MannKind Corporation: Q3 2019 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 primarily in the United States. The company also develops inhaled products using its Technosphere platform and has collaboration arrangements, including with United Therapeutics.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the same periods in 2018. The company had 206.4 million common shares outstanding as of October 31, 2019.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $14.6 million | $4.5 million | $47.0 million | $11.8 million |
| Afrezza commercial sales | $6.4 million | $4.4 million | $17.5 million | $11.5 million |
| Collaboration and services revenue | $8.2 million | $0.1 million | $29.5 million | $0.2 million |
| Loss from operations | $(8.8) million | $(21.5) million | $(33.2) million | $(68.9) million |
| Net loss | $(10.4) million | $(24.2) million | $(37.6) million | $(77.2) million |
| Net loss per share | $(0.05) | $(0.16) | $(0.20) | $(0.56) |
| Net cash used in operations | Not separately provided | Not separately provided | $(83.4) million | $(62.7) million |
Afrezza commercial product gross profit was $(0.7) million in Q3 2019 versus $(0.9) million in Q3 2018. For the nine months, commercial product gross profit was $2.1 million versus $(2.9) million. Management reported non-GAAP Afrezza gross profit of $2.1 million for Q3 and $4.9 million for nine months, excluding a $2.8 million Amphastar insulin-supply agreement amendment fee.
Gross-to-net deductions on Afrezza were approximately 41% of gross product revenue in both Q3 and the first nine months of 2019, compared with approximately 47% and 43%, respectively, in the comparable 2018 periods.
Liquidity, balance sheet and debt
- Cash and cash equivalents were $30.2 million at September 30, 2019, down from $71.2 million at December 31, 2018.
- Short-term investments were $19.9 million, and restricted cash was $0.3 million.
- Total assets were $95.1 million; total liabilities were $279.8 million; and stockholders’ deficit was $(184.7) million.
- Principal debt outstanding was $120.1 million, with carrying-value debt of $118.8 million. The company also reported $89.5 million of liabilities related to recognized losses on insulin purchase commitments.
- The August 2019 recapitalization replaced the Deerfield facility with a $75.0 million MidCap secured credit facility, of which $40.0 million was drawn at quarter-end. The remaining $35.0 million is conditional on Afrezza revenue and United Therapeutics milestones.
- Other principal obligations included $70.1 million of Mann Group notes, $5.0 million of 2020 notes, and $5.0 million of 2024 convertible notes.
- The MidCap facility requires minimum unrestricted cash of $15.0 million before additional tranches are funded and $20.0 million after certain additional funding. It is secured by substantially all company assets, including intellectual property.
Management stated that the company’s accumulated deficit, debt, operating losses and limited capital resources raise substantial doubt about its ability to continue as a going concern. The company may need increased Afrezza revenue, access to conditional debt tranches, additional equity or debt financing, collaborations, licensing transactions or asset sales.
Material changes versus the prior comparable period
- Total revenue increased 227% in Q3 and 298% for the first nine months, primarily because United Therapeutics collaboration revenue began in late 2018.
- Afrezza net revenue increased 46% in Q3 and 52% for the first nine months, driven by higher demand, price increases, cartridge mix and a $0.7 million shipment to Biomm in Brazil.
- Operating and net losses narrowed substantially, although the company remained unprofitable.
- Research and development expense declined 23% in Q3 and 36% for the first nine months. Q3 selling expense declined 24%, while nine-month selling expense increased 5% because of higher television advertising costs.
- Operating cash use increased to $83.4 million from $62.7 million despite the lower net loss. The 2019 cash outflow included a $32.8 million non-cash adjustment for payment-in-kind interest on promissory notes and a $12.7 million decrease in deferred revenue.
- The company issued substantial equity in connection with debt exchanges and other financing activity. Shares outstanding increased from 187.0 million at December 31, 2018 to 206.4 million at September 30, 2019.
- The company amended its Amphastar insulin agreement, reducing annual purchase commitments for 2020 through 2024 but extending commitments through 2026. It paid a $1.5 million amendment fee and owed an additional $1.25 million, both recorded or expected as cost of goods sold.
- The company adopted lease accounting guidance, increasing assets and liabilities by approximately $5.2 million at January 1, 2019.
Outlook, commentary, risks and unusual items
No formal revenue or earnings guidance is provided in the filing. Management expects continued significant spending on Afrezza manufacturing, sales and marketing, and collaboration and development activities. The company’s near-term outlook depends heavily on increasing Afrezza prescriptions and revenue and satisfying conditions for additional MidCap financing.
- United Therapeutics recognized $7.9 million of collaboration revenue in Q3 and $23.3 million for the first nine months under the license agreement. The company received a $12.5 million milestone payment from United Therapeutics on November 4, 2019, after the reporting period; up to $25.0 million of additional milestone payments remained possible.
- MannKind achieved an Afrezza sales milestone that required a $5.0 million payment to the milestone-rights holders. The company recorded $1.6 million as a current liability and $3.4 million as interest expense.
- The filing identifies significant risks involving continued losses, liquidity, debt maturities, secured creditor remedies, Afrezza market acceptance, reimbursement, manufacturing and insulin supply, regulatory compliance, clinical and post-approval requirements, intellectual property and litigation.
- The FDA-required five-year post-approval trial for Afrezza concerning pulmonary malignancy had not been initiated as of the filing.
- An Israeli securities class-action certification proceeding related to historical Afrezza disclosures remained pending; the company opposed a September 2019 motion to amend the claim and had recorded no accrual.
- The company reported that disclosure controls and procedures were effective as of September 30, 2019, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Afrezza revenue growth and gross-to-net trends are sufficient to meet the MidCap minimum-revenue covenant and unlock the additional $35.0 million of borrowing capacity.
- The company’s ability to fund operations while using cash at an annualized rate implied by $83.4 million of operating cash use through nine months.
- Near-term repayment requirements for the $5.0 million of 2020 notes and the company’s ability to service or refinance its $120.1 million of principal debt.
- The extent to which payment-in-kind interest, debt conversions, warrants and future equity financing may increase dilution and debt balances.
- The status and cost of the $89.5 million insulin purchase-commitment liability and the remaining Amphastar commitments through 2026.
- Progress on Afrezza commercialization, reimbursement, foreign regulatory approvals, the required post-approval trial and United Therapeutics milestones.
- Developments in the Israeli securities litigation, milestone-rights obligations and any potential regulatory, manufacturing or intellectual-property matters.