MannKind Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 7, 2017. MannKind is a biopharmaceutical company focused on Afrezza, its only approved product, and Technosphere drug-delivery technologies.
Financial Results and Liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $2.2 million | $0 | $5.2 million | $0 |
| Net Afrezza product revenue | $1.5 million | $0 | $2.7 million | $0 |
| Loss from operations | $(31.6) million | $(19.1) million | $(51.2) million | $(39.1) million |
| Net loss | $(35.3) million | $(30.0) million | $(51.7) million | $(54.8) million |
| Net loss per share | $(0.35) | $(0.33) | $(0.53) | $(0.62) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(11.5) million | $(42.3) million |
| Cash and cash equivalents | Not separately provided | Not separately provided | $43.4 million at June 30, 2017 |
- Q2 gross-to-net deductions were approximately $1.1 million, or 41% of gross Afrezza product revenue. For the six-month period, deductions were approximately $1.5 million, or 36% of gross product revenue.
- Q2 cost of goods sold was $5.1 million, producing an approximate negative gross margin of 135%. Six-month cost of goods sold was $7.6 million, or approximately 148% of revenue. Operating margins were approximately negative 1,460% for Q2 and negative 989% for the six-month period.
- Q2 selling expense increased to $11.6 million from $4.0 million, primarily because MannKind brought its sales force in-house in early 2017 and increased commercial support and promotional spending.
- Research and development expense declined to $3.1 million in Q2 and $6.3 million for the six-month period, mainly due to workforce reductions.
- Q2 included a $1.5 million inventory write-down for product expected to expire or become obsolete, $6.8 million of foreign-currency translation loss, and $0.8 million of debt-extinguishment loss.
- Cash increased from $22.9 million at December 31, 2016 to $43.4 million at June 30, 2017, primarily reflecting the $30.6 million Sanofi payment received in January, $16.7 million of real-estate sale proceeds, and $19.4 million of related-party borrowing, partly offset by operating cash use and debt repayment.
Material Changes Versus the Prior Comparable Period
- MannKind generated its first reported commercial product revenue in the comparable period, following the transition of Afrezza commercialization from Sanofi to MannKind. Afrezza revenue is recognized when product is dispensed to patients because the company cannot yet reliably estimate returns at shipment.
- Revenue growth did not offset higher commercial expenses, inventory charges, foreign-currency losses, and continued financing costs. Q2 net loss increased by $5.4 million versus Q2 2016, while the six-month net loss improved by $3.2 million primarily because of lower interest expense and a favorable warrant-liability valuation change.
- Debt principal outstanding was $167.4 million at June 30, 2017, including $79.7 million owed under The Mann Group Loan Arrangement, $45.0 million of 2019 notes, $15.0 million of Tranche B notes, and $27.7 million of 2018 convertible notes.
- In April and June, MannKind exchanged or converted $11.0 million of Deerfield debt into common stock and repaid $4.0 million in cash. The company also deferred a $10.0 million 2019-note payment originally due in July 2017 to August 31, 2017, with a possible extension to October 31, 2017 if conditions are satisfied.
- The company completed a 1-for-5 reverse stock split in March 2017. Common shares outstanding increased to approximately 104.6 million at June 30, 2017 from 95.7 million at December 31, 2016, reflecting debt exchanges and other issuances.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated second-half 2017 net operating cash flow of approximately $18 million to $24 million per quarter, assuming the company remains a going concern. This is an estimate, not a formal revenue or earnings forecast.
- The filing states that substantial doubt exists about MannKind’s ability to continue as a going concern. Additional capital will be required through potential equity or debt offerings, collaborations, licensing, asset sales, or other financing.
- The Deerfield facility covenant generally requires at least $25.0 million of cash and available borrowings; under the June 2017 amendment, the threshold may be reduced to $10.0 million through specified dates if conditions remain satisfied. Failure to comply could permit acceleration of secured debt.
- MannKind has no remaining borrowing capacity under The Mann Group Loan Arrangement after receiving $19.4 million in cash and capitalizing $10.7 million of accrued interest. Interest payments under that arrangement were deferred until July 1, 2018, subject to the Deerfield subordination agreement.
- The company has a remaining aggregate insulin purchase commitment of €93.0 million for 2017 through 2023 under its Amphastar supply agreement, plus potential cancellation fees. Foreign-currency movements produced an $8.4 million loss in the first six months.
- Milestone obligations could require payments of up to $90.0 million upon specified commercialization and sales milestones; the company estimated the next milestone could be reached in Q2 2018.
- Afrezza commercialization remains dependent on prescription demand, reimbursement and market acceptance, manufacturing and supply continuity, regulatory compliance, post-approval studies, and additional financing. The FDA-required long-term pulmonary malignancy trial had not enrolled subjects as of the filing.
- The filing discloses a pending Israeli securities class-action certification matter related to statements concerning Afrezza. Management believes ordinary-course legal matters are not expected to have a material adverse effect, but the outcome of the Israeli matter is unresolved.
- The company entered into a new Westlake Village headquarters lease with total future minimum payments of approximately $2.6 million.
Investor Verification Checklist
- Verify subsequent Afrezza prescription, gross sales, net sales, return reserves, and gross-to-net adjustment trends.
- Verify whether the August 31, 2017 $10.0 million debt payment was made, further deferred, refinanced, or triggered a default.
- Verify compliance with Deerfield’s cash covenant and the company’s ability to raise additional capital.
- Assess cash burn against the $18 million to $24 million quarterly estimate and determine the resulting liquidity runway.
- Review debt exchange dilution, outstanding warrants, convertible notes, and the availability of authorized shares for future financing.
- Monitor inventory expiration exposure, the Amphastar insulin commitment, foreign-exchange sensitivity, and potential milestone payments.
- Follow the Israeli securities litigation, Afrezza post-approval safety study, regulatory status, and any changes to the going-concern disclosure.