MannKind Corporation — Form 10-Q Summary
Business Context and Reporting Period
MannKind is a development-stage biopharmaceutical company focused on diabetes therapies and the Technosphere pulmonary-delivery platform. Its lead candidate, AFREZZA inhaled insulin, was in late-stage clinical development for adults with type 1 and type 2 diabetes. The filing covers the quarter and six months ended June 30, 2013; financial statements are unaudited and presented in thousands except per-share and share data.
During the second quarter, MannKind completed two Phase 3 AFREZZA studies and expected to submit the results to the FDA as an amendment to its NDA during the fourth quarter of 2013. No product had received marketing approval or generated commercial revenue.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0 in 2013 and 2012 | $0 in 2013 and 2012 |
| Research and development expense | $27.1 million vs. $26.6 million | $53.5 million vs. $50.8 million |
| General and administrative expense | $14.5 million vs. $17.4 million | $24.6 million vs. $27.2 million |
| Operating loss | $41.6 million vs. $44.1 million | $78.0 million vs. $78.0 million |
| Net loss | $46.1 million vs. $36.6 million | $87.1 million vs. $74.8 million |
| Net loss per share | $0.16 vs. $0.23 | $0.31 vs. $0.49 |
| Cash used in operating activities | Not separately presented | $61.8 million vs. $57.5 million |
Because the company had no revenue, gross profit and operating margins were not meaningful. Cumulative net loss since inception was $2.2 billion, including a historical $151.4 million goodwill impairment charge, and cumulative negative operating cash flow was $1.7 billion.
At June 30, 2013, cash and cash equivalents were $28.5 million, down from $61.8 million at December 31, 2012. Total assets were $212.4 million, total liabilities were $364.8 million, and stockholders’ deficit was $152.4 million. Property and equipment, net, was $179.6 million.
Debt included $115.0 million principal amount of 3.75% senior convertible notes due December 15, 2013, $100.0 million principal amount of 5.75% senior convertible notes due August 15, 2015, and $119.6 million outstanding under the related-party loan arrangement with The Mann Group. The Mann Group facility had $125.4 million available for future borrowings as of June 30, 2013, with an effective interest rate of 5.84%.
Material Changes Versus the Prior Comparable Period
- Second-quarter research and development expense increased 2%, primarily because of higher stock-based compensation, while clinical costs declined following completion of two Phase 3 studies.
- Six-month research and development expense increased 5%, largely because stock-based compensation rose by $4.5 million, partly offset by lower research and manufacturing costs.
- General and administrative expense declined 17% for the quarter and 10% for the six months, primarily because the prior-year periods included a $7.7 million litigation settlement accrual. The 2013 periods included increased stock-based compensation and a $0.5 million sales and use tax payment.
- Net loss increased despite a lower operating loss because second-quarter 2012 included $13.3 million of other income, principally from a forward purchase contract fair-value adjustment; 2013 other income was only $15,000.
- Operating cash use increased $4.3 million to $61.8 million, principally because of payments of accrued clinical-trial and other expenses.
- Financing cash inflow decreased to $30.1 million from $86.8 million. The 2013 inflow was primarily $28.3 million from warrant exercises, compared with substantial equity financing in the 2012 period.
- Stock-based compensation increased to $15.4 million for the first six months from $6.0 million in the prior-year period, reflecting performance-based equity awards granted in 2013.
Liquidity, Outlook, Risks and Unusual Items
Management stated that cash on hand and available Mann Group borrowings, together with proceeds from the first tranche of the Deerfield facility received after quarter-end, were expected to support planned operations into the fourth quarter of 2013. The filing expressly states that substantial doubt exists regarding the company’s ability to continue as a going concern.
On July 1, 2013, after the reporting date, Deerfield purchased $40.0 million principal amount of 9.75% senior secured convertible notes due 2019 for $21.1 million of cash after original issue discount. Deerfield committed to purchase up to an additional $120.0 million in three tranches, subject to conditions including Phase 3 results, repayment of the 2013 notes, FDA approval of AFREZZA, and registration or other free tradability of conversion shares.
The company also received $18.9 million under a milestone rights transaction and sold rights to receive up to $90.0 million upon specified strategic and sales milestones, including first commercial sale and specified AFREZZA net-sales levels.
The $115.0 million 2013 notes mature in December 2013, while available cash at June 30 was insufficient to repay them. MannKind indicated that it would need additional equity or debt financing, refinancing, a strategic collaboration, licensing or asset sales, or other funding. No strategic collaboration had been completed as of the filing date.
Potential additional funding included $64.6 million of unexercised public-offering warrants expiring in the fourth quarter of 2013 and an unused ATM program permitting up to $50.0 million of aggregate common-stock sales. Neither source was assured. The Deerfield debt is secured by substantially all assets and includes financial and operating covenants, including a requirement that cash and available Mann Group borrowings not fall below $25.0 million at the end of a fiscal quarter.
Key operating and regulatory risks include failure of AFREZZA clinical data to support FDA approval, possible requests for additional studies, manufacturing and facility-inspection requirements, competition, reimbursement and market-acceptance uncertainty, intellectual-property challenges, dilution from equity and convertible securities, and potential default or acceleration of debt.
Management reported that disclosure controls and procedures were effective at the reasonable-assurance level and identified no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings considered material, no defaults upon senior securities, and no off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether AFREZZA Phase 3 results were sufficient for the planned FDA NDA amendment and whether the FDA ultimately approved the product.
- Whether the remaining Deerfield financing tranches closed and whether their conditions, covenants and security interests affected liquidity or operations.
- How MannKind refinanced or repaid the $115.0 million 2013 notes due December 2013.
- Actual exercise of the remaining $64.6 million of public-offering warrants and any resulting dilution or cash proceeds.
- Cash burn, available borrowing capacity and compliance with the Deerfield $25.0 million minimum-liquidity covenant.
- The impact of performance-based equity awards, convertible notes, warrants and other potentially dilutive securities; 129.4 million potentially dilutive shares were excluded from diluted loss-per-share calculations at June 30, 2013.
- Whether AFREZZA manufacturing capacity, FDA inspections, supplier readiness and reimbursement arrangements supported eventual commercialization.