MannKind Corporation 2015 Form 10-K Summary
Business context and reporting period
MannKind is a biopharmaceutical company focused on diabetes therapies and the Technosphere inhalation platform. AFREZZA, its only approved product, is rapid-acting inhaled human insulin approved by the FDA in June 2014 and launched in U.S. retail pharmacies in February 2015. This Form 10-K covers the fiscal year ended December 31, 2015; quarterly data show fourth-quarter results where relevant.
Sanofi commercialized AFREZZA during 2015 and reported €7.0 million of annual sales. On January 4, 2016, Sanofi notified MannKind that it would terminate the license and collaboration agreement, with a stated effective date of April 4 or July 4, 2016, depending on the contractual basis for termination. MannKind planned to assume U.S. commercialization and seek regional partners internationally.
Financial performance, liquidity, and capital structure
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No recognized revenue |
| Operating expenses | $344.7 million | $179.6 million | Up $165.0 million |
| Net loss | $368.4 million | $198.4 million | Loss increased $170.1 million |
| Net loss per share | $0.91 | $0.51 | Loss increased |
| Cash used in operations | $57.2 million | $4.1 million provided | Material deterioration |
| Cash and equivalents at year-end | $59.1 million | $120.8 million | Down $61.8 million |
| Total assets | $126.4 million | $394.4 million | Down $268.0 million |
| Stockholders’ deficit | $350.3 million | $73.8 million | Deficit increased $276.6 million |
There was no meaningful revenue margin to report because no revenue was recognized. Operating expenses included $29.7 million of research and development, $41.0 million of general and administrative expense, $67.4 million of product manufacturing expense, a $140.4 million property and equipment impairment charge, and a $66.2 million loss on purchase commitments.
Operating cash use was partly offset by non-cash charges, including $206.6 million of impairment-related charges and other non-cash items. Investing cash use was $10.2 million. Financing activities provided $5.7 million, including equity proceeds that partly offset payments of approximately $64.3 million on the 2015 notes and $4.2 million of milestone payments.
At December 31, 2015, reported debt principal was approximately $201.7 million, comprising $27.7 million of 2018 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 $44.5 million borrowed under the Sanofi Loan Facility. Subsequent to year-end, MannKind borrowed an additional $17.9 million under the Sanofi facility, bringing the reported Sanofi-related obligation to $62.4 million, including paid-in-kind interest.
The company had a $25.0 million minimum cash and available-borrowings covenant under the Deerfield facility. Management and Deloitte disclosed substantial doubt about MannKind’s ability to continue as a going concern because of operating losses, limited cash, debt obligations, and the need for additional financing.
Material changes versus the prior comparable period
- Net loss increased from $198.4 million to $368.4 million, driven primarily by impairment and purchase-commitment charges.
- Research and development expense declined 70% to $29.7 million from $100.2 million as clinical and manufacturing-development spending decreased and prior-period stock compensation did not recur.
- General and administrative expense declined 48% to $41.0 million from $79.4 million, largely due to lower stock-based compensation and reduced professional fees.
- Product manufacturing expense increased to $67.4 million from zero in 2014 as commercial production began; the amount included $21.4 million of under-absorbed labor and overhead and approximately $36.1 million of inventory write-offs.
- Property and equipment, net, fell to $48.7 million from $192.1 million following the $140.4 million impairment charge, including $138.6 million related to the Danbury manufacturing facility and $1.8 million related to the Valencia facility.
- Inventory was reduced to zero from $9.7 million after a $39.3 million write-down. The company also recorded a $66.2 million loss on future purchase commitments.
- Stockholders’ deficit increased to $350.3 million from $73.8 million, while outstanding common shares increased to approximately 428.7 million from 406.1 million, reflecting equity financing and other issuances.
Guidance, outlook, commentary, risks, and unusual items
Management expected 2016 research and development expense to decline further because of the AFREZZA transition and limited incremental pipeline spending. General and administrative expense was expected to remain broadly flat, offsetting restructuring savings with Sanofi termination-related professional fees. Sales and marketing expense was expected to increase as MannKind assumed commercialization responsibilities.
MannKind expected 2016 AFREZZA production to remain relatively consistent with 2015 levels because of existing demand, although the company’s ability to support production and commercialization depended on financing, market acceptance, reimbursement, and the transition from Sanofi.
- The FDA-required post-marketing program included a pediatric study and a five-year randomized study of 8,000–10,000 type 2 diabetes patients addressing potential pulmonary malignancy risk, cardiovascular risk, and long-term pulmonary function. These obligations were expected to revert to MannKind after the NDA transfer from Sanofi.
- The Amphastar insulin supply agreement required aggregate minimum purchases of approximately €120.1 million through 2019, with approximately €98.5 million remaining at year-end. The filing also recorded a $66.2 million loss on purchase commitments and disclosed potential termination payments.
- MannKind had not generated cumulative positive operating cash flow and had an accumulated deficit of approximately $2.9 billion. Additional equity, debt, collaboration, licensing, or asset-sale financing was considered necessary.
- The company disclosed a material weakness in internal control over financial reporting related to the precision of impairment-testing review controls. Management and Deloitte concluded that internal controls were ineffective as of December 31, 2015.
- Several U.S. and Israeli securities class-action proceedings were pending following the Sanofi termination announcement and decline in MannKind’s stock price. The company intended to defend the claims; no material loss was accrued.
- AFREZZA faced competition from injected insulin, other diabetes therapies, and potential competing inhaled-insulin technologies. Risks also included regulatory requirements, product safety, reimbursement, supplier concentration, intellectual-property disputes, manufacturing execution, and debt covenant or payment defaults.
Most important facts for an investor to verify
- Final effective date and terms of Sanofi’s termination, including the transition of the AFREZZA NDA, distribution responsibilities, and post-marketing study obligations.
- Current AFREZZA prescription volume, net sales, reimbursement coverage, pricing, and MannKind’s post-transition commercialization costs.
- Available cash, subsequent financing, compliance with the $25.0 million Deerfield covenant, and near-term maturities under the 2019 notes and other debt.
- Actual amount and timing of the Amphastar insulin commitments, purchase-commitment liabilities, and any recoveries or cancellation payments.
- Progress in remediating the material weakness and whether further impairment, inventory write-downs, or restructuring charges are required.
- Status and potential financial exposure of the U.S. and Israeli securities litigation.
- Completion, funding, and results of the FDA-required pediatric and long-term pulmonary safety studies.