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MNKD > SEC Filings for MNKD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MANNKIND CORP

Form 10-Q for MANNKIND CORP


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements, which involve risks and uncertainties. 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. These 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 notes for the year ended December 31, 2011 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are 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

We are a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes and cancer. Our lead product candidate, AFREZZA (insulin human [rDNA origin]) inhalation powder, is an ultra rapid-acting insulin that is in late-stage clinical investigation for the treatment of adults with type 1 or type 2 diabetes for the control of hyperglycemia.

In January 2011, we received a second Complete Response letter in which the FDA requested that we conduct two clinical studies with the Dreamboat inhaler (one in patients with type 1 diabetes and one in patients with type 2 diabetes), with at least one trial including a treatment group using the MedTone inhaler in order to obtain a head-to-head comparison of the pulmonary safety data for the two devices. We are conducting these studies at sites in the United States, Eastern Europe and South America. We finished recruiting patients into study 171 in late September 2012 and finished recruiting patients into study 175 in early October 2012, putting these studies on a schedule estimated to be completed in the second quarter of 2013. Upon completion, we then would expect to submit the results to the FDA as an amendment to our NDA in the third quarter of 2013. However, the data collected from these clinical trials may not reach statistical significance or otherwise be sufficient to support an amendment to our NDA, or FDA approval. Moreover, there can be no assurance that we will satisfy all of the FDA's requirements with these two clinical studies or that the FDA will ultimately find our proposed approach to these clinical studies acceptable. The FDA could also request that we conduct additional clinical studies beyond the currently planned studies in order to provide sufficient data for approval of AFREZZA.

We are a development stage enterprise and have incurred significant losses since our inception in 1991. As of September 30, 2012, we have incurred a cumulative net loss of $2.1 billion and an accumulated stockholders' deficit of $276.2 million. To date, we have not generated any product revenues and have funded our operations primarily through the sale of equity securities, convertible debt securities and borrowings under our related party loan. As discussed below in "Liquidity and Capital Resources," this raises substantial doubt about our ability to continue as a going concern.

We have held extensive discussions with a number of pharmaceutical companies concerning a potential strategic business collaboration for AFREZZA. To date we have not reached an agreement on a collaboration with any of these companies. There can be no assurance that any such collaboration will be available to us on a timely basis or on acceptable terms, if at all.

We do not expect to record sales of any product prior to regulatory approval and commercialization of AFREZZA. We currently do not have the required approvals to market any of our product candidates, and we may not receive such approvals. We may not be profitable even if we succeed in commercializing any of our product candidates. We expect to make substantial expenditures and to incur additional operating losses for at least the next several years as we:

continue the clinical development of AFREZZA and new inhalation systems for the treatment of diabetes;

seek regulatory approval to sell AFREZZA in the United States and other markets;


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seek development and commercialization collaborations for AFREZZA; and

develop additional applications of our proprietary Technosphere platform technology for the pulmonary delivery of other drugs.

Our business is subject to significant risks, including but not limited to the risks inherent in our ongoing clinical trials and the regulatory approval process, our potential inability to enter into sales and marketing collaborations or to commercialize our lead product candidate in a timely manner, the results of our research and development efforts, competition from other products and technologies and uncertainties associated with obtaining and enforcing patent rights.

RESEARCH AND DEVELOPMENT EXPENSES

Our research and development expenses consist mainly of costs associated with the clinical trials of our product candidates that have not yet received regulatory approval for marketing and for which no alternative future use has been identified. This includes the salaries, benefits and stock-based compensation of research and development personnel, raw materials, such as insulin purchases, laboratory supplies and materials, facility costs, costs for consultants and related contract research, licensing fees, and depreciation of laboratory equipment. We track research and development costs by the type of cost incurred. We partially offset research and development expenses with the recognition of estimated amounts receivable from the State of Connecticut pursuant to a program under which we can exchange qualified research and development income tax credits for cash.

Our research and development staff conducts our internal research and development activities, which include research, product development, clinical development, manufacturing and related activities. This staff is located in our facilities in Valencia, California; Paramus, New Jersey; and Danbury, Connecticut. We expense research and development costs as we incur them.

Clinical development timelines, likelihood of success and total costs vary widely. We are focused primarily on advancing AFREZZA through regulatory filings. Based on the results of preclinical studies, we plan to develop additional applications of our Technosphere technology. Additionally, we anticipate that we will continue to determine which research and development projects to pursue, and how much funding to direct to each project, on an ongoing basis, in response to the scientific and clinical success of each product candidate. We cannot be certain when any revenues from the commercialization of our products will commence.

At this time, due to the risks inherent in the clinical trial process and given the early stage of development of our product candidates other than AFREZZA, we are unable to estimate with any certainty the costs that we will incur in the continued development of our product candidates for commercialization. The costs required to complete the development of AFREZZA will be largely dependent on the cost and efficiency of our clinical trial operations and discussions with the FDA regarding its requirements.

GENERAL AND ADMINISTRATIVE EXPENSES

Our general and administrative expenses consist primarily of salaries, benefits and stock-based compensation for administrative, finance, business development, human resources, legal and information systems support personnel. In addition, general and administrative expenses include professional service fees and business insurance costs, and litigation settlement charges.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies as described in Item 7 of our Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Three and nine months ended September 30, 2012 and 2011

Revenues

We recognized revenue of $35,000 under a license agreement for the three months ended September 30, 2012 and no revenue for the three months ended September 30, 2011. We recognized revenue of $35,000 and $50,000 under license agreements for the nine months ended September 30, 2012 and 2011, respectively. We do not anticipate sales of any product prior to regulatory approval and commercialization of AFREZZA.


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Research and Development Expenses

The following table provides a comparison of the research and development
expense categories for the three and nine months ended September 30, 2012 and
2011 (dollars in thousands):



                                        Three months ended
                                           September 30,
                                        2012           2011        $ Change       % Change
Clinical                              $  12,248      $  5,245      $   7,003            133 %
Manufacturing                             9,735        13,917         (4,182 )          (30 %)
Research                                  1,721         2,528           (807 )          (32 %)
Research and development tax credit         (85 )        (265 )          180            (68 %)
Stock-based compensation expense          1,834         1,707            127              7 %

Research and development expenses     $  25,453      $ 23,132      $   2,321             10 %

                                         Nine months ended
                                           September 30,
                                         2012          2011        $ Change       % Change
 Clinical                              $ 36,454      $ 17,870      $  18,584            104 %
 Manufacturing                           29,727        49,377        (19,650 )          (40 %)
 Research                                 5,843         9,266         (3,423 )          (37 %)
 Research and development tax credit       (270 )        (522 )          252            (48 %)
 Stock-based compensation expense         4,493         3,726            767             21 %

 Research and development expenses     $ 76,247      $ 79,717      $  (3,470 )           (4 %)

Total research and development expenses for the three months ended September 30, 2012 increased, as compared to the three months ended September 30, 2011. In June 2011, we entered into a letter agreement with N.V. Organon, or Organon, now a subsidiary of Merck, to settle a dispute arising from us terminating our supply agreement with Organon. Pursuant to the letter agreement, we received two shipments of recombinant human insulin from Organon in exchange for payments totaling $16.0 million. During the second quarter of 2011 quarter, we had expensed $4.3 million for insulin received related to the first shipment and recorded a contract cancellation fee of $7.6 million. During the third quarter of 2011, we expensed the remaining $4.1 million for insulin received related to the second shipment. The increase in research and development expenses was primarily due to increased clinical trial related expenses of $7.0 million in connection with studies 171 and 175 which began enrollment in the latter part of 2011, partially offset by a non-recurring $4.1 million expense recorded in the third quarter of 2011 in connection with insulin received pursuant to the termination of our supply agreement with Organon and decreased salary related costs of $0.5 million as a result of non-recurring retention bonus expense incurred during the three months ended September 30, 2011.

Total research and development expenses for the nine months ended September 30, 2012 decreased as compared to the nine months ended September 30, 2011. In connection with the terminated insulin supply agreement, during the nine months ended September 30, 2011, we expensed $8.4 million for insulin received and recorded $7.6 million for a contract cancellation fee. The decrease in research and development expenses was primarily due to the non-recurring $16.0 million expense recorded during the nine months ended September 30, 2011 related to our termination of the supply agreement with Organon and receipt of insulin, decreased salary related expenses of $7.9 million due to the February 2011 restructuring as well as the positive effect of our cost cutting measures on operating expenses, partially offset by $20.2 million of increased clinical trial related expenses in connection with studies 171 and 175 being conducted in 2012.

We anticipate that our overall research and development expenses will increase in 2012 as a result of our ongoing clinical trials.


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General and Administrative Expenses

The following table provides a comparison of the general and administrative
expense categories for the three and nine months ended September 30, 2012 and
2011 (dollars in thousands):



                                                Three months ended
                                                   September 30,
                                                2012            2011          $ Change       % Change
Salaries, employee related and other
general expenses                             $     7,182       $ 8,027       $     (845 )          (10 %)
Charge for litigation settlement                     901            -               901
Stock-based compensation expense                   1,986         1,614              372             23 %

General and administrative expenses          $    10,069       $ 9,641       $      428              4 %

                                                 Nine months ended
                                                   September 30,
                                                2012            2011         $ Change       % Change
Salaries, employee related and other
general expenses                              $  23,337       $ 25,996       $  (2,659 )          (10 %)
Charge for litigation settlement                  8,648             -            8,648
Stock-based compensation expense                  5,277          4,297             980             23 %

General and administrative expenses           $  37,262       $ 30,293       $   6,969             23 %

General and administrative expenses for the three months ended September 30, 2012 increased as compared to the same period in the prior year primarily due to an increase in the estimated charge for litigation settlement of $0.9 million and increased stock-based compensation expense of $0.4 million, offset in part by decreased salary related costs of $0.4 million as a result of non-recurring retention bonus expense incurred during the third quarter of 2011 and decreased professional fees of $0.4 million due to the resolution of litigation matters. For the nine months ended September 30, 2012 compared to the same period in the prior year, general and administrative expenses increased due to an estimated charge for litigation settlement of $8.6 million, increased stock-based compensation expense of $1.0 million resulting from special awards issued to employees, partially offset by decreased salary related costs of $2.9 million as a result of the February 2011 reduction in force.

Other Income (Expense)

Other income (expense) for the three months ended September 30, 2012 decreased by $2.7 million as compared to the same period in the prior year due to a $2.7 million adjustment recorded related to warrants (see Note 9 - Warrants). Other income (expense) for the nine months ended September 30, 2012 increased by $10.6 million as compared to the same period in the prior year primarily due to a $12.0 million gain recognized to reflect the adjustment in fair value of a forward purchase contract with a related party, partially offset by a realized loss of $1.3 million on foreign exchange hedging contracts recognized for the nine months ended September 30, 2011.

Interest Expense

Interest expense for the three months ended September 30, 2012 decreased by $0.6 million and increased by $0.7 million for the nine months ended September 30, 2012, as compared to the same periods in the prior year primarily due to the interest expense associated with additional principal drawn down on our note payable to our principal stockholder.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily through the sale of equity securities, convertible debt securities and borrowings under our related party note.

In October 2007, we entered into a $350.0 million loan arrangement with our principal stockholder. In February 2009, as a result of our principal stockholder being licensed as a finance lender under the California Finance Lenders Law, the promissory note underlying the loan arrangement was revised to reflect the lender as The Mann Group LLC, an entity controlled by our principal stockholder. Interest will accrue on each outstanding advance at a fixed rate equal to the one-year LIBOR rate as reported by the Wall Street Journal on the date of such advance plus 3% per annum and is payable quarterly in arrears. The borrowing rate was 4.5% at both September 30, 2012 and December 31, 2011.

In August 2010, we entered into a letter agreement confirming a previous commitment by The Mann Group to not require us to prepay amounts outstanding under the amended and restated promissory note if the prepayment would require us to use its working capital resources. In the event of a default, all unpaid principal and interest either becomes immediately due and


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payable or may be accelerated at The Mann Group's option, and the interest rate will increase to the one-year LIBOR rate calculated on the date of the initial advance or in effect on the date of default, whichever is greater, plus 5% per annum. All borrowings under the loan arrangement are unsecured. The loan arrangement contains no financial covenants. There are no warrants associated with the loan arrangement.

In August 2010, we amended and restated the existing promissory note evidencing the loan arrangement with The Mann Group to extend the maturity date from December 31, 2011 to December 31, 2012. In January 2012, we amended the note with The Mann Group to extend the maturity date from December 31, 2012 to March 31, 2013 and to extend the date through which we could continue to borrow under the amended terms of the note until September 30, 2012. Interest is payable on the first day of the calendar quarter following the calendar quarter in which an advance is made, or such other time as we mutually agree. On May 9, 2012, we amended the note with The Mann Group to extend the maturity date from March 31, 2013 to July 1, 2013. Under the amended and restated promissory note, The Mann Group can require us to prepay up to $200.0 million in advances that have been outstanding for at least 12 months. If The Mann Group exercises this right, we will have 90 days after The Mann Group provides written notice (or the number of days to maturity of the note if less than 90 days) to prepay such advances (see discussion regarding letter agreement below). On June 27, 2012, we amended the note with The Mann Group to allow accrued and unpaid interest that becomes due and payable under the note to be paid-in-kind and capitalized into new principal indebtedness upon agreement of the parties, and concurrently agreed to capitalize into new principal indebtedness an aggregate of approximately $11.9 million of accrued and unpaid interest due and payable as of June 27, 2012. In addition, we and The Mann Group agreed that the cancelled principal amount related to the common stock purchase agreement as described below would be permanently retired and not available for re-borrowing under the note. The amendment also extended the date through which we can borrow under the note to December 31, 2012.

In October 2012, pursuant to a previously filed shelf registration statement, which the SEC declared effective on September 24, 2012, we sold shares of its common stock and offered warrants to purchase shares of its common stock in an underwritten public offering (see Note 14 - Subsequent events). Concurrent with the underwritten public offering, the Mann Group agreed to purchase $107.4 million worth of restricted shares of common stock and restricted warrants in exchange for cancellation of principal under the $350 million amended and restated promissory note. Principal indebtedness cancelled in connection with the amended and restated promissory note will become available for reborrowing by us. The closing is subject to stockholder approval of an increase of our authorized shares of common stock for the potential new issuances to The Mann Group.

In addition, we amended and restated the promissory note to, among other things, extend the maturity date of the promissory note to January 1, 2014, extend the date through which we can borrow under the promissory note to September 30, 2013, and adjust the annual interest rate on all outstanding principal to the one year London Interbank Offered Rate (LIBOR) on December 31, 2012 plus 5%, effective beginning on January 1, 2013. The amendment to extend the maturity date to January 1, 2014 resulted in us classifying the note payable to related party as long-term as of September 30, 2012.

In August 2010, we completed a Rule 144A offering of $100.0 million aggregate principal amount of 5.75% Senior Convertible Notes due 2015. The net proceeds to us from the sale of the notes were approximately $95.8 million, after deducting the discount to the initial purchasers of $3.3 million and the offering expenses paid by us.

In connection with the offering of the notes, in August 2010, we entered into a share lending agreement with Bank of America, pursuant to which we lent 9,000,000 shares of our common stock to Bank of America, which is obligated to return the borrowed shares (or, in certain circumstances, the cash value thereof) to us on or about the 45th business day following the date as of which the entire principal amount of the notes ceases to be outstanding, subject to extension or acceleration in certain circumstances or early termination at Bank of America's option.

Also in August 2010, we entered into an underwriting agreement with Merrill Lynch and Bank of America, pursuant to which the borrowed shares were offered and sold to the public at a fixed price of $5.55 per share. We did not receive any proceeds from the sale of the borrowed shares to the public, but received a lending fee of $90,000 pursuant to the share lending agreement for the use by Bank of America of the borrowed shares. Bank of America received all of the net proceeds from the sale of the borrowed shares to the public.

On February 8, 2012, we sold $86.3 million worth of units in an underwritten public offering, with each unit consisting of one share of common stock and a warrant to purchase 0.6 of a share of common stock, and reflects the full exercise of an over-allotment option granted to the underwriters. Net proceeds from this offering were approximately $80.6 million (excluding discounts and commissions to the underwriters and offering expenses), excluding any warrant exercises. Concurrent with this public offering, The Mann Group LLC agreed to purchase $77.2 million worth of restricted shares of common stock which were issued on June 27, 2012 in exchange for cancellation of principal indebtedness of $77.2 million. Concurrently with this closing, we capitalized into new principal indebtedness an aggregate of approximately $11.9 million of accrued and unpaid interest due and payable as of June 27, 2012.

In October 2012, pursuant to a previously filed Shelf Registration, which was declared effective by the SEC on September 24, 2012, we sold in an underwritten public offering 40,000,000 shares of its common stock, together with warrants to purchase up to 30,000,000 shares of our common stock. In addition, we sold pursuant to the full exercise of an over-allotment option granted to the underwriters, an additional 6,000,000 shares of common stock , together with warrants to purchase up to an aggregate of 4,500,000 shares of common stock. All of the securities were sold together with a warrant for a combined purchase price of $2.00. The shares of common stock and warrants are immediately separable and were issued separately. Net proceeds from this offering were approximately $86.0 million (after deducting discounts and commissions to the underwriters and offering expenses), excluding any future proceeds from the exercise of the warrants. Each warrant entitles the holder to purchase 0.75 of a share of common stock. The warrants are exercisable at $2.60 per share and will expire 53 weeks from the date of the issuance.

During the nine months ended September 30, 2012, we used $91.8 million of cash for our operations and had a net loss $117.6 million, of which $8.6 million consisted of non-cash charges such as depreciation and amortization, stock-based compensation, and the fair value adjustments of the forward purchase contract. Net loss during the same period also included $17.0 million of changes in assets and liabilities, which primarily consisted of changes in prepaid expenses and other current assets and accrued expenses and other current liabilities, which consisted primarily of a non-recurring litigation settlement accrual recorded during the nine months ended September 30, 2012 and an increase in the clinical trial accrual. By comparison, during the nine months ended September 30, 2011, we used $103.5 million of cash for our operations and had a net loss of $124.4 million, of which $20.1 million consisted of non-cash charges such as depreciation and amortization, and stock-based compensation. Net loss during the same period included $0.9 million of changes in assets and liabilities consisting primarily of increased accrued expenses and other current liabilities. Cash used for our operations for the nine months ended September 30, 2012 decreased by $11.7 million compared to cash used for our operations for the nine months ended September 30, 2011 due primarily to decreased salary related expenses due to the February 2011 restructuring, the termination of a supply agreement in 2011 offset by an increase in clinical trial related expenses in 2012. We expect our negative operating cash flow to continue at least until we obtain regulatory approval and achieve commercialization of AFREZZA.


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We used $0.5 million of cash for investing activities during the nine months ended September 30, 2012, compared to $2.8 million for the nine months ended September 30, 2011, primarily to purchase machinery and equipment to expand our manufacturing operations and our quality systems that support clinical trials for AFREZZA. Cash used in investing activities for the nine months ended September 30, 2012 decreased $2.3 million compared to the same period in prior year due to $3.8 million in proceeds received from the early termination of certificates of deposit that were previously held as collateral for foreign exchange hedging instruments during the nine months ended September 30, 2011 offset by $6.1 million in decreased purchases of machinery and equipment in the first nine months of 2012.

Our financing activities generated $91.3 million of cash for the nine months . . .

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