MannKind Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company developing and commercializing inhaled therapies. Afrezza, its only approved product, is an inhaled insulin marketed in the United States. The filing covers the three months ended March 31, 2019, with comparative results for the three months ended March 31, 2018. The financial statements are unaudited.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Commercial product revenue | $5.1 million | $3.4 million | +49% |
| Collaboration and services revenue | $12.4 million | $0.1 million | +$12.3 million |
| Total revenue | $17.4 million | $3.5 million | +404% |
| Commercial product gross profit | $1.1 million | $(0.6) million | +$1.7 million |
| Loss from operations | $(13.5) million | $(26.8) million | Improved by $13.3 million |
| Net loss | $(14.9) million | $(30.4) million | Improved by $15.5 million |
| Net loss per share | $(0.08) | $(0.25) | Improved |
| Net cash used in operating activities | $(11.6) million | $(21.7) million | Improved by $10.1 million |
Afrezza gross sales increased 58% to $8.2 million, driven primarily by higher demand, price increases and product mix. Gross-to-net deductions increased to $3.1 million, or 38% of gross sales, from $1.8 million, or 35%, reflecting higher commercial and government rebates and chargebacks. Commercial product gross margin was approximately 21% in Q1 2019 versus negative 18% in the prior-year quarter.
Collaboration revenue included $7.6 million from the United Therapeutics license agreement and $4.7 million from the related research agreement. These arrangements were entered into in September 2018 and accounted for over time as performance obligations are satisfied. Collaboration revenue had associated costs of $1.5 million in Q1 2019.
Total operating expenses were $31.0 million, up 2% year over year. Selling expense increased 70% to $18.6 million, largely because of a $9.3 million Afrezza television campaign. Research and development expense declined 37% to $1.7 million, while general and administrative expense declined 27% to $7.0 million. A $1.9 million foreign-currency translation gain benefited Q1 2019 results, compared with a $3.0 million loss in Q1 2018.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $34.5 million at March 31, 2019, compared with $71.2 million at December 31, 2018.
- Short-term investments were $24.8 million, consisting primarily of U.S. Treasury securities; restricted cash was $0.5 million.
- Cash, cash equivalents and restricted cash totaled $35.1 million at quarter-end, down from $71.7 million at year-end.
- Operating cash use was $11.6 million. Investing cash use was $25.0 million, primarily for purchases of short-term investments. Financing activities provided $3,000.
- Total debt had a $102.5 million carrying value and approximately $101.7 million of principal, excluding $8.0 million of accrued related-party interest that is payable in kind.
- Debt included $18.7 million of 5.75% convertible notes due 2021, $9.0 million of 9.75% notes due July 2019, $2.5 million of 8.75% Tranche B notes due May 2019, and $71.5 million of related-party debt due July 2021.
- The Deerfield facility requires at least $25.0 million of cash and cash equivalents at each quarter-end and is secured by substantially all of the Company's assets, including intellectual property.
- Stockholders' deficit increased to $188.0 million from $175.1 million at December 31, 2018. Accumulated deficit was approximately $3.0 billion.
Material changes versus the prior comparable period
- Revenue growth was primarily collaboration-driven rather than solely attributable to Afrezza sales. Commercial product revenue increased 49%, while collaboration revenue increased by $12.3 million.
- Operating and net losses narrowed substantially, helped by increased revenue, lower research and development and general and administrative costs, reduced interest expense and the favorable foreign-currency impact.
- Selling expense rose materially because of increased Afrezza promotion, including the television campaign.
- The company adopted ASC Topic 842 for leases on January 1, 2019, recording approximately $5.2 million of right-of-use assets and lease liabilities. The adoption did not materially affect net earnings or cash flow.
- Short-term investments increased from zero at year-end to $24.8 million, while cash and cash equivalents declined by $36.6 million.
Guidance, outlook, management commentary and risks
The filing does not provide formal revenue, earnings or cash-flow guidance. Management expects continued significant expenditures for Afrezza manufacturing, sales and marketing, collaboration work and pipeline development. The company states that its current resources and financing sources will not be sufficient to meet anticipated requirements within one year after issuance of the financial statements.
Management plans to seek additional capital through equity or debt offerings, collaborations, licensing arrangements, funding facilities, asset sales or other transactions, but provides no assurance that funding will be available on acceptable terms or at all. The filing therefore includes a substantial doubt about the company's ability to continue as a going concern.
Near-term liquidity pressure includes the $2.5 million Tranche B maturity in May 2019 and the $9.0 million 2019 notes maturity in July 2019. The company also faces approximately €84.1 million of remaining minimum insulin purchase commitments through 2024 under its Amphastar agreement. The related recognized loss on purchase commitments was $94.4 million at March 31, 2019.
The company expects a $5.0 million milestone payment may become due in the second or third quarter of 2019. It also remains exposed to Afrezza commercialization, reimbursement, manufacturing, regulatory, intellectual-property, litigation and competition risks. A pending Israeli securities class-action certification matter related to statements concerning Afrezza remains unresolved; management believes existing legal matters are not expected to have a material adverse effect, although no assurance is provided.
The FDA required a five-year post-approval trial comparing pulmonary malignancy incidence for Afrezza with standard of care in type 2 diabetes. The company disclosed that no subjects had been enrolled in that trial as of the filing.
Important facts investors should verify
- Whether the company refinanced or otherwise satisfied the May and July 2019 debt maturities and maintained the Deerfield $25.0 million quarter-end cash covenant.
- The sustainability of Afrezza demand growth, gross-to-net deductions, reimbursement levels and commercial gross margins after the television campaign.
- The timing and collectability of additional United Therapeutics milestones, future collaboration revenue and deferred revenue recognition.
- Availability and terms of new financing, including potential dilution, secured borrowing restrictions and conversion of outstanding convertible debt.
- The company's ability to fund the €84.1 million insulin purchase commitment and other operating obligations.
- Progress on the required Afrezza post-approval safety trial and compliance with FDA promotional and manufacturing requirements.
- Developments in the Israeli securities litigation and any other material legal, regulatory or intellectual-property matters.