MannKind Corporation Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also presents selected unaudited fourth-quarter data. MannKind is a biopharmaceutical company focused primarily on Afrezza, its only approved product, and the Technosphere inhalation platform.
Business Context and Key Developments
- Sanofi terminated the Afrezza license and collaboration agreement effective April 4, 2016. MannKind assumed worldwide development and commercialization responsibilities.
- MannKind began distributing its own Afrezza-branded product to wholesalers in late July 2016 and recognized commercial product revenue when prescriptions were dispensed beginning in August 2016.
- In November 2016, MannKind and Sanofi entered into a settlement that included forgiveness of the $72.0 million Sanofi loan balance, a $10.2 million insulin purchase, and a $30.6 million cash payment received in January 2017.
- MannKind entered into a collaboration and license agreement with Receptor Life Sciences. Receptor exercised its option in December 2016, generating a $1.0 million deferred license fee and $0.4 million of prior formulation-study payments.
Financial Performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total net revenue | $174.8 million | $0 |
| Collaboration revenue | $172.0 million | $0 |
| Commercial Afrezza revenue | $1.9 million | $0 |
| Bulk insulin revenue | $0.9 million | $0 |
| Total expenses | $107.5 million | $344.7 million |
| Operating income (loss) | $67.3 million | $(344.7) million |
| Net income (loss) | $125.7 million | $(368.4) million |
| Basic earnings (loss) per share | $1.37 | $(4.54) |
| Cash used in operating activities | $78.1 million | $57.2 million |
| Cash and cash equivalents at year-end | $22.9 million | $59.1 million |
- Reported operating margin was approximately 38.5% and net margin approximately 71.9%, but both were heavily affected by nonrecurring Sanofi-related revenue and debt forgiveness rather than recurring Afrezza sales.
- Collaboration revenue included the $150.0 million upfront payment and two $25.0 million milestone payments, offset by $64.9 million of net loss sharing with Sanofi, as well as Sanofi Afrezza and insulin sales.
- The $125.7 million net income included a $72.0 million gain from extinguishment of the Sanofi loan. No income tax expense was recorded because the company maintained a full valuation allowance against its deferred tax assets.
- Research and development expense declined to $14.9 million from $29.7 million. Selling and marketing expense increased to $19.9 million from $1.6 million as MannKind assumed commercialization activities.
Liquidity, Debt and Commitments
- Year-end cash was $22.9 million, down $36.2 million during 2016. Cash used in operations was $78.1 million; financing activities provided $43.0 million, primarily from a $50.0 million common stock and warrant offering.
- Outstanding principal debt totaled $152.1 million: $27.6 million of 2018 notes, $55.0 million of 2019 notes, $20.0 million of Tranche B notes and $49.5 million under The Mann Group Loan Arrangement.
- Interest rates ranged from 5.75% to 9.75%. Principal repayments included $20.0 million due in 2017, $20.0 million in 2018 and $35.0 million in 2019 under the facility financing obligation.
- The company had $9.3 million of accrued interest on The Mann Group Loan Arrangement and approximately $30.1 million of additional borrowing capacity, subject to applicable terms.
- The Facility Agreement required cash, cash equivalents and available Mann Group borrowings of at least $25.0 million at each quarter-end. The filing states that available resources and continuing cash needs raised substantial doubt about MannKind’s ability to continue as a going concern.
- Total contractual obligations were approximately $295.4 million, including approximately $100.2 million under the Amphastar insulin supply agreement. The remaining insulin commitment was approximately €93.0 million at year-end, extending through 2023.
- Stockholders’ deficit was $183.6 million and accumulated deficit was $2.7 billion.
Material Changes Versus 2015
- MannKind shifted from a Sanofi-led commercialization model to direct U.S. commercialization, while reported revenue moved from zero to $174.8 million largely because previously deferred Sanofi-related amounts became recognizable.
- Net income improved from a $368.4 million loss to $125.7 million of income, primarily due to Sanofi-related revenue, the $72.0 million debt-forgiveness gain and the absence of 2015’s $140.4 million property impairment and $66.2 million purchase-commitment loss.
- Operating cash burn worsened from $57.2 million to $78.1 million despite reported net income, reflecting working-capital needs, Sanofi receivables and ongoing commercialization costs.
- Sales and marketing expense increased substantially, while R&D and general and administrative expenses declined due to restructuring and cost controls.
- The company recorded approximately $1.5 million of 2016 restructuring charges and reduced its workforce by approximately 18%.
- Afrezza commercial revenue remained limited at $1.9 million, with approximately 30% of gross product sales recognized as gross-to-net adjustments. Approximately $1.6 million of net Afrezza shipments remained deferred at year-end because product had not yet been dispensed to patients.
Guidance, Outlook, Risks and Unusual Items
- Management’s strategy is to build U.S. Afrezza sales through an internal commercial organization and seek regional partners for markets outside the United States. The filing does not provide a quantified revenue or profitability forecast.
- Afrezza remains the company’s only approved product and future operating performance depends heavily on market acceptance, prescription growth, reimbursement, pricing, manufacturing execution and additional financing.
- FDA-required post-marketing obligations include a pediatric study and a five-year pulmonary malignancy safety study involving 8,000 to 10,000 type 2 diabetes patients. The filing states that no subjects had been enrolled in the pulmonary safety study as of the filing.
- Only one approved insulin source, Amphastar, was identified for Afrezza. Supply interruptions, quality issues or the large minimum-purchase commitment could materially affect liquidity and operations.
- The company’s U.S. federal and state deferred tax assets totaled approximately $914.5 million and were fully reserved. The filing also reports approximately $1.9 billion of federal and $1.3 billion of state net operating loss carryforwards.
- MannKind received a Nasdaq minimum-bid-price deficiency notice in September 2016. A 1-for-5 reverse stock split became effective in March 2017, after which management expected to regain compliance.
- The Valencia, California property was classified as held for sale at a $16.7 million carrying value at year-end and was sold in February 2017 for $17.3 million, with net proceeds of approximately $16.7 million.
- Federal securities litigation was dismissed without leave to amend, and the plaintiff later dismissed the appeal. One Israeli shareholder action remained pending, with a hearing scheduled for May 2017 regarding applicable law and class certification.
- Management and Deloitte concluded that internal control over financial reporting was effective as of December 31, 2016, following remediation of prior weaknesses involving impairment testing, inventory and significant non-routine transactions.
Investor Verification Checklist
- Verify the recurring level of Afrezza prescriptions, net sales, gross-to-net deductions and channel inventory after the transition to MannKind’s direct commercial model.
- Assess the company’s ability to fund operations and meet near-term debt maturities, the $25.0 million liquidity covenant and the Amphastar insulin commitments.
- Confirm receipt and use of the $30.6 million Sanofi settlement payment and the accounting treatment of the Sanofi settlement and loan forgiveness.
- Monitor enrollment and results of the required pediatric and pulmonary safety studies and any resulting FDA labeling or commercialization requirements.
- Review potential dilution from the 2018 convertible notes, outstanding warrants, equity awards and future capital raises.
- Reconcile reported 2016 profitability with operating cash burn and exclude Sanofi-related and other nonrecurring items when evaluating ongoing earnings power.