MannKind Corporation: Q3 2017 Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on inhaled therapies. Afrezza, its only approved product, is an inhaled insulin marketed in the United States. The company assumed commercialization responsibility from Sanofi in 2016 and expanded its internal specialty sales force in early 2017. This filing covers the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $2.0 million | $162.4 million | $7.2 million | $162.4 million |
| Afrezza commercial revenue | $2.0 million | $0.6 million | $4.7 million | $0.6 million |
| Net loss | $32.9 million | Net income of $126.5 million | $84.5 million | Net income of $71.7 million |
| Loss per share | $0.31 | Income per share of $1.32 | $0.84 | Income per share of $0.79 |
| Cash used in operating activities | Not separately provided | Not separately provided | $34.8 million | $65.3 million |
| Cash and equivalents | Not applicable | $20.1 million at September 30, 2017 | $35.5 million at September 30, 2016 | |
| Accumulated deficit | Not applicable | $2.8 billion | Not provided in this filing summary |
Gross-to-net deductions reduced Afrezza gross sales by approximately 30% in Q3 and 33% for the nine-month period. Cost of goods sold was $4.6 million in Q3 and $12.2 million for nine months, producing approximate gross margins of negative 124% and negative 69%, respectively. Operating losses were $28.2 million in Q3 and $79.4 million for nine months; corresponding operating margins were approximately negative 1,380% and negative 1,100%.
At September 30, 2017, total assets were $56.5 million, total liabilities were $307.5 million, and stockholders’ deficit was $251.0 million. Principal debt totaled approximately $167.4 million, including $79.7 million owed under The Mann Group Loan Arrangement, $45.0 million of 2019 notes, $15.0 million of Tranche B notes, and $27.7 million of convertible notes. The balance sheet classified substantial debt as current because of covenant and liquidity concerns.
Material changes versus the prior comparable period
- Afrezza commercial revenue increased 246% year over year in Q3 and 725% for the nine-month period, but remained insufficient to offset the loss of Sanofi-related collaboration revenue.
- Collaboration revenue fell from $161.8 million in Q3 2016 and for the nine months ended September 30, 2016 to $62,000 and $187,000, respectively, following Sanofi’s termination of the collaboration.
- The company reported a Q3 net loss of $32.9 million versus net income of $126.5 million in the prior-year quarter. The prior-year result included significant Sanofi-related revenue.
- Selling expense increased to $9.2 million in Q3 and $28.6 million for nine months as the company brought its sales force in-house. General and administrative expense also increased.
- Research and development expense declined 21% for the nine-month period, although Q3 research and development expense increased 11% year over year.
- Foreign currency translation losses increased to $3.7 million in Q3 and $12.1 million for nine months, primarily reflecting euro-denominated insulin purchase commitments.
- The company sold Valencia, California real estate for net proceeds of approximately $16.7 million and received $19.4 million in cash borrowings from The Mann Group. These transactions helped fund operations but did not resolve the liquidity deficit.
- The company exchanged or repaid portions of its Deerfield debt for cash and common stock, reducing the facility principal outstanding. It also exchanged outstanding warrants for common stock, eliminating the warrant liability by September 30, 2017.
Outlook, liquidity, risks, and unusual items
- Management stated that the company has never been profitable or generated positive cumulative operating cash flow and disclosed substantial doubt about its ability to continue as a going concern.
- Additional capital is required to fund Afrezza commercialization, manufacturing, research and development, debt service, and other activities. Potential sources include equity or debt financing, collaborations, licensing transactions, and asset sales; availability and terms are uncertain.
- The company’s Deerfield facility agreement generally required at least $25.0 million of cash or available borrowing at quarter-end. Amendments temporarily reduced the required cash level to $10.0 million if specified conditions were satisfied. The company had $20.1 million of cash and no remaining borrowing availability under The Mann Group arrangement at September 30, 2017.
- The company had approximately $10.0 million of 2019 notes scheduled for repayment in early 2018, with additional principal payments due in 2018 and 2019. Debt is secured by substantially all of the company’s assets, including intellectual property.
- The company is committed to minimum insulin purchases from Amphastar totaling approximately €93.0 million for 2017 through 2023. The company had not purchased insulin under the amended agreement during 2017 as of September 30.
- Inventory write-downs were approximately $0.3 million in Q3 and $1.8 million for nine months, reflecting anticipated expiration or obsolescence.
- The company has an ongoing Israeli securities class-action certification proceeding related to allegations concerning statements about Afrezza. Management believes the matter will not have a material adverse effect, but no assurance is provided.
- Subsequent to quarter-end, the company raised approximately $57.7 million net in an October 2017 registered equity offering, exchanged $27.7 million of 2018 notes for $23.7 million of 2021 notes and common stock, and further deferred a $10.0 million Deerfield payment to January 2018. These events materially changed post-quarter-end liquidity and capitalization.
- The company expects to adopt the new revenue standard in 2018 using the modified retrospective method. It expects Afrezza wholesaler revenue recognition to move from a sell-through model toward recognition at delivery, subject to estimated returns.
Most important facts for investors to verify
- Whether Afrezza prescription volume and net revenue can grow rapidly enough to offset selling, manufacturing, research, and administrative cash requirements.
- The company’s post-quarter-end cash balance after the October equity offering, escrow requirements, operating burn, and debt payments.
- Compliance with Deerfield cash covenants and the January 2018 repayment obligation, including any conversions into common stock.
- The terms, dilution potential, and repayment requirements of the 2021 notes and remaining 2019 and Tranche B notes.
- The company’s ability to satisfy the €93.0 million insulin purchase commitment or renegotiate obligations if Afrezza demand remains limited.
- The status and potential exposure of the Israeli securities litigation and any other claims.
- Afrezza’s reimbursement, payer access, gross-to-net deductions, inventory levels, returns, and product expiration risk.
- Progress on required post-approval safety studies, regulatory compliance, manufacturing capacity, and the company’s ability to maintain sufficient authorized common shares for future financings.