MANNKIND CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this report that are not strictly historical in nature are “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below in Part II, Item 1A Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. The preceding interim condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and related notes for the year ended December 31, 2021 and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made. OVERVIEW MannKind focuses on the development and commercialization of therapeutic products for patients with endocrine and orphan lung diseases. We are currently commercializing Afrezza (insulin human) Inhalation Powder, an ultra rapid-acting inhaled insulin indicated to improve glycemic control in adults with diabetes, and the V-Go wearable insulin delivery device, which provides continuous subcutaneous infusion of insulin in adults that require insulin. We also collaborate with third parties to formulate their drugs on our Technosphere drug delivery platform. In May 2022, our partner, United Therapeutics, received approval from the FDA for Tyvaso DPI (treprostinil) inhalation powder, which is indicated for the treatment of pulmonary arterial hypertension and for the treatment of pulmonary hypertension associated with interstitial lung disease. UT began commercializing Tyvaso DPI in June 2022 and is obligated to pay us a royalty on net sales of the product. We also receive a margin on supplies of Tyvaso DPI that we manufacture for UT. Our business is subject to significant risks, including but not limited to our ability to commercialize our products successfully as well as our ability to manufacture sufficient quantities of our products and Tyvaso DPI. Other significant risks also include the risks inherent in drug development, clinical trials and the regulatory approval process for our product candidates, which in some cases depends upon the efforts of our partners. We continue to manage the risk to our business posed by the global COVID-19 pandemic. We do not yet know the full extent of potential delays or impacts on our business, our collaboration arrangements, commercialization efforts, healthcare systems or to the global economy as a whole. The COVID-19 pandemic has the potential to have additional adverse impacts on our operations. We will continue to monitor the COVID-19 situation closely. As of September 30, 2022, we had an accumulated deficit of $3.2 billion and a stockholders’ deficit of $237.7 million. Our net loss was $14.4 million and $69.5 million for the three and nine months ended September 30, 2022. To date, we have funded our operations through the sale of convertible debt securities and equity, from the receipt of upfront and milestone payments from certain collaborations, from borrowings, from sales of Afrezza and V-Go, and royalties from UT from the sale of Tyvaso DPI and proceeds of the Sale-Leaseback Transaction. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our critical accounting policies and estimates can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. See Note 1 – Description of Business and Significant Accounting Policies in the condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) for descriptions of the new accounting policies and impact of adoption. 36 RESULTS OF OPERATIONS Trends and Uncertainties We continue to experience the impact of the COVID-19 pandemic on our sales activities and Biomm’s ability to market Afrezza in Brazil. In addition, we have increased the safety stock of certain raw materials due to concerns that COVID-19 may impact the supply chain for manufacturing Afrezza, V-Go and Tyvaso DPI. Our manufacturing of Tyvaso DPI may not meet the required demand of our partner, UT. If we fail as an effective manufacturing organization, we may be unable to support commercialization of Tyvaso DPI. Three and nine months ended September 30, 2022 and 2021 Revenues The following tables provide a comparison of the revenue categories for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, 2022 2021 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 28,548 $ 16,335 $ 12,213 75 % Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (12,289 ) (6,582 ) $ 5,707 87 % Net revenue — commercial product sales 16,259 9,753 $ 6,506 67 % Gross-to-net revenue adjustment percentage -43.0 % -40.3 % Revenue — collaborations and services 10,346 12,458 $ (2,112 ) (17 %) Royalties — collaborations 6,220 — $ 6,220 * Total revenues $ 32,825 $ 22,211 $ 10,614 48 % Nine Months Ended September 30, 2022 2021 $ Change % Change Net revenue — commercial product sales: Gross revenue from commercial product sales $ 65,968 $ 46,520 $ 19,448 42 % Wholesaler distribution fees, rebates and chargebacks, product returns and other discounts (27,161 ) (18,692 ) $ 8,469 45 % Net revenue — commercial product sales 38,807 27,828 $ 10,979 39 % Gross-to-net revenue adjustment percentage -41.2 % -40.2 % Revenue — collaborations and services 18,380 35,099 $ (16,719 ) (48 %) Royalties — collaborations 6,524 — $ 6,524 * Total revenues $ 63,711 $ 62,927 $ 784 1 % _________________________ * Not meaningful Afrezza — Gross revenue from sales of Afrezza increased by $1.5 million, or 9%, for the three months ended September 30, 2022 compared to the same period in the prior year. The increase was mainly attributable to increased price (including a more favorable gross-to-net adjustment) and patient demand, partially offset by wholesaler inventory ordering patterns resulting in lower inventory levels for the third quarter of 2022 . The gross-to-net adjustment was 39.2% of gross revenue for the three months ended September 30, 2022, compared to 40.3% of gross revenue for the same period in the prior year. The decrease in the gross-to-net percentage was primarily driven by a decrease in co-pay assistance and a decrease in wholesaler distribution fees (as a percentage of gross sales) due to an increased mix of specialty and retail pharmacy sales, partially offset by an increase in anticipated product returns. As a result, net revenue from sales of Afrezza increased by $1.1 million, or 11%, for the three months ended September 30, 2022 compared to the same period in the prior year. Gross revenue from sales of Afrezza increased by $4.6 million, or 10%, for the nine months ended September 30, 2022 compared to the same period in the prior year. The increase reflects price (including a more favorable gross-to-net adjustment), higher product demand and a favorable cartridge mix. The gross-to-net adjustment was 38.8% of gross revenue for the nine months ended September 30, 2022, compared to 40.2% of gross revenue for the same period in the prior year. The decrease in the gross-to-net percentage was primarily driven by a decrease in co-pay assistance and a decrease in wholesaler distribution fees (as a percentage of gross sales) due to an increased mix of specialty and retail pharmacy sales, partially offset by an increase in anticipated product returns. As a result, net 37 revenue from sales of Afrezza increased by $ 3.5 million, or 13 %, for the nine months ended September 3 0, 2022 compared to the same period in the prior year. V-Go — The acquisition of V-Go on May 31, 2022 resulted in an increase in gross revenue from commercial product sales of $10.7 million and net revenue of $5.4 million for the three months ended September 30, 2022. The gross-to-net adjustment of 49.4% of gross revenue was mainly attributable to commercial and government rebates and product distribution fees. V-Go gross revenue for the nine months ended September 30, 2022 was $14.8 million and net revenue was $7.5 million for the nine months ended September 30, 2022. The gross-to-net adjustment of 49.4% of gross revenue was mainly attributable to commercial and government rebates and product distribution fees. Collaborations and Services — Net revenue from collaborations and services decreased by $2.1 million, or 17%, for the three months ended September 30, 2022 and $16.7 million, or 48%, for the nine months ended September 30, 2022 compared to the same periods in the prior year. The decrease in collaborations and services revenue was primarily attributable to the completion of the R&D Services associated with our collaboration with UT. In August 2021, we entered into a commercial supply agreement with UT (the “CSA”). Revenue associated with the CSA was deferred until we began manufacturing and subsequently selling Tyvaso DPI in June 2022. During the three and nine months ended September 30, 2022, we recognized $9.9 million and $15.8 million, respectively, of revenue under the CSA. We also recognized royalty revenue of $6.2 million and $6.5 million during the three and nine months ended September 30, 2022, respectively. See Note 10 – Collaboration, Licensing and Other Arrangements . Commercial product gross profit The following tables provide a comparison of the commercial product gross profit categories for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, 2022 2021 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 16,259 $ 9,753 $ 6,506 67 % Less: cost of goods sold 5,021 3,812 $ 1,209 32 % Commercial product gross profit $ 11,238 $ 5,941 $ 5,297 89 % Gross margin 69 % 61 % Nine Months Ended September 30, 2022 2021 $ Change % Change Commercial product gross profit: Net revenue — commercial product sales $ 38,807 $ 27,828 $ 10,979 39 % Less: cost of goods sold 11,922 12,538 $ (616 ) (5 %) Commercial product gross profit $ 26,885 $ 15,290 $ 11,595 76 % Gross margin 69 % 55 % Afrezza — Commercial product gross profit for Afrezza increased by $2.8 million, or 47%, for the three months ended September 30, 2022, compared to the same period in the prior year. Gross margin for the three months ended September 30, 2022 was 81% compared to 61% for the same period in the prior year. The increase in gross profit and gross margin was attributable to an increase in Afrezza sales as well as a decrease in cost of goods sold. Cost of goods sold decreased by $1.7 million, or 45%, for the three months ended September 30, 2022 compared to the same period in the prior year. The decrease in cost of goods sold was primarily attributable to a $2.0 million decrease in excess capacity costs for Afrezza. Commercial product gross profit for Afrezza increased by $8.3 million, or 54%, for the nine months ended September 30, 2022, compared to the same period in the prior year. Gross margin for the nine months ended September 30, 2022 was 75% compared to 55% for the same period in the prior year. The increase in gross profit and gross margin was attributable to an increase in Afrezza sales as well as a decrease in cost of goods sold. Cost of goods sold decreased by $4.8 million, or 38%, for the nine months ended September 30, 2022 compared to the same period in the prior year. The decrease in cost of goods sold was primarily attributable to a $3.8 million decrease in excess capacity costs in the current period and a $2.0 million fee incurred for the amendment of the Insulin Supply Agreement in the prior year period. 38 V-Go — The acquisition of V-Go on May 31, 2022 resulted in an increase in c ommercial product gross profit of $ 2.5 million and gross margin of 46% for the three months ended September 30, 2022. Gross profit for V-Go was $3.3 million and gross margin was 44% for the nine months ended September 30, 2022. Expenses The following tables provide a comparison of the expense categories for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, 2022 2021 $ Change % Change Expenses: Cost of goods sold $ 5,021 $ 3,812 $ 1,209 32 % Cost of revenue — collaborations and services 12,439 6,075 $ 6,364 105 % Research and development 4,136 3,655 $ 481 13 % Selling 13,541 10,839 $ 2,702 25 % General and administrative 9,097 6,382 $ 2,715 43 % Asset impairment — 106 $ (106 ) * Gain on foreign currency translation (1,799 ) (2,068 ) $ (269 ) (13 %) Total expenses $ 42,435 $ 28,801 $ 13,634 47 % Nine Months Ended September 30, 2022 2021 $ Change % Change Expenses: Cost of goods sold $ 11,922 $ 12,538 $ (616 ) (5 %) Cost of revenue — collaborations and services 29,451 14,885 $ 14,566 98 % Research and development 12,565 8,426 $ 4,139 49 % Selling 42,137 31,992 $ 10,145 32 % General and administrative 27,241 22,698 $ 4,543 20 % Asset impairment — 106 $ (106 ) * Gain on foreign currency translation (8,285 ) (5,003 ) $ 3,282 66 % Loss on purchase commitments — 339 $ (339 ) * Total expenses $ 115,031 $ 85,981 $ 29,050 34 % _________________________ * Not meaningful Cost of revenue — collaborations and services increased by $6.4 million, or 105%, for the three months ended September 30, 2022 and $14.6 million, or 98%, for the nine months ended September 30, 2022 compared to the respective periods in the prior year. The increase was attributable to an increase in manufacturing activities for commercial product. Research and development expenses increased by $0.5 million, or 13%, for the three months ended September 30, 2022 compared to the same period in the prior year. The increase was primarily attributable to personnel costs for headcount hired in the second half of 2021, partially offset by a decrease in the Afrezza pediatrics clinical study (INHALE-1) due to study startup costs incurred in the third quarter of 2021. Research and development expenses increased by $4.1 million, or 49%, for the nine months ended September 30, 2022 compared to the same period in the prior year. The increase was primarily attributable to personnel costs for headcount hired in the second half of 2021, development activities on our product pipeline, and the Afrezza pediatrics clinical study (INHALE-1). Selling expenses increased by $2.7 million, or 25%, for the three months ended September 30, 2022, compared to the same period in the prior year. The increase was primarily attributable to V-Go promotional efforts, elimination of the Thyquidity co-promotion (which permitted some expenses associated with the sales force to be recognized as cost of revenue — collaborations and services in the third quarter of 2021), and net impact of personnel-related costs due to Afrezza sales force restructuring. Selling expenses increased by $10.1 million, or 32%, for the nine months ended September 30, 2022, compared to the same period in the prior year. The increase was primarily attributable to a pilot promotional effort aimed at primary care physicians that began in the fourth quarter of 2021, elimination of the Thyquidity co-promotion (which permitted some expenses associated with the sales force to 39 be recognized as cost of revenue — collaborations and services in the same period of 2021), V-Go promotional efforts, and net impact of personnel - related costs due to Afrezza sales force restructuring. General and administrative expenses increased by $2.7 million, or 43%, for the three months ended September 30, 2022, compared to the same period in the prior year. This increase was primarily attributable to higher stock-based compensation, increased headcount and higher professional fees. General and administrative expenses increased by $4.5 million, or 20%, for the nine months ended September 30, 2022, compared to the same period in the prior year. This increase was primarily attributable to higher stock-based compensation, increased headcount, and higher professional and consulting fees. An impairment of $0.1 million was recognized for the three and nine months ended September 30, 2021 for the contract asset associated with variable consideration for gross profits for sales of Thyquidity under Vertice Pharma’s co-promotion agreement. See Note 10 – Collaboration, Licensing and Other Arrangements. Under the Insulin Supply Agreement with Amphastar, payment obligations are denominated in Euros. We are required to record the foreign currency translation impact of the U.S. dollar to Euro exchange rate associated with the recognized gain or loss on purchase commitments. The foreign currency translation gain was $1.8 million for the three months ended September 30, 2022 compared to $2.1 million for the same period in the prior year. The foreign currency translation gain was $8.3 million for the nine months ended September 30, 2022 compared to $5.0 million for the same period in the prior year. Other Income (Expense) The following tables provide a comparison of the other income (expense) categories for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, 2022 2021 $ Change % Change Interest income $ 663 $ 36 $ 627 * Interest expense on financing liability (2,466 ) — $ 2,466 * Interest expense on notes (2,812 ) (2,803 ) $ 9 * Gain on extinguishment of debt — 4,930 $ (4,930 ) * Other (expense) income (207 ) 1 $ 208 * Total other expense $ (4,822 ) $ 2,164 $ 6,986 (323 %) Nine Months Ended September 30, 2022 2021 $ Change % Change Interest income $ 1,556 $ 64 $ 1,492 * Interest expense on financing liability (7,280 ) — $ 7,280 * Interest expense on notes (12,202 ) (12,435 ) $ (233 ) (2 %) Loss on extinguishment of debt, net — (17,200 ) $ (17,200 ) * Other expense (207 ) (240 ) $ (33 ) (14 %) Total other expense $ (18,133 ) $ (29,811 ) $ (11,678 ) (39 %) _________________________ * Not meaningful Interest income, consisting of interest on investments net of amortization, increased $0.6 million for the three months ended September 30, 2022 and $1.5 million for the nine months ended September 30, 2022 compared to the same periods in the prior year primarily due to higher yields on our marketable securities and money market funds. Interest expense on financing liability was $2.5 million for the three months ended September 30, 2022 and $7.3 million for the nine months ended September 30, 2022 and represented interest incurred on the Sale-Leaseback Transaction for our manufacturing facility in Danbury, CT, which closed in the fourth quarter of 2021. 40 Interest expense on notes for the three months ended September 30 , 2022 was comparable to the same period in the prior year . See Note 9 — Borrowings . Interest expense on notes decreased $ 0.2 million , or 2 %, for the nine months ended September 30, 2022. Gain on extinguishment of debt of $4.9 million for the three months ended September 30, 2021 consisted of the principal amount and related accrued and unpaid interest for our Paycheck Protection Program (“PPP”) loan, which was forgiven by the SBA in July 2021. Loss on extinguishment of debt, net of $17.2 million for the nine months ended September 30, 2021 consisted of $22.1 million loss on extinguishment of debt for the amendment to the Mann Group convertible note, which did not result in a change in our financial position, partially offset by a $4.9 million gain on extinguishment of debt as a result of the SBA’s forgiveness of the PPP loan. Other expense or income for the nine months ended September 30, 2022 and 2021 consisted primarily of the loss associated with a foreign currency hedging transaction which was entered into to mitigate our exposure to foreign currency exchange risks associated with our insulin purchase obligation in 2021 under the Insulin Supply Agreement. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are our cash, cash equivalents, and investments. Our primary uses of cash include the development of our product pipeline, the manufacturing and marketing of Afrezza, the funding of general and administrative expenses, and interest expense on our financing liability and debt. To date, we have funded our operations through the sale of equity and convertible debt securities, from the receipt of upfront and milestone payments from certain collaborations, from borrowings, from sales of Afrezza and V-Go, royalties and manufacturing revenue from UT as well as proceeds from the Sale-Leaseback transaction. We believe we will be able to meet our liquidity needs over the next twelve months based on the balance of cash, cash equivalents and investments on hand. We believe we will meet longer-term expected future cash requirements and obligations, through a combination of cash and investments on hand, operating activities including manufacturing revenue and royalties from the production and sale of Tyvaso DPI. As of September 30, 2022, we had $278.8 million principal amount of outstanding debt, consisting of: • $230.0 million aggregate principal amount of Senior convertible notes bearing interest at 2.50% payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2021 and maturing on March 1, 2026, unless earlier converted, redeemed or repurchased. The Senior convertible notes are convertible at an initial conversion price of approximately $5.21 per share of common stock. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. • $40.0 million principal amount under the MidCap credit facility, bearing interest at an annual rate equal to one-month Secured Overnight Financing Rate (“SOFR”) plus 6.25% (cap of 8.25%), subject to a one-month SOFR floor of 1.00%, payable in equal monthly installments beginning in September 2023 through maturity in August 2025. In August 2022, the Company amended the MidCap credit facility and transitioned the benchmark interest rate from LIBOR to SOFR. The interest rate prior to the amendment was one-month LIBOR (1% floor) plus 6.25% (cap of 8.25%) . • $8.8 million principal amount of indebtedness under the Mann Group convertible note bearing interest at a fixed rate of 2.50% per annum compounded quarterly and maturing in December 2025, which is convertible into shares of our common stock at the option of Mann Group at a conversion price of $2.50 per share. Interest was paid-in-kind from August 2019 until the end of 2020, after which we have the option to pay interest in-kind or in shares. There can be no assurance that we will have sufficient resources to make any required repayments of principal under the Senior convertible notes, the MidCap credit facility or the Mann Group convertible note. The Senior convertible notes and Mann Group convertible note are fully convertible prior to maturity as further disclosed in Note 9 – Borrowings . To date, we have been able to timely make our required interest payments, but we cannot guarantee that we will be able to do so in the future. If we fail to repurchase the Mann Group promissory note, we will be in default under the applicable instrument for such indebtedness and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including the noteholders initiating bankruptcy proceedings or causing us to cease operations altogether. In July 2013, we issued Milestone Rights to the Original Milestone Purchasers. The Milestone Rights were subsequently assigned the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, $60.0 million of which remains payable upon achievement of such milestones as of September 30, 2022. A $5.0 million milestone payment was made in the third quarter of 2022. See Note 15 – Commitments and Contingencies and Note 9 – Borrowings for further information related to the Milestone Rights. 41 During the nine months ended September 3 0 , 2022 , we used $ 78.3 million of cash for our operating activities , which primarily consisted of $ 59.1 million of selling, general and administrative expenses , $ 5.0 million of cost of goods sold, $ 16.0 million of costs for research and development and $ 12.0 million of cash paid for interest , partially offset by $ 63.0 million of revenue . During the nine months ended September 30, 2021, we used $49.4 million of cash for our operating activities, which primarily consists of $47.7 million of selling, general and administrative expenses, $25.5 million of cost of goods sold, $7.7 million for research and development and $5.6 million of cash paid for interest, partially offset by $37.6 million of revenue. Cash used in investing activities of $10.1 million for the nine months ended September 30 , 2022 was primarily due to the purchase of $70.1 million of debt securities, the up-front consideration of $15.1 million for certain assets and assumed liabilities related to V-Go and $5.0 million purchase of available-for-sale securities, and $2.5 million purchase of property and equipment, partially offset by the maturity of $82.6 million of debt securities. Cash used in investing activities of $139.0 million for the nine months ended September 30, 2021 was primarily due to the purchase of $238.4 million of debt securities and $6.3 million purchase of property and equipment, partially offset by the sale of $105.7 million of debt securities. Cash provided by financing activities of $18.6 million for the nine months ended September 30 , 2022 was primarily due to net proceeds from at-the-market offering of $19.4 million, partially offset by the milestone payment of $1.1 million. Cash provided by financing activities of $172.9 million for the nine months ended September 30, 2021 was primarily due to net proceeds from the offering of Senior convertible notes of $222.7 million, partially offset by the repayment of $35.1 million of Mann Group non-convertible notes and related unpaid accrued interest and the repayment of $10.0 million of principal and $1.0 million prepayment penalty for the MidCap credit facility. Future Liquidity Needs We are not currently profitable and have rarely generated positive net cash flow from operations. In addition, we expect to continue to incur significant expenditures for the foreseeable future in support of our manufacturing operations, sales and marketing costs for our products, and development costs for other product candidates in our pipeline. As of September 30, 2022, we had capital resources of $54.3 million in cash and cash equivalents, $110.7 million in short-term investments, $12.7 million in long-term investments, and total principal amount of outstanding borrowings of $278.8 million. We believe our resources will be sufficient to fund our operations for beyond the next twelve months from the date of issuance of our condensed consolidated financial statements included in Part I – Financial Statements (Unaudited) . Contractual Obligations See Note 9 – Borrowings and Note 15 – Commitments and Contingencies for a discussion of material changes outside of the ordinary course of business in our contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as contained in the Annual Report. 42