MannKind Corporation — Form 10-Q Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on diabetes therapies. Its only approved product is AFREZZA, an inhaled insulin approved by the FDA in 2014. This unaudited Form 10-Q covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015.
Sanofi notified MannKind on January 4, 2016 that it would terminate the AFREZZA license agreement. The termination became effective April 4, 2016, after which MannKind assumed worldwide development and commercialization responsibilities. Sanofi may continue fulfilling orders through depletion of usable inventory, but no later than October 1, 2016.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $5.1 million | $9.4 million | Down 45% |
| General and administrative expense | $7.4 million | $10.5 million | Down 30% |
| Product manufacturing expense | $7.5 million | $1.9 million | Up $5.6 million |
| Total operating expenses | $20.0 million | $21.7 million | Down 8% |
| Loss from operations | $20.0 million | $21.7 million | Improved $1.7 million |
| Net loss | $24.9 million | $30.7 million | Improved $5.8 million |
| Net loss per share | $0.06 | $0.08 | Improved |
| Cash used in operating activities | $30.8 million | Cash provided of $3.0 million | Down $33.8 million |
Cash and cash equivalents were $27.7 million at March 31, 2016, compared with $59.1 million at December 31, 2015. Total assets were $93.3 million, while total liabilities were $466.7 million. Stockholders’ deficit increased to $373.5 million from $350.3 million at year-end 2015. The accumulated deficit was approximately $2.9 billion.
Operating cash usage reflected the net loss, a $2.4 million foreign-currency loss, $1.2 million of interest accrued under the Sanofi Loan Facility, and a $15.0 million reduction in accounts payable. Investing activities used $1.1 million, primarily for property and equipment. Financing activities provided $0.5 million from common-stock issuance.
Material changes versus the prior comparable period
- Research and development expense declined primarily because of the 2015 reduction in force, closure of the Paramus facility, and lower development activity.
- General and administrative expense declined because of lower personnel costs, professional fees, and stock-based compensation.
- Product manufacturing expense increased substantially because of under-absorbed labor and overhead and a $2.4 million foreign-currency loss related to euro-denominated insulin commitments.
- Interest expense declined $5.4 million, principally because Q1 2015 included a non-recurring $5.8 million milestone-related charge and higher interest associated with the former 2015 notes.
- Unlike Q1 2015, when Sanofi milestone cash receipts contributed to positive operating cash flow, Q1 2016 generated substantial operating cash usage.
Debt, liquidity, outlook, and risks
Principal debt outstanding totaled approximately $220.7 million at March 31, 2016, comprising $27.7 million of 2018 convertible notes, $60.0 million of 2019 notes, $20.0 million of Tranche B notes, $49.5 million owed under The Mann Group Loan Arrangement, and $63.5 million borrowed under the Sanofi Loan Facility. The company also had $7.1 million of accrued interest under The Mann Group arrangement and approximately $30.1 million of additional borrowing capacity under that arrangement.
The Deerfield Facility Agreement requires cash, cash equivalents, and available borrowings under The Mann Group Loan Arrangement of at least $25.0 million at each quarter-end. Because of uncertainty regarding future funding and covenant compliance, the 2019 notes were classified as current liabilities. The filing states that substantial doubt exists regarding MannKind’s ability to continue as a going concern unless it raises additional capital.
Management expects research and development expense to decline in 2016, while sales and marketing expense is expected to increase as MannKind assumes responsibility for AFREZZA commercialization. The company expects to recognize, likely during 2016, deferred AFREZZA product sales and costs and more than $100 million of deferred collaboration income, subject to revenue-recognition requirements.
On April 26, 2016, MannKind entered into an at-the-market offering allowing sales of up to $50.0 million of common stock. The company is not required to sell shares under the agreement, and any issuance would dilute existing holders.
Other significant exposures include approximately €98.5 million of remaining minimum insulin purchase commitments through 2019, including €28.8 million for 2016; potential cancellation fees; secured debt and acceleration rights; required post-approval AFREZZA studies; regulatory, manufacturing, reimbursement, competition, intellectual-property, and product-liability risks; and securities class actions in the United States and Israel. The company is also defending a shareholder derivative action.
Management reported that disclosure controls and procedures were not effective as of March 31, 2016. The material weakness related to the operating effectiveness and precision of controls over impairment testing and inventory valuation identified at December 31, 2015. Remediation was in progress but not complete.
Most important facts for investors to verify
- Whether MannKind can raise sufficient capital to fund AFREZZA commercialization, meet the $25.0 million liquidity covenant, and avoid debt defaults or accelerated repayment.
- The timing and amount of recognition of the $17.7 million deferred product sales, $13.5 million deferred product costs, and more than $100 million of deferred collaboration income.
- AFREZZA prescription demand, reimbursement coverage, pricing, manufacturing output, and the timing of MannKind’s planned independent distribution.
- The status and economic effect of Sanofi’s transition obligations, the Insulin Put for up to $50 million of insulin inventory, and ongoing 65%/35% loss sharing through no later than October 1, 2016.
- Progress in remediating the material weakness in internal controls and the effect of any future impairment or inventory charges.
- Potential dilution from the $50.0 million at-the-market offering, equity awards, warrants, and convertible notes.
- Developments in the U.S. and Israeli securities litigation and shareholder derivative action.