MannKind Corporation — Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; quarterly data below includes the fourth quarter ended December 31, 2017. MannKind is a biopharmaceutical company focused on inhaled therapies. Its only approved product is Afrezza, an inhaled insulin for adults with type 1 and type 2 diabetes.
Business Context and Operating Developments
- MannKind assumed worldwide development and commercialization of Afrezza from Sanofi in 2016 and used its own specialty sales force during 2017.
- The company expanded sales and marketing activities, initiated selected television advertising, and entered a Brazil supply and distribution agreement with Biomm S.A.
- Afrezza is manufactured at MannKind’s Danbury, Connecticut facility. Amphastar is currently the only approved insulin supplier for Afrezza.
- MannKind continued development of its Technosphere inhalation platform, its Receptor collaboration, and an inhaled treprostinil program for pulmonary arterial hypertension. An investigational new drug application for inhaled treprostinil was submitted in January 2018.
Financial Metrics
| Metric | 2017 | 2016 | Change or comment |
|---|---|---|---|
| Total revenue | $11.7 million | $174.8 million | Down 93%; 2016 included $172.0 million of Sanofi collaboration revenue |
| Afrezza commercial net revenue | $9.2 million | $1.9 million | Up 385%; gross product sales were $12.6 million |
| Other revenue | $2.3 million | $0.9 million | Included $1.7 million of bulk insulin sales and $0.6 million from intellectual property |
| Research and development | $14.1 million | $14.9 million | Down 5% |
| Selling expense | $42.6 million | $19.9 million | Up 114%, reflecting the internal sales force and advertising |
| General and administrative | $32.4 million | $27.1 million | Up 20% |
| Loss from operations | $(108.2) million | $67.3 million | 2016 benefited from collaboration-related revenue |
| Net income (loss) | $(117.3) million | $125.7 million | 2017 loss of $1.13 per basic and diluted share |
| Net cash used in operations | $(64.8) million | $(78.1) million | Cash burn improved but remained substantial |
| Cash and cash equivalents | $43.9 million | $22.9 million | Restricted cash added $4.4 million; total cash and restricted cash was $48.4 million |
| Total assets | $84.6 million | $107.1 million | Down primarily after asset sales and ongoing losses |
| Stockholders’ deficit | $(214.7) million | $(183.6) million | Deficit increased |
| Accumulated deficit | $(2.855) billion | $(2.738) billion | Reflects substantial historical operating losses |
Margins and profitability: Commercial product revenue was insufficient to cover product costs and operating expenses. Cost of goods sold was $17.2 million, exceeding Afrezza commercial net revenue. The filing does not provide a meaningful consolidated gross margin because revenue included collaboration and other items and cost recognition included inventory write-offs and other manufacturing charges.
Fourth-Quarter 2017 Data
| Metric | Q4 2017 |
|---|---|
| Net revenue | $4.5 million |
| Net loss | $(32.8) million |
| Basic and diluted loss per share | $(0.28) |
Fourth-quarter revenue included a $1.2 million increase arising from a change in the estimate of inventory remaining in the distribution channel. The filing states that this estimate change increased full-year 2017 net income by $1.2 million.
Debt, Liquidity and Capital Resources
- Principal debt outstanding at December 31, 2017 was $157.8 million, consisting of $23.7 million of 5.75% senior convertible notes due 2021, $39.4 million of 9.75% 2019 notes, $15.0 million of 8.75% Tranche B notes, and $79.7 million owed under The Mann Group Loan Arrangement at 5.84%.
- Facility financing obligations had scheduled principal payments in 2018 and 2019, including $24.4 million in 2018 and $30.0 million in 2019 under the facility financing arrangement.
- MannKind raised approximately $57.7 million net in an October 2017 registered equity offering and borrowed approximately $19.4 million under The Mann Group Loan Arrangement.
- In January 2018, MannKind issued 1,267,972 shares to Deerfield to cancel $3.2 million of 2019 notes and extended a remaining $1.25 million payment to May 6, 2018. Deerfield also received expanded rights to convert additional debt into up to 10 million shares, subject to the amendment terms.
- The company states that available cash and anticipated operating needs raise substantial doubt about its ability to continue as a going concern. Management expects to seek additional equity or debt financing, collaborations, licensing transactions, asset sales or other funding sources.
- In February 2018, MannKind entered into an at-the-market agreement under which it may sell up to $50.0 million of common stock through Cantor Fitzgerald. The company is not required to sell shares, and the filing does not state how much had been sold under this agreement as of the filing date.
Material Changes Versus the Prior Comparable Period
- Afrezza commercial net revenue increased from $1.9 million to $9.2 million, but this growth was more than offset by the absence of $172.0 million of Sanofi collaboration revenue recognized in 2016.
- Selling expense more than doubled as MannKind replaced contract sales resources with an internal specialty sales organization and increased advertising and marketing.
- Operating results shifted from 2016 income to a substantial 2017 operating and net loss.
- Operating cash use improved by $13.3 million versus 2016, but cash generation remained negative.
- Debt principal declined through debt-for-equity exchanges and repayments, while borrowings from the principal stockholder increased from $49.5 million to $79.7 million.
- MannKind completed the sale of Valencia, California property for net proceeds of approximately $16.7 million.
- The company completed a one-for-five reverse stock split in March 2017 and increased authorized common shares from 140 million to 280 million in December 2017.
- Inventory write-offs totaled $3.0 million in 2017, compared with none in 2016. A $13.6 million foreign-currency translation loss related primarily to euro-denominated insulin commitments also affected 2017 results.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided. For 2018 executive bonus purposes, corporate objectives were weighted 60% to Afrezza sales, 20% to net cash burn, 15% to clinical development and regulatory submissions, and 5% to business development.
- The FDA requires pediatric Afrezza studies and a five-year randomized trial involving 8,000 to 10,000 type 2 diabetes patients to assess potential pulmonary malignancy risk. The filing states that no subjects had been enrolled in the pulmonary malignancy trial as of the filing date.
- MannKind has an insulin purchase commitment totaling €90.3 million through 2023, with annual requirements ranging from €8.9 million in 2018 to €19.4 million in each of 2022 and 2023. The company also carried a recognized loss on purchase commitments of approximately $109.3 million.
- Milestone rights could require contingent payments of up to $90.0 million upon specified commercialization and sales milestones. MannKind estimated a $5.0 million milestone payment could be triggered in the third quarter of 2018.
- Deerfield’s facility financing is secured by substantially all of MannKind’s assets, including intellectual property and the Danbury facility. Failure to meet payment or covenant requirements could permit acceleration or foreclosure remedies.
- Key risks include dependence on Afrezza as the only approved product, limited market acceptance and reimbursement, competition from injected and other diabetes therapies, regulatory and post-marketing obligations, reliance on a single approved insulin supplier, manufacturing risks, patent disputes, litigation, foreign-exchange exposure and continued equity dilution.
- An ongoing securities class-action matter remains in Israel. One action was dismissed without prejudice; in the remaining matter, the court ruled that U.S. law applies and the plaintiff appealed.
- Internal controls over financial reporting were reported effective, and Deloitte & Touche issued unqualified opinions, while also including an explanatory paragraph regarding going-concern uncertainty.
Important Facts for Investors to Verify
- Afrezza prescription volume, channel inventory, gross-to-net deductions, reimbursement coverage and repeat-patient trends.
- Cash runway, quarterly cash burn and the company’s ability to refinance or repay 2018 and 2019 debt obligations.
- Actual equity issuance under the February 2018 Cantor Fitzgerald at-the-market facility and resulting dilution.
- Status, enrollment and costs of FDA-required post-marketing studies, particularly the pulmonary malignancy trial.
- Ability to satisfy the €90.3 million insulin supply commitment and the impact of euro-dollar exchange rates.
- Timing and amount of contingent milestone payments, including the potential $5.0 million payment expected in the third quarter of 2018.
- Outcome and potential financial exposure from the pending securities litigation and any future regulatory, product-liability or intellectual-property claims.