, excluding financing obligations.
- Total liabilities were $282.7 million.
- Net financing cash inflow was $40.5 million, primarily from $20.0 million of Tranche B notes, $14.1 million of warrant exercises and $6.5 million of option exercises.
Material Changes Versus Prior Comparable Period
- Q2 net loss increased 59% to $73.4 million from $46.1 million; six-month net loss increased 44% to $125.4 million from $87.1 million.
- Q2 research and development expense increased 38%, primarily from higher stock-based compensation and commercialization-related manufacturing spending. Clinical expense declined following completion of two Phase 3 studies in 2013.
- Q2 general and administrative expense increased 124%, primarily because of stock-based compensation.
- Six-month stock-based compensation expense rose to $51.6 million from $15.4 million. A June 30 modification of performance-based restricted stock units caused a $35.9 million reclassification and remeasurement charge.
- Operating cash use was broadly stable year over year, but investing cash use increased to $9.7 million from $1.6 million, largely for machinery and equipment supporting AFREZZA commercialization.
- Deerfield conversions reduced the carrying value of the facility financing obligation from $102.3 million at December 31, 2013 to $37.7 million at June 30, 2014, while increasing common shares outstanding to 394.0 million from 369.4 million.
Debt, Liquidity, Outlook and Risks
- At June 30, debt principal included $100.0 million of 5.75% convertible notes due August 2015, $20.0 million of 9.75% 2019 notes, $20.0 million of 9.75% Tranche B notes and $49.5 million owed under the related-party Mann Group loan arrangement. The filing reports $98.9 million of carrying value for the 2015 notes and $37.7 million for the facility financing obligation.
- The Mann Group loan had $30.1 million of available borrowing capacity, subject to mutual agreement for certain interest capitalization. The facility financing agreement required cash and available loan borrowings of at least $25.0 million at each quarter-end.
- Management stated that existing resources were expected to fund planned operations at least into the first quarter of 2015, excluding payments under the later Sanofi collaboration. The filing nevertheless reported substantial doubt about the Company’s ability to continue as a going concern.
- Management expected continued operating losses and negative operating cash flow while preparing for AFREZZA commercialization and expanding manufacturing capacity.
- After quarter-end, Deerfield purchased the final $40.0 million tranche of 2019 notes on July 18, 2014.
- On August 11, 2014, MannKind entered into a Sanofi license and collaboration agreement providing for a $150.0 million upfront payment, up to $775.0 million of potential milestones, and a 65%/35% sharing of worldwide profits and losses in favor of Sanofi. The related secured Sanofi loan facility could provide up to $175.0 million to fund MannKind’s share of losses, subject to conditions and final documentation.
- On July 31, 2014, MannKind entered into an insulin supply agreement requiring minimum purchases of approximately €120.1 million over 2015–2019. Certain termination scenarios could accelerate unpaid purchase commitments.
- Key risks include dependence on successful AFREZZA commercialization, market acceptance and reimbursement, manufacturing scale-up and supply reliability, post-marketing safety studies, regulatory requirements, intellectual-property disputes, debt maturities and covenants, dilution, and the ability to obtain additional capital.
Important Facts for Investors to Verify
- Whether the Sanofi license and supply agreements became effective after satisfaction of antitrust and financing conditions, and whether the $150.0 million upfront payment was received.
- The timing, terms and actual utilization of the Sanofi secured loan facility and any additional Tranche B borrowings.
- AFREZZA launch timing, prescription demand, reimbursement, manufacturing capacity and resulting product revenue.
- Liquidity relative to the $100.0 million 2015 notes maturity and the Facility Agreement’s $25.0 million minimum liquidity covenant.
- The financial effect of the €120.1 million minimum insulin purchase commitment and any related termination obligations.
- Progress and results of FDA-required post-marketing studies, particularly the long-term pulmonary malignancy and pulmonary-function study.
- Potential dilution from convertible notes, warrants, options, restricted stock units and the outstanding share count, which was 402.4 million as of August 4, 2014.