MannKind Corporation 2013 Form 10-K Summary
Business context and reporting period
MannKind is a development-stage biopharmaceutical company focused on diabetes therapies and proprietary Technosphere drug-delivery technology. Its lead candidate, AFREZZA, is an ultra-rapid-acting inhaled insulin delivered through the Gen2 inhaler. The filing covers the fiscal year ended December 31, 2013, including fourth-quarter results, and was filed March 3, 2014.
AFREZZA had not been approved or commercialized. MannKind resubmitted its AFREZZA NDA to the FDA in October 2013 after completing two Phase 3 studies. The FDA advisory committee meeting was scheduled for April 1, 2014, with an FDA action target of April 15, 2014.
Financial and operating metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $0 | $35,000 | Declined to zero |
| Research and development expense | $109.7 million | $101.5 million | Up 8% |
| General and administrative expense | $59.7 million | $45.5 million | Up 31% |
| Total operating expenses | $169.4 million | $147.0 million | Up 15% |
| Loss from operations | $169.4 million | $147.0 million | Higher loss |
| Net loss | $191.5 million | $169.4 million | Higher loss |
| Basic and diluted loss per share | $0.64 | $0.94 | Improved due to share issuance |
| Cash used in operating activities | $128.7 million | $119.9 million | Use increased $8.9 million |
| Cash used in investing activities | $8.0 million | $0.6 million | Higher capital spending |
| Cash provided by financing activities | $145.7 million | $179.6 million | Lower financing proceeds |
| Cash and cash equivalents at year-end | $70.8 million | $61.8 million | Increased $9.0 million |
2013 research and development expense included $20.4 million of stock-based compensation, compared with $6.2 million in 2012. General and administrative expense included $24.8 million of stock-based compensation, compared with $7.1 million in 2012. Excluding the effect of increased stock compensation, clinical spending declined following completion of the Phase 3 studies.
The company reported $258.6 million of total assets and a $30.7 million stockholders’ deficit at December 31, 2013. Long-lived assets totaled $176.6 million. No product margins or operating margins were meaningful because the company had no product revenue.
Debt, liquidity, and capital resources
- Outstanding debt included $100.0 million of 5.75% senior convertible notes due August 2015 and $113.5 million of 9.75% 2019 notes outstanding after $6.5 million was converted into equity in December 2013.
- The company repaid the $115.0 million principal amount of its 3.75% 2013 notes at maturity in December 2013.
- Debt under the Deerfield Facility Agreement was secured by substantially all company assets, including intellectual property, inventory, equipment, and certain real estate.
- The Mann Group loan had $49.5 million outstanding at year-end, $30.1 million available for future borrowing, a stated interest rate of 5.84%, and a maturity date extended to January 5, 2020.
- 2013 financing included $119.5 million from the Deerfield facility and Milestone Rights, $94.2 million from warrant exercises, and $48.9 million of net proceeds from prior at-the-market equity sales.
- Management stated that existing capital resources were expected to support planned operations only into at least the third quarter of 2014. The auditor’s report and financial statements included an explanatory paragraph regarding substantial doubt about the company’s ability to continue as a going concern.
Material changes versus the prior comparable period
- Revenue fell from $35,000 in 2012 to zero in 2013 because AFREZZA remained unapproved and uncommercialized.
- Net loss increased from $169.4 million to $191.5 million, primarily reflecting higher operating expenses and materially higher stock-based compensation.
- Operating cash use increased from $119.9 million to $128.7 million.
- Capital spending increased to $8.0 million, largely for manufacturing equipment and quality-system expansion supporting potential AFREZZA commercialization.
- The company completed two Phase 3 AFREZZA studies. Study 171 established non-inferiority to insulin aspart in type 1 diabetes; Study 175 showed statistical superiority to comparator oral therapy in type 2 diabetes.
- Common shares outstanding increased from approximately 286.0 million at year-end 2012 to 369.4 million at year-end 2013, reflecting equity issuance, warrant exercises, and debt conversion.
- The company issued milestone rights with potential payments of up to $90.0 million tied to AFREZZA commercialization and sales milestones.
Guidance, outlook, commentary, and risks
Management expected research and development expense to increase in 2014 because of preparation for AFREZZA commercialization, and general and administrative expense to increase because of higher stock compensation. Management was seeking a pharmaceutical partner for AFREZZA but had not entered into a commercialization agreement.
AFREZZA’s clinical results were favorable on the reported endpoints, but the filing cautioned that the data might not be sufficient for approval and that the FDA could request additional studies or impose restrictive labeling. Cough was a common adverse event, and type 2 patients experienced more mild and moderate hypoglycemia than the comparator group.
- Liquidity and going-concern risk: the company expected continuing negative operating cash flow and required additional capital, collaboration proceeds, licensing proceeds, asset sales, or additional debt or equity financing.
- Debt and covenant risk: the Deerfield facility included a minimum liquidity covenant of $25.0 million, secured substantially all assets, and could permit acceleration upon defaults.
- Regulatory risk: AFREZZA was a drug-device combination product subject to multiple FDA review groups, manufacturing inspections, and continuing regulatory requirements.
- Commercialization risk: MannKind had no established pharmaceutical sales or distribution capabilities and depended on a partner or costly internal buildout.
- Supply and manufacturing risk: commercial-scale production had not yet been demonstrated, and the company depended on suppliers for insulin, inhalers, cartridges, and other materials.
- Intellectual-property risk: the company identified third-party patents that could lead to infringement claims involving pulmonary insulin delivery.
- Financing and dilution risk: additional equity issuance, debt conversion, warrant exercise, or future financing could dilute existing stockholders.
Subsequent events
- In January 2014, Deerfield converted an additional $33.5 million of 2019 notes, resulting in 6,559,251 shares issued and full conversion of the $40.0 million Tranche 2 notes into 7,852,475 shares in aggregate.
- On February 28, 2014, the company amended the Deerfield facility to permit potential Tranche B notes and additional conversions of up to $60.0 million of 2019 notes, subject to conditions.
- On March 3, 2014, MannKind established ATM agreements permitting up to $50.0 million of aggregate common-stock sales; no shares had been sold under those agreements as of the filing date.
Investor verification checklist
- Verify the FDA’s decision, labeling, and any post-approval requirements for AFREZZA.
- Assess cash burn, available borrowing capacity, minimum-liquidity covenant compliance, and the timing and terms of additional financing.
- Review the maturity, conversion, security, and acceleration provisions of the 2015 notes, 2019 notes, and any Tranche B notes.
- Monitor share-count growth, Deerfield conversions, warrant exercises, and potential dilution from equity financing.
- Confirm whether MannKind secures a commercialization partner and the economics of any collaboration.
- Evaluate commercial manufacturing readiness, supplier concentration, and FDA inspection outcomes.
- Review contingent milestone payments of up to $90.0 million and potential intellectual-property litigation exposure.