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FORM 10-K
MANNKIND CORP - MNKD
Filed: March 16, 2010 (period: December 31, 2009)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
� ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-50865.
MannKind Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
28903 North Avenue Paine
Valencia, California
(Address of principal executive offices)
13-3607736
(I.R.S. Employer
Identification No.)
91355
(Zip Code)
Registrant’s telephone number, including area code
(661) 775-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes � No �
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes � No �
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes � No �
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. �
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes � No �
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
�
Accelerated
filer �
Source: MANNKIND CORP, 10-K, March 16, 2010
Non-accelerated filer �
Smaller reporting �
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(Do not check if a smaller reporting
company)
company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes � No �
As of June 30, 2009, the aggregate market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the last sale price of such stock as of such date on the Nasdaq Global Market, was
approximately $473,888,088.
As of February 19, 2010, there were 113,355,204 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement, or the Proxy Statement, for the 2010 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are
incorporated by reference in Part III, Items 9-13 of this Annual Report on Form 10-K.
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
(Removed and Reserved)
PART I
PART II
Item 5.
Item 6.
Item 7.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
EX-23.1
EX-31.1
EX-31.2
EX-32
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Source: MANNKIND CORP, 10-K, March 16, 2010
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Forward-Looking Statements
Statements in this report that are not strictly historical in nature are forward-looking statements. These
statements include, but are not limited to, statements about: the progress or success of our research,
development and clinical programs, including the submission of application for and receipt of regulatory
clearances and approvals, and the timing or success of the commercialization of AFREZZA™, our ultra
rapid-acting insulin product that was formerly known as AFRESA®, or any other products or therapies that
we may develop; our ability to market, commercialize and achieve market acceptance for AFREZZA, or any
other products or therapies that we may develop; our ability to protect our intellectual property and operate
our business without infringing upon the intellectual property rights of others; our estimates for future
performance; our estimates regarding anticipated operating losses, future revenues, capital requirements and
our needs for additional financing; and scientific studies and the conclusions we draw from them. In some
cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “goal,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,”
“will,” “would,” and similar expressions intended to identify forward-looking statements. These statements
are only predictions or conclusions based on current information and expectations and involve a number of
risks and uncertainties. The underlying information and expectations are likely to change over time. Actual
events or results may differ materially from those projected in the forward-looking statements due to various
factors, including, but not limited to, those set forth under the caption “Risks and Uncertainties That May
Affect Results” and elsewhere in this report. Except as required by law, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
AFREZZA™, MedTone® and Technosphere® are our trademarks in the United States. We have also
applied for or have registered company trademarks in other jurisdictions, including Europe and Japan. This
document also contains trademarks and service marks of other companies that are the property of their
respective owners.
PART I
Item 1. Business
Unless the context requires otherwise, the words “MannKind,” “we,” “company,” “us” and “our” refer to
MannKind Corporation. Unless explicitly stated otherwise, AFREZZA refers to the combination of
AFREZZA inhalation powder and the AFREZZA inhaler.
OVERVIEW
MannKind Corporation is 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
has completed Phase 3 clinical trials that evaluated its safety and efficacy in the treatment of diabetes. We
submitted a new drug application, or NDA, to the United Stated Food and Drug Administration, or FDA, for
AFREZZA in March 2009. On March 12, 2010, we received a Complete Response letter from the FDA
regarding this NDA, seeking additional information about AFREZZA. As of the date of this Annual Report,
AFREZZA remains under review by the FDA.
AFREZZA utilizes our proprietary Technosphere formulation technology, which is based on a class of
organic molecules that are designed to self-assemble into small particles onto which drug molecules can be
loaded. With AFREZZA, we load recombinant human insulin onto the Technosphere particles; however, this
technology is not limited to insulin delivery. We believe it represents a versatile drug delivery platform that
may allow pulmonary administration of certain drugs that currently require administration by injection, such
as glucagon-like peptide-1, or GLP-1. Beyond convenience, we believe the key advantage of drugs inhaled as
Technosphere formulations is that they have been shown to be absorbed very rapidly into the arterial
circulation, essentially mimicking intra-arterial administration.
In addition to our Technosphere platform, we are developing therapies for the treatment of different types
of cancer. We have conducted Phase 1 clinical studies of two immunotherapy product candidates,
MKC1106-PP and MKC1106-MT, and are preparing to initiate a Phase 2 study of MKC1106-MT in patients
with advanced melanoma. We are also conducting preclinical studies of a drug candidate, MKC204, that may
have the potential to treat certain malignancies and inflammatory diseases.
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The following chart indicates the most advanced stage of development for each of our product candidates.
Technosphere Platform
AFREZZA (insulin)
MKC253 (GLP-1)
MKC180 (obesity
compound)
Cancer Immunotherapy
MKC1106-MT
MKC1106-PP
MKC1106-NS
Cancer Drugs
MKC204 (IRE-1
inhibitor)
Preclinical
Development
Phase 1
Clinical Studies
Phase 2
Phase 3
Regulatory
Review
Commercial
X
X
X
X
X
X
X
We were incorporated in the State of Delaware in 1991. Our principal executive offices are located at
28903 North Avenue Paine, Valencia, California 91355, and our telephone number at that address is
(661) 775-5300. Our website address is http://www.mannkindcorp.com. Our filings with the Securities and
Exchange Commission, or SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports are available free of charge through our
website as soon as reasonably practicable after being electronically filed with or furnished to the SEC. We
regularly post copies of our press releases as well as additional information on our website. Interested persons
can subscribe on the website to e-mail alerts that are sent automatically when we issue press releases, file
reports with the SEC or post certain other information to the website.
RECENT DEVELOPMENTS
On March 12, 2010, we received a Complete Response letter from the FDA regarding the NDA for
AFREZZA. A Complete Response letter is issued by the FDA’s Center for Drug Evaluation and Research
when the review of a submitted file is completed and questions remain that preclude the approval of the NDA
in its current form.
The Complete Response letter related to the AFREZZA application requested several items, including:
•
•
•
•
information and currently available clinical data that support the clinical utility of AFREZZA;
information about the comparability of the MedTone inhaler to an earlier version of this device that
was used in pivotal clinical trials;
changes to the proposed labeling of the cartridges, foil pouches and cartons; and
updated safety data related to AFREZZA, including whether there were any significant changes or
findings in the safety profile.
The letter did not require any additional pre-marketing clinical studies in order for the FDA to complete its
review of the NDA.
The letter stated that the FDA had not yet completed its inspection of one of the manufacturing or testing
facilities listed in the NDA and that satisfactory inspection reports for all facilities must be received before the
application could be approved. We had previously been informed by the FDA that it had not yet completed
this inspection. We are aware from our supplier that the inspection of its facility has now been scheduled by
the FDA and is expected to take place during the week of March 22, 2010.
In the Complete Response letter, the FDA also stated that a Risk Evaluation and Mitigation Strategy, or
REMS, will be necessary for AFREZZA, if it is approved, to ensure that the benefits of the drug outweigh:
•
•
•
the risk of respiratory difficulty immediately post-inhalation, especially in patients with undiagnosed
chronic lung disease;
the risk of pulmonary function decline over time; and
the potential risk of harm due to use by inappropriate patient populations, such as smokers and
patients with chronic lung disease.
The FDA acknowledged receipt of our proposed REMS materials that were included in the original NDA
submission and stated that it would continue its discussion with us regarding the REMS after we had
Source: MANNKIND CORP, 10-K, March 16, 2010
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submitted our response to the Complete Response letter.
As recommended by the FDA, we will request an End-of-Review meeting with the agency to discuss our
approach for resolving the remaining issues. Prior to this regulatory action, our plan had been to follow the
original NDA for AFREZZA with another regulatory submission for our next-generation inhaler rather than
launch AFREZZA with the MedTone device. We intend to discuss with the FDA whether it is appropriate to
address the agency’s requests using what would otherwise have been a supplemental NDA submission. If this
approach is acceptable, we believe that this regulatory action may not have a significant impact on the timing
of the commercial launch of AFREZZA, which would not have occurred until at least 2011 in any event.
We plan to work closely with the FDA to answer the agency’s questions and to provide the requested
information and data as quickly as possible. There can be no assurance that we will be able to satisfy all of the
FDA’s requirements with currently available data or that the FDA will find our proposed approach with
respect to the inhaler acceptable. The FDA could also request that we conduct additional clinical trials to
provide sufficient data for approval of the NDA. There can be no assurance that we will obtain approval of
the NDA in time for a commercial launch of AFREZZA in 2011 or at any time.
DIABETES
Diabetes is a major disease characterized by the body’s inability to properly regulate levels of blood
glucose, or blood sugar. The cells of the body use glucose as fuel, which is consumed 24 hours a day.
Between meals, when glucose is not being supplied from food, the liver releases glucose into the blood to
sustain adequate levels. Insulin is a hormone produced by the pancreas that regulates the body’s blood
glucose levels. Patients with diabetes develop abnormally high levels of glucose, a state known as
hyperglycemia, either because they produce insufficient levels of insulin or because they fail to respond
adequately to insulin produced by the body. Over time, poorly controlled levels of blood glucose can lead to
major complications, including high blood pressure, blindness, amputations, kidney failure, heart attack,
stroke and death.
According to the United States Centers for Disease Control, or CDC, approximately 23.6 million people in
the United States, or 7.8% of the population, suffered from diabetes as of 2007. The CDC estimated that
17.9 million cases of diabetes were diagnosed and under treatment, with about 1.6 million new cases being
diagnosed each year in people aged 20 or older. Diabetes extracts a heavy toll from those who suffer from it.
The CDC reported that diabetes was the seventh leading cause of death listed on death certificates in 2006,
but that diabetes was likely to be underreported as a cause of death. Overall, the CDC found that the risk of
death among people with diabetes is about twice that of people without diabetes of similar age. The economic
costs of diabetes are high as well. The American
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Diabetes Association estimated that, in 2007, the total cost of diabetes in the United States was $174 billion,
an increase of 32% since 2002. This amount includes $27 billion of direct costs for drug treatment for glucose
control, of which approximately $5.4 billion were for insulin and delivery supplies and approximately
$8.5 billion were for non-insulin oral medications.
There are two major forms of diabetes, type 1 and type 2. Type 1 diabetes is an autoimmune disease
characterized by a complete lack of insulin secretion by the pancreas, so insulin must be supplied from
outside the body in order to sustain life. In type 2 diabetes, the pancreas continues to produce insulin;
however, insulin-dependent cells become resistant to the insulin effect. Over time, the pancreas becomes
increasingly unable to secrete adequate amounts of insulin to support metabolism. According to the CDC,
type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of people
diagnosed with diabetes.
Challenges of Treating Diabetes
Since patients with type 1 diabetes produce no insulin of their own, the primary treatment for type 1
diabetes is daily intensive insulin therapy. Such patients usually require a daily injection of long-acting, or
basal, insulin along with an injection of rapid- or fast-acting insulin at mealtimes.
When patients with type 2 diabetes are first diagnosed, the initial therapy is typically lifestyle intervention
(diet and exercise) in order to try to normalize their blood glucose levels. As the disease progresses, treatment
moves to various non-insulin oral medications. Often, the first drug introduced is metformin, which acts to
reduce the glucose output of the liver. When this drug fails to reduce blood glucose levels, other drugs are
added. Some of these additional medications act to increase the amount of insulin produced by the pancreas;
others increase the sensitivity of muscle, fat and liver cells to the effects of insulin. Generally, these oral
medications are limited in their ability to manage the disease effectively and tend to have significant side
effects, such as weight gain and hypertension. Ultimately, many patients with type 2 diabetes will require
insulin therapy in order to maintain appropriate levels of blood glucose.
Although insulin therapy is accepted as an effective means to control glucose levels, the available insulin
products have limitations, including:
• the risk of severe hypoglycemia, which is abnormally low levels of blood glucose that result from
excessive insulin administration. Hypoglycemia can result in loss of mental acuity, confusion, increased
heart rate, hunger, sweating and faintness and, at very low glucose levels, loss of consciousness, seizures,
coma and death;
• the likelihood of weight gain;
• inadequate post-meal glucose control;
• the need for complex titration of insulin doses in connection with meals; and
• the need for injections.
Because of these limitations, patients tend not to comply with the prescribed treatment regimens and are often
under-treated. Moreover, even when properly administered, subcutaneous injections of insulin do not
replicate the natural time-action profile of insulin for a healthy person. In a person without diabetes, blood
insulin levels rise within several minutes of the entry into the bloodstream of glucose from a meal. By
contrast, injected insulin enters the bloodstream slowly, resulting in peak insulin levels in about 120 to 180
minutes for regular human insulin or 30-90 minutes for so-called “rapid-acting” insulin analogs. The
consequence of these slower acting insulins is that patients do not have adequate levels of insulin present at
the initiation of a meal and tend to be over-insulinized between meals. This lag in insulin delivery results in
hyperglycemia early after meal onset, followed by a tendency for hypoglycemia to develop during the period
between meals. Physicians who treat patients with diabetes are concerned about the risks of hypoglycemia
and, as a result, tend to undertreat the chronic hyperglycemia that is associated with the disease. However, the
resultant extensive hyperglycemia significantly contributes to many of the long-term cardiovascular and other
serious complications of diabetes.
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Our Solution
Our lead product, AFREZZA (insulin human [rDNA origin]) Inhalation Powder, has a time-action profile
unlike other insulin products. In our clinical trials to date, we have consistently observed that AFREZZA is
rapidly absorbed into the bloodstream following inhalation, reaching peak levels within 12 to 14 minutes. In
this manner, AFREZZA produces a profile of insulin levels in the bloodstream that closely approximates the
early insulin secretion normally seen in healthy individuals immediately following the beginning of a meal,
but which is absent in patients with diabetes.
We believe the rapid action of AFREZZA may be related to the unique aspects of both the carrier
molecule as well as the way insulin is stabilized in our formulation. Our formulation technology is centered
on a class of pH-sensitive organic molecules that self-assemble into small particles under acidic conditions.
We refer to these particles as Technosphere particles. Certain drugs, such as insulin, can be loaded onto these
particles by combining an acidic solution of the drug with a suspension of Technosphere material, which is
then dried to a powder. This powder is then filled into plastic cartridges and packaged. To administer
AFREZZA, a patient loads a cartridge into our inhaler. By inhaling through this device, air is pulled through
the cartridge, which aerosolizes the powder and pulls the particles into the air current and out through the
mouthpiece. The individual particles within this aerosol are small and have aerodynamic properties that
enable them to fly deep into the lungs. When the particles contact the moist lung surface with its neutral pH,
the Technosphere particles dissolve immediately, releasing the insulin molecules to diffuse across a thin layer
of cells into the bloodstream. We believe that the insulin absorption step is a passive process that occurs
without any active assistance or enhancement and without disruption of either cell membranes or the tight
junctions between cells.
Significantly, when the Technosphere particles dissociate, we believe that the insulin that is released is in a
form that can be readily used by the body. In most pharmaceutical dosage forms, regular human insulin exists
as a hexamer, a complex of six associated insulin molecules. In order to exert a pharmacological effect, the
hexamer must first dissociate into three dimers — complexes of two insulin molecules — which then further
dissociate into individual insulin molecules, or monomers. Only monomeric insulin can attach to the insulin
receptor and exert a physiological effect. Rapid-acting insulin analogs are designed to be fragile hexamers
that dissociate more quickly, thereby reducing the time required to achieve an effect but this is still far slower
than insulin that is released from a healthy pancreas. However, the insulin released from Technosphere
particles is already largely in monomeric form. During the manufacture of AFREZZA, we cause hexameric
insulin to dissociate into monomeric insulin before being loaded onto Technosphere particles. When
AFREZZA particles dissolve in the deep lung, the insulin that is released diffuses across a thin layer of cells
to reach the bloodstream. Little change is required before the insulin can start exerting its glucose-lowering
effect in the body.
The AFREZZA clinical program involved 49 different studies of AFREZZA and over 5,000 adult patients.
In our clinical studies, we observed that AFREZZA produces the following clinical benefits:
• Consistent decreases in A1C levels, comparable to current insulin therapies. In a number of clinical
studies involving patients with type 1 and type 2 diabetes, we have evaluated levels of glycosylated
hemoglobin, or A1C, which is a measure of average blood glucose. A consistent finding was that
AFREZZA produced decreases in A1C levels that were essentially comparable to the decreases observed
in the control arm of these studies, including studies that compared AFREZZA to rapid-acting insulin
analogs, to pre-mixed insulin analogs and to metformin in combination with a sulfonylurea.
• Superior post-meal glucose control. AFREZZA has a shorter duration of action than other insulin
therapies, so its glucose-lowering effect better meets a patient’s needs following a meal. Specifically,
AFREZZA treatment produces lower blood glucose levels than comparators in the first hour following
meal ingestion with comparable levels after two hours. Importantly, AFREZZA does not remain active
for an extended period of time, thereby reducing the risk of hypoglycemia between meals.
• Improved fasting glucose control. In clinical trials of both type 1 and type 2 diabetes, AFREZZA has
consistently provided lower fasting blood glucose control than comparator insulin therapies.
• Less hypoglycemia due to better synchronization with glucose absorption from meals. In clinical trials
involving patients with type 2 diabetes, we observed that the incidence and frequency of hypoglycemia
was significantly reduced. Similar results were observed in patients with type 1 diabetes. The overall
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hypoglycemic event rate was lower for AFREZZA at all times of the day, but in particular, there were
fewer nocturnal hypoglycemic events, a condition much feared by patients with diabetes.
• Little or no weight gain. In our clinical trials, patients receiving AFREZZA experienced weight reduction
or significantly less weight gain compared to other insulin therapies.
There are no assurances, however, that these or any other advantages of AFREZZA will be agreed to by
the FDA or otherwise included in final product labeling or advertising.
To date, our clinical trials have indicated that AFREZZA has a favorable safety profile. The most common
adverse event associated with AFREZZA therapy was a transient, mild and non-productive cough, which
occurred early in about 25-30% of subjects and diminished within the first few weeks after initiation of
AFREZZA therapy. The occurrence of mild cough is well recognized with inhaled medications. In our
studies, the incidence of cough leading to the discontinuation of AFREZZA was low.
After a two-year Phase 3 clinical trial of AFREZZA, we determined that the use of AFREZZA in patients
with diabetes was non-inferior to usual diabetes care with respect to a decline in FEV1, a measure of lung
function that assesses the volume of air that can be forcibly expired within one second. Similar results were
obtained for other measures of lung function.
Our clinical trials for AFREZZA have not demonstrated an increased risk of pulmonary cancer. In
addition, we conducted comprehensive nonclinical studies of AFREZZA and unloaded Technosphere
particles, including a two-year rat carcinogenicity study and a six-month transgenic mouse study. These
studies indicated that there was no increased risk of cancer, or any other pathological effects.
As part of our NDA submission, we voluntarily proposed a REMS for ensuring that the benefits of
AFREZZA outweighed its risks. Our proposed REMS included communication tools, such as the prescribing
information, medication guide, educational materials and training materials, as well as evaluation tools, such
as prescriber and patient surveys, a pharmacovigilance program and oversight by an independent safety
monitoring committee. We have been informed by the FDA that a REMS will be necessary for AFREZZA, if
it is approved, to ensure that the benefits of the drug outweigh:
•
•
•
the risk of respiratory difficulty immediately post-inhalation, especially in patients with undiagnosed
chronic lung disease;
the risk of pulmonary function decline over time; and
the potential risk of harm due to use by inappropriate patient populations, such as smokers and patients
with chronic lung disease.
We expect to continue our discussions with the FDA regarding the REMS after we submit our response to the
Complete Response letter.
To facilitate the delivery of Technosphere-formulated drugs to the deep lung, we developed an inhaler that
utilizes single-use, disposable, plastic cartridges containing drug-loaded powder. The MedTone inhaler is
light and easy to use, and fits in the palm of the patient’s hand. However, while this inhaler was under
regulatory review as part of the AFREZZA NDA, we have been conducting bioequivalency and other studies
to the safety and efficacy of our next-generation inhaler, which is even smaller (thumb-sized), easier to use,
cheaper to manufacture and allows for more efficient emptying of the cartridge. Prior to receiving the
Complete Response letter, our plan had been to follow the original NDA for AFREZZA with another
regulatory submission for our next-generation inhaler rather than launch AFREZZA with the MedTone
device. We intend to discuss with the FDA whether it is appropriate to address the agency’s requests using
what would otherwise have been a supplemental NDA submission to amend the original NDA. If this
approach is acceptable, we believe that this regulatory action may not have a significant impact on the timing
of the commercial launch of AFREZZA, which would not have occurred until at least 2011 in any event.
Another Potential MannKind Solution
In a healthy person, the consumption of a meal triggers the release of insulin by the pancreas. However,
the insulin response is much less robust if the same amount of glucose is administered by intravenous
injection, effectively by-passing the intestinal tract. This effect is due to the fact that when glucose is
administered intravenously, the intestinal tract is not stimulated to release incretins, which are hormones that
stimulate the release of insulin by the pancreas. One such incretin is GLP-1. In addition to its effect on the
pancreas, GLP-1 slows stomach emptying and reduces food intake. The incretin effect — the robust release of
insulin in response to meal consumption — is much less pronounced in patients with type 2 diabetes. This
observation has suggested that augmenting the GLP-1 signal may be a useful strategy to help treat type 2
diabetes.
Under normal circumstances, GLP-1 is short-lived in the bloodstream; half the amount that is released by
the intestinal tract is inactivated in about two minutes. Much of the circulating GLP-1 is degraded by an
Source: MANNKIND CORP, 10-K, March 16, 2010
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enzyme known
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as dipeptidyl peptidase-4, or DPP-4. The rapid degradation of GLP-1 by DPP-4 represents a challenge for the
use of exogenous GLP-1 in the treatment of type 2 diabetes. Some drug manufacturers have responded to this
challenge by developing analog variations of GLP-1 that are resistant to DPP-4 degradation. Exenatide was
the first so-called incretin mimetic to be marketed. Exenatide is a peptide derived from lizard venom that is
sufficiently similar to human GLP-1 to have comparable effects but is much more resistant to DPP-4
degradation than human GLP-1. The formulation of exenatide currently being marketed requires twice-daily
injection; however, a once-weekly injection is under development. Other drug manufacturers have developed
drugs that inhibit DPP-4 activity. Sitagliptin was the first drug of this class to be approved. This drug is
available as a once-daily pill.
With both incretin mimetic and DPP-4 inhibitor therapies, the objective is to augment the GLP-1 signal to
the pancreas and other target organs. However, this approach does not truly reestablish the incretin effect that
is lost in type 2 diabetes. These types of drugs act to increase the duration of elevated GLP-1 levels in the
bloodstream, but they do not restore or simulate the short burst of GLP-1 that is released by the gut in
response to meal ingestion.
Unlike incretin mimetics and DPP-4 inhibitors, our GLP-1 product candidate — MKC253, a proprietary
formulation of human GLP-1 loaded onto Technosphere particles — is intended to mimic gut physiology
more closely. In a Phase 1 clinical trial involving 26 healthy subjects, inhalation of MKC253 produced a
sharp pulse of GLP-1 in the bloodstream that peaked within five minutes after inhalation. Administering
human GLP-1 in this manner was found to produce the desired response. We observed a GLP-1-induced
release of insulin from the pancreas that peaked within six minutes of inhalation. The insulin response
increased in proportion to the dose of MKC253 that was inhaled. In subjects that received the highest dose of
MKC253 (1.5 mg of GLP-1), blood glucose levels were observed to decrease for a period of approximately
20 minutes after administration. All of the subjects that participated in this trial had fasted prior to
administration of MKC253; thus, these results support the hypothesis that inhalation of MKC253 may be able
to simulate the incretin effect that is lost in patients with type 2 diabetes.
The primary objective of this Phase 1a trial was to evaluate the tolerability of ascending doses of MKC253
as determined by the incidence and severity of reported adverse events. At all dose levels, MKC253 was well
tolerated. Even in subjects that achieved plasma GLP-1 concentrations in excess of 100 pmol/L, we observed
none of the nausea and vomiting characteristically associated with such levels of the GLP-1 products
currently marketed or in late development. This lack of side effects may be another benefit of administering
MKC253 in this pulsatile manner rather than administering a longer acting formulation of a GLP-1 analogue
that lingers in the bloodstream for hours or days.
We conducted a second Phase 1 trial to assess the effect of MKC253 on post-meal glucose excursions in
patients with type 2 diabetes. A total of 15 subjects were each given MKC253, placebo or exenatide on
different days and followed for a four-hour period after each administration. In both fasted and fed subjects,
inhalation of MKC253 produced a rise in insulin levels that peaked within 10 — 15 minutes. In fasted
subjects, this increase in insulin led to a rapid decrease in blood glucose concentrations within 30 minutes,
with a slower decline over the next 3.5 hours. Subjects who were fed and given MKC253 displayed a blunting
of the initial post-meal glucose excursion for approximately 30-50 minutes, depending on the dose. In the
same subjects, exenatide stimulated insulin release but produced much lower peak levels than those produced
by MKC253 in either the fed or fasted state. Nonetheless, over the four-hour study period, exenatide also
produced mean decreases in blood glucose concentrations. This observation may be due to the fact that
exenatide had a profound effect on gastric emptying, with approximately 90% of the meal retained in the
stomach at four hours after meal ingestion. In contrast, MKC253 did not have any overall effect on gastric
emptying. Until we have conducted a full program of clinical trials, we will not be able to reach definitive
conclusions about the potential safety or efficacy of MKC253.
CANCER
Cancer is the unregulated proliferation of cells that have the capacity to spread to other sites in the body. A
neoplasm is an uncontrolled growth of abnormal cells. A neoplasm is considered benign if it does not spread;
if it invades other tissues, however, it is considered malignant. The term cancer refers to a malignant
neoplasm.
The first goal of cancer treatment is to eradicate the cancer. Typically, this goal is pursued using treatment
methods — surgery, radiation and chemotherapy — that can be highly toxic and may offer little clinical
benefit. In the past decade or so, newer treatment methods have begun to emerge, including:
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• immunotherapy approaches that attempt to induce the immune system to kill tumor cells instead of
tolerating them; and
• drugs and antibodies that specifically target the abnormal mechanisms of proliferation, differentiation and
invasion of malignant cells.
Our Cancer Immunotherapy Program
Our cancer immunotherapy program utilizes the body’s immune system to help eradicate tumor cells. The
immune system is a network of cells and organs that defends the body against infection and abnormal cells,
such as tumor cells. A key element of the immune system is its ability to distinguish between healthy cells
and foreign or diseased cells that do not belong in the body. The immune system accomplishes this task by
recognizing distinctive molecules called epitopes on the surface of each cell as either normal or abnormal, and
responding to them appropriately. Any substance capable of being recognized by the immune system is
known as an antigen. An antigen can be all or part of a pathogenic organism or it can be a by-product of
diseased cells. Certain specialized cells of the immune system (antigen-presenting cells or APC) sample
antigens found in the body and present the epitopes associated with foreign antigens to other cells of the
immune system, known as Tcells, whose function is to destroy any cell that expresses the same epitope; this
process is known as cell-mediated immunity. In this way, the immune system can launch a very specific
response to infection or disease.
Our approach uses DNA- and peptide-based compounds that correspond to tumor-associated antigens that
are expressed in a range of tumors. We select as target antigens molecules that either play a role in disease
progression or that are very selectively expressed by tumor cells. A patient’s immune system is first “primed”
by DNA-based compounds, or plasmids, that are injected directly into the patient’s lymph nodes. This is
designed to sensitize the immune system to the tumor-associated antigens encoded by the plasmids. After a
period of time, the patient’s lymph nodes are then injected with synthetic peptides that are designed to “boost”
or greatly amplify the immune response to the target antigens. The immune response is maintained by
repeated immunization cycles. This prime-boost regimen is designed to provoke a potent cell-mediated
immune response that destroys cancer cells along with the underlying blood supply to tumors.
The key features of our cancer immunotherapy program include the following:
• It is a targeted therapeutic approach that aims to redirect patients’ immune response to the
tumor targets expressed by their cancer. The patients with a highest likelihood to benefit
from this treatment can be identified by histological analysis of their tumors.
• It involves an innovative and potent vaccination approach comprising direct intra-lymphatic
administration of the immunizing components using a prime-boost sequence that is designed
to achieve optimal response.
• The selected target antigens are molecules that play a key role in tumor progression and
migration and that display increased expression, or selective expression, in tumor cells.
Moreover, they are expressed in a range of tumors.
• The immunizing components are “off-the-shelf” formulations of DNA and peptides
containing excipients that are well recognized and generally regarded as safe. There is no
need to harvest any material from patients’ tumors or cells in order to manufacture our
immunotherapy products.
To date, we have evaluated two product candidates in clinical trials: MKC1106-PP and MKC1106-MT.
MKC1106-PP consists of three components: a plasmid that encodes pharmacologically active elements from
two tumor-associated antigens, known as PRAME and PSMA, and two synthetic peptides, one an analog of a
PRAME epitope and the other an analog of a PSMA epitope. In addition to melanoma, PRAME is expressed
in carcinomas such as prostate, lung, breast, ovarian, renal, pancreatic and colorectal. PSMA was originally
isolated from prostate carcinoma cells and later shown to be expressed in the blood vessels that supply several
types of carcinoma, including breast, lung, ovarian, pancreatic, renal and colorectal carcinoma and melanoma.
MKC1106-MT consists of a plasmid that encodes portions of two antigens known as Melan-A and tyrosinase,
and two synthetic peptides,
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one an analog of a Melan-A epitope and the other an analog of a tyrosinase epitope. Melan-A and tyrosinase
are antigens commonly expressed by melanoma tumor cells.
In one study, MKC1106-PP was used to treat 26 advanced cancer patients with diverse tumor types,
metastatic disease and/or progressive, refractory disease. Patients were evaluated after two therapeutic cycles
of six weeks each and again after four therapeutic cycles, as applicable. Patients demonstrating a clinical
response or no evidence of disease progression remained in the clinical trial and received up to six cycles of
treatment over nine months. In all patients, the treatment was well tolerated with few and mild adverse events.
In this study, an immune response was found in approximately 58% of patients. Overall, ten patients had
stable disease. Patients attaining an immune response against both antigens, persisting throughout the first
two cycles of therapy, were more likely to show clinical benefit.
In a separate study, 18 patients with advanced melanoma were treated with MKC1106-MT. Patients were
evaluated after each therapeutic cycle of six weeks and those who demonstrated a clinical response or no
evidence of disease progression remained in the clinical trial and received up to eight cycles of treatment over
one year. Treatment with MKC1106-MT was well tolerated by all patients. In this study, the immune
response rate was greater than 40%, defined as the percentage of patients who showed elevated numbers of
antigen-specific Tcells in the blood upon immunization. There was also preliminary evidence of clinical
benefit. Fourteen patients had visceral metastases; in the remaining four, metastases were confined to the
lymphatic system. All four patients with metastatic disease confined to the lymph system achieved a durable
objective response, as measured by tumor imaging. A subset analysis of these patients identified the presence
of melanoma-specific Tcells at baseline.
These latter results have suggested which patients could benefit most from treatment with our
immunotherapy regimen. Accordingly, we plan to initiate a Phase 2 study of MKC1106-MT involving up to
44 patients with advanced melanoma that is confined to the skin, subcutaneous tissue or lymph nodes;
patients with visceral metastases will be excluded. The primary end-point of this open-label, non-randomized
study is objective tumor response. Clinical efficacy will also be assessed using measures of
time-to-progression, progression-free survival and overall survival. We expect to initiate this study in the
second quarter of 2010.
Our Cancer Small Molecule Drug Program
Our drug discovery efforts, though focused primarily on cancer targets, are directed at several biochemical
signaling pathways that may play a role in a number of diseases, including inflammatory diseases and cancer.
One of these pathways is known as the unfolded protein response, or UPR, a response to stress or changes in
cellular conditions during which proteins cease to function correctly. The UPR is intended to restore the
normal function of the cell and preserve its viability, by halting protein production while molecular
“chaperones” remove the improperly folded proteins. When cellular stress continues for an extended period of
time, the role of the UPR changes from restoring normal function to initiating programmed cell death or
apoptosis. In this manner, the improperly functioning cell is removed from the body.
However, in myeloma cells and possibly other malignancies, the UPR is not properly regulated. In these
cells, an enzyme known as inositol-requiring enzyme-1, or IRE-1, activates the X-box binding protein-1 , or
XBP-1, gene thus enhancing molecular chaperone activity and protein degradation. The result is that tumor
cells escape apoptosis, proliferate and invade vital organs in cancer patients, and/or confer resistance to other
therapeutic means that induce cellular stress, including chemotherapy, radiotherapy and antiangiogenic drugs.
Multiple myeloma, the second most prevalent blood cancer after non-Hodgkin’s lymphoma, is a key focus
of our IRE-1 program. According to the American Cancer Society, in 2009 there were approximately 20,500
new cases diagnosed and about 10,500 deaths from multiple myeloma. This disease results in excessive
abnormal cells as a result of transformation of normal B-cells (B-lymphocytes) into malignant plasma cells,
which may lead to hypercalcemia, anemia, renal damage, increased susceptibility to bacterial infection,
impaired production of immunoglobulin and diffuse osteoporosis.
Using our proprietary IRE-1 assay, we have identified a novel compound that selectively antagonizes
IRE-1 in vitro and consequently down-regulates XBP-1 activity in tumor cells and animal models. We are
currently undertaking preclinical studies in order
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to position the compound for clinical trials in 2011. Our efforts are partially supported by a research award
from the Multiple Myeloma Research Foundation.
OUR STRATEGY
Our objective is to develop products primarily in the major therapeutic areas of diabetes and cancer. Our
strategy is to achieve this objective by doing the following:
• Commercialize AFREZZA with a partner that shares our commitment to improving the lives of patients
with diabetes. We are evaluating potential collaboration opportunities with large pharmaceutical
companies in the United States, Europe and Japan to provide marketing, sales and financial resources to
commercialize, market and sell AFREZZA. We have not licensed or transferred any of our rights to this
product or to our platform technology.
• Expand our proprietary Technosphere formulation technology for the delivery of other peptide
hormones. On the basis of some initial clinical studies, we believe that additional Technosphere
formulations of peptide hormones have the potential to demonstrate clinical advantages over existing
therapeutic options in diabetes, endocrine disorders and obesity.
• Develop novel approaches to treating cancer using our immunotherapy and drug discovery platforms.
We are currently conducting a Phase 2 clinical trial of one of our investigational cancer immunotherapy
product candidates. Our goal is to evaluate the safety and efficacy of this approach while also continuing
to conduct research aimed at identifying novel drug therapies for cancer indications.
SALES AND MARKETING
Our efforts to date have primarily been directed at developing products for a number of different markets.
We currently have no sales or distribution capabilities and have no experience as a company in marketing or
selling pharmaceutical products. However, we have built a small marketing team and are actively engaged in
the activities that would normally be undertaken in preparation for commercial launch of a pharmaceutical
product.
In order to commercially market any of our products, we need either to develop an internal sales team,
continue to expand our marketing infrastructure or collaborate with third parties who have greater sales and
marketing capabilities and have access to potentially large markets. Although we believe that establishing our
own sales and marketing organizations in North America would have substantial advantages, we recognize
that this may not be practical for some of our products and that collaborating with companies with established
sales and marketing capabilities in a particular market or markets may be a more effective alternative for
some products. To date, we have retained worldwide commercialization rights for all of our products,
including AFREZZA. We believe that this will give us flexibility if we enter into collaborations to provide
the necessary sales and marketing support.
We are evaluating potential collaboration opportunities to assist us in the commercialization of AFREZZA
in the United States and other major markets, and we may also create parallel in-house sales and marketing
operations in certain key markets, particularly in the United States.
MANUFACTURING AND SUPPLY
We formulate and fill the AFREZZA inhalation powder into plastic cartridges and blister package the
cartridges in our Danbury facility. We believe that our Danbury facility has enough capacity to satisfy the
initial commercial demand for AFREZZA, although the facility includes expansion space that will allow
production capacity to be increased based on anticipated needs during the initial years of commercialization.
The quality management systems of our facility were certified to be in conformance with the ISO 13485 and
ISO 9001 standards. In addition, our facility underwent a successful pre-approval inspection by the FDA
during the fall of 2009.
We currently have two sources of insulin. In November 2007, we entered into a long-term supply
agreement with N. V. Organon, or Organon, (now owned by Merck & Co., Inc.) pursuant to which Organon
will manufacture and supply specified quantities of recombinant human insulin to us. The initial term of this
supply agreement will end on
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December 31, 2012 and will be automatically extended for consecutive two-year periods unless (i) we fail to
provide a forecast of our insulin requirements for the two-year extension period to Organon at least 24 months
before any automatic extension or (ii) either party provides 23-months’ advance written notice to the other
party of its desire to terminate the agreement. We and Organon each have normal and customary termination
rights, including (a) for material breach of the agreement by the other party, (b) due to the liquidation or
bankruptcy of the other party or (c) upon 90-days advance written notice if the parties are unable to agree
after mediation on the consequences of any changes to the product specifications required by any controlling
regulatory authority. We may terminate the supply agreement upon 30-days advance written notice to
Organon if certain regulatory authorities fail to approve or withdraw approval of AFREZZA. If we terminate
the supply agreement following failure to obtain or maintain regulatory approval of AFREZZA or either party
terminates the agreement following the parties’ inability to agree after any regulatory authority-mandated
changes to product specifications that relate specifically to the use of insulin in AFREZZA, we will be
required to pay Organon a specified termination fee if Organon is unable to sell certain quantities of insulin to
other parties. We must rely on our insulin supplier to maintain compliance with relevant regulatory
requirements including current Good Manufacturing Practices, or cGMP.
In June 2009, we acquired a quantity of bulk insulin from Pfizer Manufacturing Frankfurt GmbH, a
subsidiary of Pfizer Inc., or Pfizer, as well as Pfizer’s rights under a license to manufacture insulin for
pulmonary delivery. In addition, we agreed to maintain and store the remainder of Pfizer’s bulk insulin
inventory and acquired an option to purchase this inventory, in whole or in part, at a specified price, to the
extent that Pfizer has not otherwise disposed of or used the retained insulin.
We have a long-term supply agreement with Vaupell, Inc. for the manufacture and supply of our
first-generation inhaler and the cartridges that are inserted into it. We are in the process of qualifying a
manufacturer to supply us with our next-generation inhaler and the corresponding cartridges. We rely on our
manufacturers to comply with relevant regulatory requirements, including compliance with Quality System
Regulations, or QSRs.
Currently, we purchase the raw material from which we produce Technosphere particles from a major
chemical manufacturer with facilities in Europe and North America. We also have the capability of
manufacturing this chemical ourselves in our Danbury facility, which is treated as a back-up facility. Like us,
our third-party manufacturers are subject to extensive governmental regulation.
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
Our success will depend in large measure on our ability to obtain and enforce our intellectual property
rights, effectively maintain our trade secrets and avoid infringing the proprietary rights of third parties. Our
policy is to file patent applications on what we deem to be important technological developments that might
relate to our product candidates or methods of using our product candidates and to seek intellectual property
protection in the United States, Europe, Japan and selected other jurisdictions for all significant inventions.
We have obtained, are seeking, and will continue to seek patent protection on the compositions of matter,
methods and devices flowing from our research and development efforts. We have also in-licensed certain
technology.
Our Technosphere drug delivery platform, including AFREZZA, enjoys patent protection relating to the
particles, their manufacture, and their use for pulmonary delivery of drugs. We have additional patent
coverage relating to the treatment of diabetes using AFREZZA. We have been granted patent coverage for
our inhaler cartridges in the form in which our insulin product will be sold to the consumer. We have
additional pending patent applications, and expect to file further applications, relating to the drug delivery
platform, methods of manufacture, the AFREZZA product and its use, and other Technosphere-based
products, inhalers and inhaler cartridges. Overall, we own 55 issued utility patents, 48 issued design patents
and over 240 pending applications in the United States and selected jurisdictions around the world related to
our Technosphere platform. These include composition and method of treatment patents providing protection
for AFREZZA that will remain in force into 2020, and patents on our inhaler and inhaler cartridges that will
remain in force into 2023.
In addition, we own or have in-licensed intellectual property relating to several drug targets of interest in
the treatment of cancer and other fields. Patents and patent applications in this area are drawn to drug
screening methods, methods of treatment, and chemical structures of inhibitors of these targets. Our cancer
immunotherapy program is built on proprietary methods for the selection, design and administration of
epitopes, as well as the plasmids and peptides that are the active ingredients of our product candidates.
Overall we own 21 issued patents
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and over 200 pending applications in the United States and selected jurisdictions around the world related to
our immunotherapy program.
The fields of pulmonary drug delivery and cancer therapies are crowded and a substantial number of
patents have been issued in these fields. In addition, because patent positions can be highly uncertain and
frequently involve complex legal and factual questions, the breadth of claims obtained in any application or
the enforceability of issued patents cannot be confidently predicted. Further, there can be substantial delays in
commercializing pharmaceutical products, which can partially consume the statutory period of exclusivity
through patents.
In addition, the coverage claimed in a patent application can be significantly reduced before a patent is
issued, either in the United States or abroad. Statutory differences in patentable subject matter may limit the
protection we can obtain on some of our inventions outside of the United States. For example, methods of
treating humans are not patentable in many countries outside of the United States. These and other issues may
limit the patent protection we will be able to secure internationally. Consequently, we do not know whether
any of our pending or future patent applications will result in the issuance of patents or, to the extent patents
have been issued or will be issued, whether these patents will be subjected to further proceedings limiting
their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented
or invalidated. Furthermore, patents already issued to us or our pending applications may become subject to
disputes that could be resolved against us. In addition, patent applications in the United States filed before
November 29, 2000 are currently maintained in secrecy until the patent issues, although in certain countries,
including the United States, for applications filed on or after November 29, 2000, applications are generally
published 18 months after the application’s priority date. In any event, because publication of discoveries in
scientific or patent literature often trails behind actual discoveries, we cannot be certain that we were the first
inventor of the subject matter covered by our pending patent applications or that we were the first to file
patent applications on such inventions.
Although we own a number of domestic and foreign patents and patent applications relating to our
Technosphere-based investigational products and our cancer products under development, we have identified
certain third-party patents having claims relating to pulmonary insulin delivery that may trigger an allegation
of infringement upon the commercial manufacture and sale of AFREZZA. We have also identified third-party
patents disclosing methods and compositions of matter related to cancer vaccines that also may trigger an
allegation of infringement upon the commercial manufacture and sale of our cancer immunotherapy. We
believe that we are not infringing any valid claims of any patent owned by a third party. However, if a court
were to determine that our inhaled insulin product or cancer immunotherapies were infringing any of these
patent rights, we would have to establish with the court that these patents were invalid in order to avoid legal
liability for infringement of these patents. Proving patent invalidity can be difficult because issued patents are
presumed valid. Therefore, in the event that we are unable to prevail in an infringement or invalidity action
we will either have to acquire the third-party patents outright or seek a royalty-bearing license.
Royalty-bearing licenses effectively increase costs and therefore may materially affect product profitability.
Furthermore, if the patent holder refuses to either assign or license us the infringed patents, it may be
necessary to cease manufacturing the product entirely and/or design around the patents. In either event, our
business would be harmed and our profitability could be materially adversely impacted. If third parties file
patent applications, or are issued patents claiming technology also claimed by us in pending applications, we
may be required to participate in interference proceedings in the United States Patent and Trademark Office,
or USPTO, to determine priority of invention. We may be required to participate in interference proceedings
involving our issued patents and pending applications.
We also rely on trade secrets and know-how, which are not protected by patents, to maintain our
competitive position. We require our officers, employees, consultants and advisors to execute proprietary
information and invention and assignment agreements upon commencement of their relationships with us.
These agreements provide that all confidential information developed or made known to the individual during
the course of our relationship must be kept confidential, except in specified circumstances. These agreements
also provide that all inventions developed by the individual on behalf of us must be assigned to us and that the
individual will cooperate with us in connection with securing patent protection on the invention if we wish to
pursue such protection. There can be no assurance, however, that these agreements will provide meaningful
protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or
disclosure of such information.
We also execute confidentiality agreements with outside collaborators. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside collaborators apply technological information to
our projects that are developed independently by them or others, or apply our technology to outside projects,
and there
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can be no assurance that any such disputes would be resolved in our favor. In addition, any of these parties
may breach the agreements and disclose our confidential information or our competitors might learn of the
information in some other way. If any trade secret, know-how or other technology not protected by a patent
were to be disclosed to or independently developed by a competitor, our business, results of operations and
financial condition could be adversely affected.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive and characterized by rapidly
evolving technology and intense research and development efforts. We expect to compete with companies,
including the major international pharmaceutical companies, and other institutions that have substantially
greater financial, research and development, marketing and sales capabilities and have substantially greater
experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and
marketing and selling biopharmaceutical products. We will face competition based on, among other things,
product efficacy and safety, the timing and scope of regulatory approvals, product ease of use and price.
Diabetes Treatments
We believe that AFREZZA has important competitive advantages in the delivery of insulin when
compared with currently known alternatives. However, new drugs or further developments in alternative drug
delivery methods may provide greater therapeutic benefits, or comparable benefits at lower cost, than
AFREZZA. There can be no assurance that existing or new competitors will not introduce products or
processes competitive with or superior to our product candidates.
We have set forth below more detailed information about certain of our competitors. The following is
based on information currently available to us.
Inhaled and Oral Insulin Delivery Systems
Currently, we are not aware of any other inhaled insulin products on the market or in development.
In January 2006, Exubera®, developed by Pfizer, Inc. in collaboration with Nektar Therapeutics, was
approved for the treatment of adults with type 1 and type 2 diabetes. Exubera® was slow to gain market
acceptance and, in October 2007, Pfizer announced that it was discontinuing the product. In September 2008,
we announced a collaboration agreement with Pfizer pursuant to which certain patients with a continuing
medical need for inhaled insulin were transitioned to AFREZZA on a compassionate use basis. Pfizer
subsequently withdrew the NDA for Exubera from the FDA.
In January 2008, Novo Nordisk A/S announced that it was halting development of its inhaled insulin
product, having reached the conclusion that the product did not have adequate commercial potential.
Notwithstanding the termination of this program, Novo Nordisk stated that it intended to increase research
and development activities targeted at inhalation systems for long-acting formulations of insulin and GLP-1.
In March 2008, Eli Lilly and Company, or Lilly, announced that it too was terminating the development of
its AIR® inhaled insulin system. Lilly stated that this decision resulted from increasing uncertainties in the
regulatory environment and after a thorough evaluation of the evolving commercial and clinical potential of
its product compared to existing medical therapies.
There are several companies that are pursuing development of products involving the oral delivery of
insulin. Biocon Limited is currently in Phase 2 clinical trials of IN-105, a tablet for the oral delivery of
insulin. Emisphere Technologies, Inc., or Emisphere, has also developed an oral formulation of insulin. A
Phase 2 clinical trial of the Emisphere investigational product was completed in the fall of 2006. Other
companies are evaluating alternative means of delivering insulin orally. Generex Biotechnology Corporation
is currently conducting Phase 3 clinical trials in North America of its liquid formulation of insulin that is
sprayed onto the buccal mucosa. This product, Oral-lyn, is currently available for sale in certain countries,
including Ecuador and India. Biodel Inc. is currently conducting Phase 1 clinical trials of an oral formulation
of insulin (VIAtab) designed to be administered
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sublingually. We are not aware that the timelines to commercialization for any of these investigational
products have been made available publicly.
Non-insulin Medications
We expect that AFREZZA will compete with currently available non-insulin medications for type 2
diabetes. These products include the following:
• Sulfonylureas, also called oral hypoglycemic agents, prompt the pancreas to secrete insulin. This class of
drugs is most effective in individuals whose pancreas still have some working pancreas cells.
• Meglitinides are taken with meals and reduce the elevation in blood glucose that generally follows eating.
If these drugs are not taken with meals, blood glucose will drop dramatically and inappropriately.
• Biguanides lower blood glucose by improving the sensitivity of cells to insulin (i.e., by diminishing
insulin resistance).
• Thiazolidinedione improves the uptake of glucose by cells in the body.
• Alpha-glucosidase inhibitors lower the amount of glucose absorbed from the intestines, thereby reducing
the rise in blood glucose that occurs after a meal.
• Inhibitors of dipeptidyl peptidase IV are a class of drugs that work by blocking the degradation of GLP-1,
which is a naturally occurring incretin.
• Incretin mimetics work by several mechanisms including stimulating the pancreas to secrete insulin when
blood glucose levels are high.
Injected Insulin
In the subcutaneous insulin market, our competitors have made considerable efforts in promoting rapid
acting injectable insulin formulations. Humalog®, which was developed by Lilly, and NovoLog®, which was
developed by Novo Nordisk A/S, are the two principal injectable insulin formulations with which we expect
AFREZZA to compete.
Cancer Treatments
For many types of cancer, chemotherapy remains a significant component of the treatment regimen.
Increasingly, however, drugs and antibodies that specifically target the abnormal mechanisms of proliferation,
differentiation and invasion of malignant cells are being used to treat cancer. One such cancer therapy is
Rituxan® (rituximab), an antibody marketed in the United States by Biogen IDEC Inc. and Genentech, Inc.,
or Genentech, a wholly-owned member of the Roche Group, or Roche, and by Roche in the rest of the world.
Genentech and Roche have also partnered to market two other successful antibodies: Avastin ®
(bevacizumab) and Herceptin® (trastuzumab). Erbitux® (cetuximab) is another antibody approved for use in
metastatic colon cancer and squamous cell carcinoma of the head and neck. This antibody is marketed
domestically by ImClone Systems Inc., a wholly-owned subsidiary of Lilly, and Bristol-Myers Squibb
Company and elsewhere by Merck KGaA.
The armamentarium of cancer treatments has been strengthened in recent years by several drugs that target
specific molecular aberrations in tumor cells. One such drug is Gleevec®, developed and marketed by
Novartis AG, which was initially approved for use in chronic myeloid leukemia. The drug has subsequently
been approved for use in additional types of cancer. Velcade ®, developed by Millenium Pharmaceuticals,
Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited, and Ortho Biotech Inc., now
Centocor Ortho Biotech Inc., acts by inhibiting protein degradation, thereby inducing apoptosis. It was
initially approved for use in multiple myeloma; its label now includes an indication for mantle cell
lymphoma.
Our cancer products may face competition from the products described above as well as from other brands.
In addition, our cancer immunotherapy products may face direct competition from one or more therapeutic
cancer vaccines that may be approved in the coming years. Although there have been a number of notable
failures recently among immunotherapy products in development, a few approaches continue to show
potential:
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• Provenge®, developed by Dendreon Corporation, or Dendreon, is a vaccine composed of autologous
APC that are loaded with an antigen (prostate acid phosphatase) from prostate tumor cells then
re-injected into patients. In May 2007, despite a positive vote from an Advisory Committee, Dendreon
received a “Complete Response” letter from the FDA with respect to its application for the approval of
Provenge® for the treatment of prostate cancer. Dendreon provided additional survival data in 2009 and
is expecting a further decision from the FDA in May 2010.
• MAGE-A3 is a tumor-specific antigen that is expressed in a large variety of cancers, including
melanoma, non-small cell lung cancer, head and neck cancer, bladder cancer, with no expression in
normal cells. GlaxoSmithKline P1c is evaluating a cancer vaccine that combines MAGE-A3, delivered as
a purified recombinant protein, with certain immunostimulating compounds that are intended to increase
the anti-tumor immune response. This investigational product is being evaluated in Phase 3 clinical trials
for the treatment of non-small cell lung cancer and melanoma.
• CDX-110 is an immunotherapy being developed by Celldex, Inc. in collaboration with Pfizer. CDX-110
targets a mutated form of epidermal growth factor receptor that is present in multiple cancer types and is
currently being evaluated for the treatment of glioblastoma multiforme in a Phase 2/3 clinical trial.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in state, local and foreign jurisdictions impose substantial
requirements upon the clinical development, manufacture and marketing of medical devices and new drug
and biologic products. These agencies, through regulations that implement the Federal Food, Drug, and
Cosmetic Act, as amended, or FDCA, and other regulations, regulate research and development activities and
the development, testing, manufacture, labeling, storage, shipping, approval, recordkeeping, advertising,
promotion, sale and distribution of such products. In addition, if our products are marketed abroad, they also
are subject to export requirements and to regulation by foreign governments. The regulatory approval process
is generally lengthy, expensive and uncertain. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on us or the manufacturers of our products, including hold
letters on clinical research, civil or criminal fines or other penalties, product recalls, or seizures, or total or
partial suspension of production or injunctions, refusals to permit products to be imported into or exported out
of the United States, refusals of the FDA to grant approval of drugs or to allow us to enter into government
supply contracts, withdrawals of previously approved marketing applications and criminal prosecutions.
The steps typically required before an unapproved new drug or biologic product for use in humans may be
marketed in the United States include:
• Preclinical studies that include laboratory evaluation of product chemistry and formulation, as well as
animal studies to assess the potential safety and efficacy of the product. Certain preclinical tests must be
conducted in compliance with good laboratory practice regulations. Violations of these regulations can,
in some cases, lead to invalidation of the studies, or requiring such studies to be repeated. In some cases,
long-term preclinical studies are conducted while clinical studies are ongoing.
• Submission to the FDA of an investigational new drug application, or IND, which must become effective
before human clinical trials may commence. The results of the preclinical studies are submitted to the
FDA as part of the IND. Unless the FDA objects, the IND becomes effective 30 days following receipt
by the FDA.
• Approval of clinical protocols by independent institutional review boards, or IRBs, at each of the
participating clinical centers conducting a study. The IRBs consider, among other things, ethical factors,
the potential risks to individuals participating in the trials and the potential liability of the institution. The
IRB also approves the consent form signed by the trial participants.
• Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product.
Clinical trials involve the administration of the drug to healthy volunteers or to patients under the
supervision of a qualified medical investigator according to an approved protocol. The clinical trials are
conducted in accordance with protocols that detail the objectives of the study, the parameters to be used
to monitor participant safety and efficacy or other criteria to be evaluated. Each protocol is submitted to
the FDA as part
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of the IND. Human clinical trials are typically conducted in the following four sequential phases that
may overlap or be combined:
• In Phase 1, the drug is initially introduced into a small number of individuals and tested for safety,
dosage tolerance, absorption, metabolism, distribution and excretion. Phase 1 clinical trials are often
conducted in healthy human volunteers and such cases do not provide evidence of efficacy. In the
case of severe or life-threatening diseases, the initial human testing is often conducted in patients
rather than healthy volunteers. Because these patients already have the target disease, these studies
may provide initial evidence of efficacy that would traditionally be obtained in Phase 2 clinical trials.
Consequently, these types of trials are frequently referred to as Phase 1/2 clinical trials. The FDA
receives reports on the progress of each phase of clinical testing and it may require the modification,
suspension or termination of clinical trials if it concludes that an unwarranted risk is presented to
patients or healthy volunteers.
• Phase 2 involves clinical trials in a limited patient population to further identify any possible adverse
effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.
• Phase 3 clinical trials are undertaken to further evaluate dosage, clinical efficacy and to further test
for safety in an expanded patient population at geographically dispersed clinical study sites. Phase 3
clinical trials usually include a broader patient population so that safety and efficacy can be
substantially established. Phase 3 clinical trials cannot begin until Phase 2 evaluation demonstrates
that a dosage range of the product may be effective and has an acceptable safety profile.
• Phase 4 clinical trials are performed if the FDA requires, or a company pursues, additional clinical
trials after a product is approved. These clinical trials may be made a condition to be satisfied after a
drug receives approval. The results of Phase 4 clinical trials can confirm the effectiveness of a
product candidate and can provide important safety information to augment the FDA’s voluntary
adverse drug reaction reporting system.
• Concurrent with clinical trials and preclinical studies, companies also must develop information about the
chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in
accordance with drug cGMP requirements. The manufacturing process must be capable of consistently
producing quality batches of the product and the manufacturer must develop methods for testing the
quality, purity, and potency of the final products. Additionally, appropriate packaging must be selected
and tested and chemistry stability studies must be conducted to demonstrate that the product does not
undergo unacceptable deterioration over its shelf-life.
• Submission to the FDA of an NDA, or Biologics License Application, or BLA, based on the clinical
trials. The results of product development, preclinical studies, and clinical trials are submitted to the FDA
in the form of an NDA or BLA for approval of the marketing and commercial shipment of the product.
Under the Pediatric Research Equity Act of 2003, NDAs are required to include an assessment, generally
based on clinical study data, of the safety and efficacy of drugs for all relevant pediatric populations. The
statute provides for waivers or deferrals in certain situations but we can make no assurances that such
situations will apply to us or our product candidates.
Medical products containing a combination of new drugs, biological products, or medical devices are
regulated as “combination products” in the United States. A combination product generally is defined as a
product comprised of components from two or more regulatory categories (e.g., drug/device, device/biologic,
drug/biologic). Each component of a combination product is subject to the requirements established by the
FDA for that type of component, whether a new drug, biologic, or device. In order to facilitate pre-market
review of combination products, the FDA designates one of its centers to have primary jurisdiction for the
pre-market review and regulation of the overall product. The determination whether a product is a
combination product or two separate products is made by the FDA on a case-by-case basis. The FDA
considers AFREZZA to be a drug-device combination product, so the review of our NDA for AFREZZA
involves reviews within the Division of Metabolism and Endocrinology Products and the Division of
Pulmonary and Allergy Products, both within the Center for Drug Evaluation and Research, as well as review
within the Center for Devices and Radiological Health, the Center within the FDA that reviews Medical
Devices. The Division of Metabolic and Endocrine Products is the lead group and obtains consulting reviews
from the other two FDA groups.
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The testing and approval process requires substantial time, effort and financial resources. Data that we
submit are subject to varying interpretations, and the FDA and comparable regulatory authorities in foreign
jurisdictions may not agree that our product candidates have been shown to be safe and effective. We cannot
be certain that any approval of our products will be granted on a timely basis, if at all. If any of our products
are approved for marketing by the FDA, we will be subject to continuing regulation by the FDA, including
record-keeping requirements, reporting of adverse experiences with the product, submitting other periodic
reports, drug sampling and distribution requirements, notifying the FDA and gaining its approval of certain
manufacturing or labeling changes, and complying with certain electronic records and signature requirements.
Prior to and following approval, if granted, all manufacturing sites are subject to inspection by the FDA and
other national regulatory bodies and must comply with cGMP, QSR and other requirements enforced by the
FDA and other national regulatory bodies through their facilities inspection program. Foreign manufacturing
establishments must comply with similar regulations. In addition, our drug-manufacturing facilities located in
Danbury and the facilities of our insulin supplier, the supplier(s) of our Technosphere material and the
supplier(s) of our inhaler and cartridges are subject to federal registration and listing requirements and, if
applicable, to state licensing requirements. Failure, including those of our suppliers, to obtain and maintain
applicable federal registrations or state licenses, or to meet the inspection criteria of the FDA or the other
national regulatory bodies, would disrupt our manufacturing processes and would harm our business. In
complying with standards set forth in these regulations, manufacturers must continue to expend time, money
and effort in the area of production and quality control to ensure full compliance. Currently, we believe we
are operating under all of the necessary guidelines and permits.
As a drug-device combination, we currently expect that our inhaler will be approved, if at all, as part of the
NDA for AFREZZA. However, numerous device regulatory requirements still apply to the device part of the
drug-device combination. These include:
• product labeling regulations;
• general prohibition against promoting products for unapproved or “off-label” uses;
• corrections and removals (e.g., recalls);
• establishment registration and device listing;
• general prohibitions against the manufacture and distribution of adulterated and misbranded devices; and
• the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur.
Further, the company we contract with to manufacture our inhaler and cartridges will be subject to the
QSR, which requires manufacturers to follow elaborate design, testing, control, documentation and other
quality assurance procedures during the manufacturing process of medical devices, among other
requirements.
Failure to adhere to regulatory requirements at any stage of development, including the preclinical and
clinical testing process, the review process, or at any time afterward, including after approval, may result in
various adverse consequences. These consequences include action by the FDA or another national regulatory
body that has the effect of delaying approval or refusing to approve a product; suspending or withdrawing an
approved product from the market; seizing or recalling a product; or imposing criminal penalties against the
manufacturer. In addition, later discovery of previously unknown problems may result in restrictions on a
product, its manufacturer, or the NDA holder, or market restrictions through labeling changes or product
withdrawal. Also, new government requirements may be established or current government requirements may
be changed at any time, which could delay or prevent regulatory approval of our products under development.
For example, healthcare reform legislation currently being considered in Congress could provide the FDA and
other federal agencies with greater authority to consider the comparative effectiveness of products and to
control costs of public spending on prescription drugs and biologics. We cannot predict the likelihood, nature
or extent of adverse governmental regulation that might arise from future legislative or administrative action,
either in the United States or abroad.
In addition, the FDA imposes a number of complex regulations on entities that advertise and promote
drugs, which include, among other requirements, standards for and regulations of direct-to-consumer
advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional
activities involving the Internet. The FDA has very broad enforcement authority under the FDCA, and failure
to comply with these regulations can
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result in penalties, including the issuance of a warning letter directing us to correct deviations from FDA
standards, including corrective advertising to healthcare providers, a requirement that future advertising and
promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and
prosecutions.
Products manufactured in the United States and marketed outside the United States are subject to certain
FDA regulations, as well as regulation by the country in which the products are to be sold. We also would be
subject to foreign regulatory requirements governing clinical trials and drug product sales if products are
studied or marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the
comparable regulatory authorities of foreign countries usually must be obtained prior to the marketing of the
product in those countries. The approval process varies from jurisdiction to jurisdiction and the time required
may be longer or shorter than that required for FDA approval.
Product development and approval within this regulatory framework take a number of years, involve the
expenditure of substantial resources and are uncertain. Many drug products ultimately do not reach the market
because they are not found to be safe or effective or cannot meet the FDA’s other regulatory requirements. In
addition, there can be no assurance that the current regulatory framework will not change or that additional
regulation will not arise at any stage of our product development that may affect approval, delay the
submission or review of an application or require additional expenditures by us. There can be no assurance
that we will be able to obtain necessary regulatory clearances or approvals on a timely basis, if at all, for any
of our product candidates under development, and delays in receipt or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business and results of operations.
Under European Union regulatory systems, marketing authorizations may be submitted either under a
centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing
authorization that is valid for all European Union member states. The decentralized procedure provides for
mutual recognition of national approval decisions. Under this latter procedure, the holder of a national
marketing authorization may submit an application to the remaining member states. Within 90 days of
receiving the application and assessment report, each member state must decide whether to recognize
approval. We plan to choose the appropriate route of European regulatory filing in an attempt to accomplish
the most rapid regulatory approvals. However, the chosen regulatory strategy may not secure regulatory
approvals or approvals of the chosen product indications. In addition, these approvals, if obtained, may take
longer than anticipated.
In addition to the foregoing, we are subject to numerous federal, state and local laws relating to such
matters as laboratory practices, the experimental use of animals, the use and disposal of hazardous or
potentially hazardous substances, controlled drug substances, privacy of individually identifiable healthcare
information, safe working conditions, manufacturing practices, environmental protection and fire hazard
control. We may incur significant costs to comply with those laws and regulations now or in the future.
Patent Restoration and Marketing Exclusivity
The Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman
Amendments to the Federal Food, Drug, and Cosmetic Act, permits the FDA to approve abbreviated new
drug applications, or ANDAs, for generic versions of innovator drugs and also provides certain patent
restoration and market exclusivity protections to innovator drug manufacturers. The ANDA process permits
competitor companies to obtain marketing approval for a new drug with the same active ingredient for the
same uses, dosage form and strength as an innovator drug but does not require the conduct and submission of
preclinical or clinical studies demonstrating safety and efficacy for that product. Instead of providing
completely new safety and efficacy data, the ANDA applicant only needs to submit manufacturing
information and clinical data demonstrating that the copy is bioequivalent to the innovator’s product in order
to gain marketing approval from the FDA.
Another type of marketing application allowed by the Hatch-Waxman Amendments, a Section 505(b)(2)
application, may be permitted where a company does not own or have a right to reference all the data required
for approval. Section 505(b)(2) applications are often submitted for drug products that contain the same active
ingredient as those in first approved drug products and where additional studies are required for approval,
such as for changes in routes of administration or dosage forms.
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Once an NDA is approved, the product covered thereby becomes a “listed drug” which can, in turn, be
cited by potential competitors in support of approval of an ANDA or a 505(b)(2) application.
The Hatch-Waxman Amendments provide for a period of three years exclusivity following approval of a
listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form,
route of administration or combination, or for a new use, the approval of which was required to be supported
by new clinical trials conducted by or for the sponsor. During this period of exclusivity, the FDA cannot grant
effective approval of an ANDA or a 505(b)(2) application based on that listed drug.
The Hatch-Waxman Amendments also provide a period of five years exclusivity following approval of a
drug containing no previously approved active ingredients. During this period of exclusivity, ANDAs or
505(b)(2) applications based upon those drugs cannot be submitted unless the submission accompanies a
challenge to a listed patent, in which case the submission may be made four years following the original
product approval.
Additionally, in the event that the sponsor of the listed drug has informed the FDA of patents covering its
listed drug and FDA lists those patents in the Orange Book, applicants submitting an ANDA or a 505(b)(2)
application referencing that drug are required to certify whether they intend to market their generic products
prior to expiration of those patents. If an ANDA applicant certifies that it believes one or more listed patents
is invalid or not infringed, it is required to provide notice of its filing to the NDA sponsor and the patent
holder. If either party then initiates a suit for patent infringement against the ANDA sponsor within 45 days of
receipt of the notice, the FDA cannot grant effective approval of the ANDA until either 30 months has passed
or there has been a court decision holding that the patent in question is invalid or not infringed. If the ANDA
applicant certifies that it does not intend to market its generic product before some or all listed patents on the
listed drug expire, then the FDA cannot grant effective approval of the ANDA until those patents expire. The
first ANDA applicant submitting substantially complete applications certifying that listed patents for a
particular product are invalid or not infringed may qualify for a period of 180 days after a court decision of
invalidity or non-infringement or after it begins marketing its product, whichever occurs first. During this
180 day period, subsequently submitted ANDAs cannot be granted effective approval.
Pediatric exclusivity, if granted, provides an additional six months of market exclusivity in the United
States for new or currently marketed drugs if certain pediatric studies requested by the FDA are completed by
the applicant and the applicant has other existing patent or exclusivity protection for the drug. To obtain this
additional six months of exclusivity, it would be necessary for us to first receive a written request from the
FDA to conduct pediatric studies and then to conduct the requested studies according to a previously agreed
timeframe and submit the report of the study. There can be no assurances that we would receive a written
request from the FDA and if so that we would complete the studies in accordance with the requirements for
this six-month exclusivity. The current pediatric exclusivity provision is scheduled to end on October 1, 2012,
and there can be no assurances that it will be reauthorized.
EMPLOYEES
As of December 31, 2009, we had 443 full-time employees. 49 of these employees were engaged in
research and development, 157 in manufacturing, 134 in clinical, regulatory affairs and quality assurance and
103 in administration, finance, management, information systems, marketing, corporate development and
human resources. 58 of these employees have a Ph.D. degree and/or M.D. degree and are engaged in activities
relating to research and development, manufacturing, quality assurance and business development. None of
our employees is subject to a collective bargaining agreement. We believe relations with our employees are
good.
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SCIENTIFIC ADVISORS
We seek advice from a number of leading scientists and physicians on scientific, technical and medical
matters. These advisors are leading scientists in the areas of pharmacology, chemistry, immunology and
biology. Our scientific advisors are consulted regularly to assess, among other things:
•
•
•
•
•
•
our research and development programs;
the design and implementation of our clinical programs;
our patent and publication strategies;
market opportunities from a clinical perspective;
new technologies relevant to our research and development programs; and
specific scientific and technical issues relevant to our business.
Our diabetes program is supported by the following scientific advisors (and their primary affiliations):
Name
Stephanie Amiel, MD, FRCP
Richard Bergenstal, MD
Geremia Bolli
Alan D. Cherrington, PhD
David D’Alessio, MD
Steven Edelman, MD
Alexander Fleming, MD
Brian Frier, MD, FECP, BS
Irl B. Hirsch, MD
Lois Jovanovic, MD
Harold E Lebovitz, MD, FACE
Daniel Lorber, MD
Sten Madsbad
Chantal Mathieu, MD, PhD
Mark Peyrot, MD
Daniel Porte, MD
Philip Raskin, MD, FACE, FACP
Julio Rosenstock, MD
Jesse Roth, MD, FACP
Richard Rubin, PhD, CDE
Robert Sherwin, MD
Jay Skyler, MD, MACP
Primary Affiliation
King’s College London School of Medicine
International Diabetes Center, Park Nicollet Institute
University of Perugia
Vanderbilt University Medical Center
University of Cincinnati
University of California, San Diego
Kinexum Box LLC
Edinburgh Royal Infirmary
University of Washington Medical Center
Sansum Medical Research Institute
State University of New York, Brooklyn
Diabetes Care & Information Center of New York
Hvidovre University Hospital, Copenhagen
Laboratorium voor Experimentele Geneeskunde en
Endocrinologie
Loyola College Center
University of California, San Diego
University of Texas
Dallas Diabetes and Endocrinology Center
North Shore-Long Island Jewish Health System
Johns Hopkins University School of Medicine
Yale University School of Medicine
University of Miami, Diabetes Research Institute
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Our cancer program is supported by the following scientific advisors (and their primary affiliations):
Name
Kenneth Anderson, M.D.
Philippe Bey, Ph.D.
Jeffrey Bluestone, Ph.D.
W. Martin Kast, Ph.D.
Antoni Ribas, M.D.
EXECUTIVE OFFICERS
Primary Affiliation
Dana Farber Cancer Institute, Boston
Pharmaceutical consultant
University of California, San Francisco
University of Southern California
University of California, Los Angeles
The following table sets forth our current executive officers and their ages as of December 31, 2009:
Name
Alfred E. Mann
Hakan S. Edstrom
Matthew J. Pfeffer
Juergen A. Martens, Ph.D.
Diane M. Palumbo
Dr. Peter C. Richardson
David Thomson, Ph.D., J.D.
Age
84
Position(s)
Chairman of the Board of Directors and Chief Executive
Officer
59 President, Chief Operating Officer and Director
52 Corporate Vice President and Chief Financial Officer
54
Corporate Vice President, Technical Operations and
Chief Technical Officer
56 Corporate Vice President, Human Resources
50 Corporate Vice President and Chief Scientific Officer
43 Corporate Vice President, General Counsel and Secretary
Alfred E. Mann has been one of our directors since April 1999, our Chairman of the Board since
December 2001 and our Chief Executive Officer since October 2003. He founded and formerly served as
Chairman and Chief Executive Officer of MiniMed, Inc., a publicly traded company focused on diabetes
therapy and microinfusion drug delivery that was acquired by Medtronic, Inc. in August 2001. Mr. Mann also
founded and, from 1972 through 1992, served as Chief Executive Officer of Pacesetter Systems, Inc. and its
successor, Siemens Pacesetter, Inc., a manufacturer of cardiac pacemakers, now the Cardiac Rhythm
Management Division of St. Jude Medical Corporation. Mr. Mann founded and since 1993, has served as
Chairman and until January 2008, as Co-Chief Executive Officer of Advanced Bionics Corporation, a medical
device manufacturer focused on neurostimulation to restore hearing to the deaf and to treat chronic pain and
other neural deficits, that was acquired by Boston Scientific Corporation in June 2004. In January 2008, the
former stockholders of Advanced Bionics Corporation repurchased certain segments from Boston Scientific
Corporation and formed Advanced Bionics LLC for cochlear implants and Infusion Systems LLC for infusion
pumps. Mr. Mann was non-executive Chairman of both entities. Advanced Bionics LLC was acquired by
Sonova Holdings on December 30, 2009. Infusion Systems LLC was acquired by the Alfred E. Mann
Foundation in February 2010. Mr. Mann has also founded and is non-executive Chairman of Second Sight
Medical Products, Inc., which is developing a visual prosthesis for the blind; Bioness Inc., which is
developing rehabilitation neurostimulation systems; Quallion LLC, which produces batteries for medical
products and for the military and aerospace industries; and Stellar Microelectronics Inc., a supplier of
electronic assemblies to the medical, military and aerospace industries. Mr. Mann also founded and is the
managing member of PerQFlo, LLC, which is developing drug delivery systems. Mr. Mann is the managing
member of the Alfred Mann Foundation and is also non-executive Chairman of Alfred Mann Institutes at the
University of Southern California, AMI Purdue and AMI Technion, and the Alfred Mann Foundation for
Biomedical Engineering, which is establishing additional institutes at other research universities. Mr. Mann is
also non-executive Chairman of the Southern California Biomedical Council and a Director of the Nevada
Cancer Institute. Mr. Mann holds a bachelor’s and master’s degree in Physics from the University of
California at Los Angeles, honorary doctorates from Johns Hopkins University, the University of Southern
California, Western University and the Technion-Israel Institute of Technology and is a member of the
National Academy of Engineering.
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Hakan S. Edstrom has been our President and Chief Operating Officer since April 2001 and has served as
one of our directors since December 2001. Mr. Edstrom was with Bausch & Lomb, Inc., a health care product
company, from January 1998 to April 2001, advancing to the position of Senior Corporate Vice President and
President of Bausch & Lomb, Inc. Americas Region. From 1981 to 1997, Mr. Edstrom was with Pharmacia
Corporation, where he held various executive positions, including President and Chief Executive Officer of
Pharmacia Ophthalmics Inc. Mr. Edstrom was educated in Sweden and holds a master’s degree in Business
Administration from the Stockholm School of Economics.
Matthew J. Pfeffer has been our Corporate Vice President and Chief Financial Officer since April 2008.
Previously, Mr. Pfeffer served as Chief Financial Officer and Senior Vice President of Finance and
Administration of VaxGen, Inc. from March 2006 until April 2008, with responsibility for finance, tax,
treasury, human resources, IT, purchasing and facilities functions. Prior to VaxGen, Mr. Pfeffer served as
CFO of Cell Genesys, Inc. During his nine year tenure at Cell Genesys, Mr. Pfeffer served as Director of
Finance before being named CFO in 1998. Prior to that, Mr. Pfeffer served in a variety of financial
management positions at other companies, including roles as Corporate Controller, Manager of Internal Audit
and Manager of Financial Reporting. Mr. Pfeffer began his career at Price Waterhouse. Mr. Pfeffer serves on
boards and advisory committees of the Biotechnology Industry Organization and the American Institute of
Certified Public Accountants. Mr. Pfeffer has a bachelor’s degree in Accounting from the University of
California, Berkeley and is a Certified Public Accountant.
Juergen A. Martens, Ph.D. has been our Corporate Vice President of Operations and Chief Technology
Officer since September 2005. From 2000 to August 2005, he was employed by Nektar Therapeutics, Inc.,
most recently as Vice President of Pharmaceutical Technology Development. Previously, he held technical
management positions at Aerojet Fine Chemicals from 1998 to 2000 and at FMC Corporation from 1996 to
1998. From 1987 to 1996, Dr. Martens held a variety of management positions with increased responsibility
in R&D, plant management, and business process development at Lonza, in Switzerland and in the United
States. Dr. Martens holds a bachelor’s degree in chemical engineering from the Technical College
Mannheim/Germany, a bachelor’s and master’s degree in Chemistry and a doctorate in Physical Chemistry
from the University of Marburg/Germany.
Diane M. Palumbo has been our Corporate Vice President of Human Resources since November 2004.
From July 2003 to November 2004, she was President of her own human resources consulting company.
From June 1991 to July 2003, Ms. Palumbo held various positions with Amgen, Inc., a California-based
biopharmaceutical company, including Senior Director, Human Resources. In addition, Ms. Palumbo has held
Human Resources positions with Unisys and Mitsui Bank Ltd. of Tokyo. She holds a master’s degree in
Business Administration from St. John’s University, New York and a bachelor’s degree, magna cum laude,
also from St. John’s University.
Dr. Peter C. Richardson has been our Corporate Vice President and Chief Scientific Officer since
October 2005. From 1991 to October 2005, he was employed by Novartis Pharmaceuticals Corporation,
which is the U.S. affiliate of Novartis AG, a world leader in healthcare, most recently as Senior Vice
President, Global Head of Development Alliances. From 2003 until 2005, he was Senior Vice President and
Head of Development of Novartis Pharmaceuticals KK Japan. He earlier practiced as an endocrinologist.
Dr. Richardson holds a B.Med.Sci (Hons.) and a BM.BS (Hons.) from University of Nottingham Medical
School; a MRCP (UK) from the Royal College of Physicians, UK; a Certificate in Pharmaceutical Medicine
from Universities of Freibourg, Strasbourg and Basle; and a Diploma in Pharmaceutical Medicine from the
Royal College of Physicians Faculty of Pharmaceutical Medicine.
David Thomson, Ph.D., J.D. has been our Corporate Vice President, General Counsel and Corporate
Secretary since January 2002. Prior to joining us, he practiced corporate/commercial and securities law at the
Toronto law firm of Davies Ward Phillips & Vineberg LLP. Earlier in his career, Dr. Thomson was a
post-doctoral fellow at the Rockefeller University. Dr. Thomson obtained his bachelor’s degree, master’s
degree and Ph.D. degree from Queens University and obtained his J.D. degree from the University of
Toronto.
Executive officers serve at the discretion of our Board of Directors. There are no family relationships
between any of our directors and executive officers.
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Item 1A. Risk Factors
You should consider carefully the following information about the risks described below, together with the
other information contained in this Annual Report before you decide to buy or maintain an investment in our
common stock. We believe the risks described below are the risks that are material to us as of the date of this
Annual Report. Additional risks and uncertainties that we are unaware of may also become important factors
that affect us. If any of the following risks actually occur, our business, financial condition, results of
operations and future growth prospects would likely be materially and adversely affected. In these
circumstances, the market price of our common stock could decline, and you may lose all or part of the
money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
We depend heavily on the successful development and commercialization of our lead product candidate,
AFREZZA, which is not yet approved, and our other product candidates, which are in early clinical or
preclinical development.
To date, we have not commercialized any product candidates. In March 2009, we submitted an NDA to the
FDA requesting approval of AFREZZA for the treatment of adults with type 1 or type 2 diabetes for the
control of hyperglycemia. The FDA accepted our NDA for filing in May 2009, meaning the FDA determined
that our submission is sufficiently complete to permit a substantive review. On March 12, 2010, we received a
Complete Response letter from the FDA regarding the NDA for AFREZZA. A Complete Response letter is
issued by the FDA’s Center for Drug Evaluation and Research when the review of a submitted file is
completed and questions remain that preclude the approval of the NDA in its current form. As recommended
by the FDA, we will request an End-of-Review meeting with the agency to discuss our approach for resolving
the remaining issues. There can be no assurance that we will be able to satisfy all of the FDA’s requirements
with currently available data or that the FDA will find our proposed approach acceptable. The FDA could also
request that we conduct additional clinical trials to provide sufficient data for approval of the NDA. There can
be no assurance that we will obtain approval of the NDA in a timely manner or at all.
Our other product candidates are generally in early clinical or preclinical development. We anticipate that
in the near term, our ability to generate revenues will depend solely on the successful development and
commercialization of AFREZZA.
We have expended significant time, money and effort in the development of our lead product candidate,
AFREZZA, which has not yet received regulatory approval and which may not be approved by the FDA in a
timely manner, or at all. We must receive the necessary approvals from the FDA and similar foreign
regulatory agencies before AFREZZA can be marketed and sold in the United States or elsewhere. Even if we
were to receive regulatory approval, we ultimately may be unable to gain market acceptance of AFREZZA
for a variety of reasons, including the treatment and dosage regimen, potential adverse effects, the availability
of alternative treatments and cost effectiveness. If we fail to commercialize AFREZZA, our business,
financial condition and results of operations will be materially and adversely affected.
We are seeking to develop and expand our portfolio of product candidates through our internal research
programs and through licensing or otherwise acquiring the rights to therapeutics in the areas of cancer and
other indications. All of these product candidates will require additional research and development and
significant preclinical, clinical and other testing prior to seeking regulatory approval to market them.
Accordingly, these product candidates will not be commercially available for a number of years, if at all.
A significant portion of the research that we are conducting involves new and unproven compounds and
technologies, including AFREZZA, Technosphere platform technology and immunotherapy product
candidates. Research programs to identify new product candidates require substantial technical, financial and
human resources. Even if our research programs identify candidates that initially show promise, these
candidates may fail to progress to clinical development for any number of reasons, including discovery upon
further research that these candidates have adverse effects or other characteristics that indicate they are
unlikely to be effective. In addition, the clinical results we obtain at one stage are not necessarily indicative of
future testing results. If we fail to successfully complete the development and commercialization of
AFREZZA or develop or expand our other product candidates, or are significantly delayed in doing so, our
business and results of operations will be harmed and the value of our stock could decline.
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We have a history of operating losses, we expect to continue to incur losses and we may never become
profitable.
We are a development stage company with no commercial products. All of our product candidates are still
being developed, and all but AFREZZA are still in the early stages of development. Our product candidates
will require significant additional development, clinical trials, regulatory clearances and additional investment
before they can be commercialized. We cannot be certain when AFREZZA may be approved, or if it will be
approved.
We have never been profitable and, as of December 31, 2009, we had an accumulated deficit of $1.6
billion. The accumulated deficit has resulted principally from costs incurred in our research and development
programs, the write-off of goodwill and general operating expenses. We expect to make substantial
expenditures and to incur increasing operating losses in the future in order to further develop and
commercialize our product candidates, including costs and expenses to complete clinical trials, seek
regulatory approvals and market our product candidates, including AFREZZA. This accumulated deficit may
increase significantly as we continue development and clinical trial efforts.
Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total
assets and stockholders’ equity. As of December 31, 2009, we had an accumulated deficit in stockholders’
equity of $59.2 million. Our ability to achieve and sustain profitability depends upon obtaining regulatory
approvals for and successfully commercializing AFREZZA, either alone or with third parties. We do not
currently have the required approvals to market any of our product candidates, and we may not receive them.
We may not be profitable even if we succeed in commercializing any of our product candidates. As a result,
we cannot be sure when we will become profitable, if at all.
If we fail to raise additional capital our financial condition and business would suffer.
It is costly to develop therapeutic product candidates and conduct clinical trials for these product
candidates. Although we are currently focusing on AFREZZA as our lead product candidate, we have begun
to conduct clinical trials for additional product candidates. Our existing capital resources will not be sufficient
to support the expense of fully commercializing AFREZZA or developing any of our product candidates.
Based upon our current expectations, we believe that our existing capital resources, including the loan
arrangement with an entity controlled by our principal stockholder, will enable us to continue planned
operations into the first quarter of 2011. However, we cannot assure you that our plans will not change or that
changed circumstances will not result in the depletion of our capital resources more rapidly than we currently
anticipate. Accordingly, we plan to raise additional capital, either through the sale of equity and/or debt
securities, the entry into a strategic business collaboration, or the establishment of other funding facilities, in
order to continue the development and commercialization of AFREZZA and other product candidates and to
support our other ongoing activities. However, it may be difficult for us to raise additional capital through the
sale of equity and/or debt securities. As of December 31, 2009, we had an accumulated deficit in
stockholders’ equity of $59.2 million which may affect our ability to raise additional capital. The amount of
additional funds we need will depend on a number of factors, including:
• the rate of progress and costs of our clinical trials and research and development activities, including
costs of procuring clinical materials and expanding our own manufacturing facilities;
• our success in establishing strategic business collaborations and the timing and amount of any payments
we might receive from any collaboration we are able to establish;
• actions taken by the FDA and other regulatory authorities affecting our products and competitive
products;
• our degree of success in commercializing AFREZZA;
• the emergence of competing technologies and products and other adverse market developments;
• the timing and amount of payments we might receive from potential licensees;
• the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual
property rights or defending against claims of infringement by others;
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• the costs of discontinuing projects and technologies or decommissioning existing facilities, if we
undertake those activities; and
• the costs of performing additional clinical trials to demonstrate safety and efficacy if our current trials do
not deliver results sufficient for FDA approval and commercialization.
We have raised capital in the past primarily through the sale of equity and debt securities. We may in the
future pursue the sale of additional equity and/or debt securities, or the establishment of other funding
facilities. Issuances of additional debt or equity securities or the conversion of any of our currently
outstanding convertible debt securities into shares of our common stock could impact your rights as a holder
of our common stock and may dilute your ownership percentage. We anticipate that we will seek approval by
our stockholders of an amendment to our certificate of incorporation to increase the authorized number of
shares of our common stock to facilitate any future capital-raising transactions. Such a proposal would require
approval by the holders of a majority of the outstanding shares of our common stock. If we were unable to
obtain the requisite approval, our ability to raise additional capital by selling our equity securities would be
constrained. Moreover, the establishment of other funding facilities may impose restrictions on our
operations. These restrictions could include limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or
make investments.
We also may seek to raise additional capital by pursuing opportunities for the licensing or sale of certain
intellectual property and other assets, including our Technosphere technology platform. We cannot offer
assurances, however, that any strategic collaborations, sales of securities or sales or licenses of assets will be
available to us on a timely basis or on acceptable terms, if at all. We may be required to enter into
relationships with third parties to develop or commercialize products or technologies that we otherwise would
have sought to develop independently, and any such relationships may not be on terms as commercially
favorable to us as might otherwise be the case.
In the event that sufficient additional funds are not obtained through strategic collaboration opportunities,
sales of securities, credit facilities, licensing arrangements and/or asset sales on a timely basis, we may be
required to reduce expenses through the delay, reduction or curtailment of our projects, including AFREZZA
commercialization, or further reduction of costs for facilities and administration. Moreover, if we do not
obtain such additional funds, there will be substantial doubt about our ability to continue as a going concern.
Deteriorating global economic conditions may have an adverse impact on the loan facility with an entity
controlled by our principal stockholder, which we currently cannot predict.
As widely reported, financial markets in the United States, Europe and Asia have been experiencing a
period of unprecedented turmoil and upheaval characterized by extreme volatility and declines in security
prices, severely diminished liquidity and credit availability, inability to access capital markets, the
bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of
intervention from the United States federal government and other governments. We cannot predict the impact
of these events on the loan facility with an entity controlled by our principal stockholder. If we are unable to
draw on this financial resource, our business and financial condition will be adversely affected.
If we do not achieve our projected development and commercialization goals in the timeframes we
announce and expect, our business would be harmed and the market price of our common stock could
decline.
For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical,
regulatory and other product development goals, which we sometimes refer to as milestones. These
milestones may include the commencement or completion of scientific studies and clinical trials and the
submission of regulatory filings. From time to time, we publicly announce the expected timing of some of
these milestones. All of these milestones are based on a variety of assumptions. The actual timing of the
achievement of these milestones can vary dramatically from our estimates, in many cases for reasons beyond
our control, depending on numerous factors, including:
• the rate of progress, costs and results of our clinical trial and research and development activities, which
will be impacted by the level of proficiency and experience of our clinical staff;
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• our ability to identify and enroll patients who meet clinical trial eligibility criteria;
• our ability to access sufficient, reliable and affordable supplies of components used in the manufacture of
our product candidates, including insulin and other materials for AFREZZA;
• the costs of expanding and maintaining manufacturing operations, as necessary;
• the extent of scheduling conflicts with participating clinicians and clinical institutions;
• the receipt of approvals by our competitors and by us from the FDA and other regulatory agencies; and
• other actions by regulators.
In addition, if we do not obtain sufficient additional funds through sales of securities, strategic
collaborations or the license or sale of certain of our assets on a timely basis, we may be required to reduce
expenses by delaying, reducing or curtailing our development of AFREZZA or other product development
activities, which would impact our ability to meet milestones. If we fail to commence or complete, or
experience delays in or are forced to curtail, our proposed clinical programs or otherwise fail to adhere to our
projected development goals in the timeframes we announce and expect, our business and results of
operations will be harmed and the market price of our common stock may decline.
We face substantial competition in the development of our product candidates and may not be able to
compete successfully, and our product candidates may be rendered obsolete by rapid technological
change.
A number of established pharmaceutical companies have or are developing technologies for the treatment
of diabetes. We also face substantial competition for the development of our other product candidates.
Many of our existing or potential competitors have, or have access to, substantially greater financial,
research and development, production, and sales and marketing resources than we do and have a greater depth
and number of experienced managers. As a result, our competitors may be better equipped than we are to
develop, manufacture, market and sell competing products. In addition, gaining favorable reimbursement is
critical to the success of AFREZZA. Many of our competitors have existing infrastructure and relationships
with managed care organizations and reimbursement authorities which can be used to their advantage.
The rapid rate of scientific discoveries and technological changes could result in one or more of our
product candidates becoming obsolete or noncompetitive. Our competitors may develop or introduce new
products that render our technology and AFREZZA less competitive, uneconomical or obsolete. Our future
success will depend not only on our ability to develop our product candidates but to improve them and keep
pace with emerging industry developments. We cannot assure you that we will be able to do so.
We also expect to face increasing competition from universities and other non-profit research
organizations. These institutions carry out a significant amount of research and development in the areas of
diabetes and cancer. These institutions are becoming increasingly aware of the commercial value of their
findings and are more active in seeking patent and other proprietary rights as well as licensing revenues.
If we fail to enter into a strategic collaboration with respect to AFREZZA, we may not be able to execute
on our business model.
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 with any of these
companies on a collaboration. We cannot predict when, if ever, we could conclude an agreement with a
partner. There can be no assurance that any such collaboration will be available to us on a timely basis or on
acceptable terms. If we are not able to enter into a collaboration on terms that are favorable to us, we may be
unable to undertake and fund product development, clinical trials, manufacturing and marketing
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activities at our own expense. Accordingly, we may have to substantially reduce our development efforts,
which would delay or otherwise impede the commercialization of AFREZZA.
We will face similar challenges as we seek to develop our other product candidates. Our current strategy
for developing, manufacturing and commercializing our other product candidates includes evaluating the
potential for collaborating with pharmaceutical and biotechnology companies at some point in the drug
development process and for these collaborators to undertake the advanced clinical development and
commercialization of our product candidates. It may be difficult for us to find third parties that are willing to
enter into collaborations on economic terms that are favorable to us, or at all. Failure to enter into a
collaboration with respect to any other product candidate could substantially increase our requirements for
capital and force us to substantially reduce our development effort.
If we enter into collaborative agreements with respect to AFREZZA and if our third-party collaborators
do not perform satisfactorily or if our collaborations fail, development or commercialization of
AFREZZA may be delayed and our business could be harmed.
We may enter into license agreements, partnerships or other collaborative arrangements to support the
financing, development and marketing of AFREZZA. We may also license technology from others to enhance
or supplement our technologies. These various collaborators may enter into arrangements that would make
them potential competitors. These various collaborators also may breach their agreements with us and delay
our progress or fail to perform under their agreements, which could harm our business.
If we enter into collaborative arrangements, we will have less control over the timing, planning and other
aspects of our clinical trials, and the sale and marketing of AFREZZA and our other product candidates. We
cannot offer assurances that we will be able to enter into satisfactory arrangements with third parties as
contemplated or that any of our existing or future collaborations will be successful.
Continued testing of AFREZZA or our other product candidate may not yield successful results, and even
if it does, we may still be unable to commercialize our product candidate.
Our research and development programs are designed to test the safety and efficacy of AFREZZA and our
other product candidates through extensive nonclinical and clinical testing. We may experience numerous
unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization
of AFREZZA or any of our other product candidates, including the following:
• safety and efficacy results obtained in our nonclinical and initial clinical testing may be inconclusive or
may not be predictive of results obtained in later-stage clinical trials or following long-term use, and we
may as a result be forced to stop developing product candidates that we currently believe are important to
our future;
• the data collected from clinical trials of our product candidates may not be sufficient to support FDA or
other regulatory approval;
• after reviewing test results, we or any potential collaborators may abandon projects that we previously
believed were promising; and
• our product candidates may not produce the desired effects or may result in adverse health effects or
other characteristics that preclude regulatory approval or limit their commercial use if approved.
Forecasts about the effects of the use of drugs, including AFREZZA, over terms longer than the clinical
trials or in much larger populations may not be consistent with the clinical results. If use of AFREZZA results
in adverse health effects or reduced efficacy or both, the FDA or other regulatory agencies may terminate our
ability to market and sell AFREZZA, may narrow the approved indications for use or otherwise require
restrictive product labeling or marketing, or may require further clinical trials, which may be time-consuming
and expensive and may not produce favorable results.
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As a result of any of these events, we, any collaborator, the FDA, or any other regulatory authorities, may
suspend or terminate clinical trials or marketing of AFREZZA at any time. Any suspension or termination of
our clinical trials or marketing activities may harm our business and results of operations and the market price
of our common stock may decline.
If we are unable to transition successfully from a development company to a company that
commercializes therapeutics, our business would suffer.
We require a well-structured plan to make the transition from the development stage to being a company
with commercial operations. We have a number of executive personnel, particularly in clinical development,
regulatory and manufacturing production, including personnel with significant Phase 3-to-commercialization
experience. In order to implement our commercialization strategy, we will need to:
• align our management structure to accommodate the increasing complexity of our operations;
• develop comprehensive and detailed commercialization, clinical development and regulatory plans; and
• implement standard operating procedures.
If we are unable to accomplish these measures in a timely manner, we would be at considerable risk of
failing to develop the capabilities necessary for FDA inspection and commercial operations.
If our suppliers fail to deliver materials and services needed for the production of AFREZZA in a timely
and sufficient manner, or they fail to comply with applicable regulations, our business and results of
operations would be harmed and the market price of our common stock could decline.
For AFREZZA to be commercially viable, we need access to sufficient, reliable and affordable supplies of
insulin, our AFREZZA inhaler, the related cartridges and other materials. We have a long-term agreement
with N.V. Organon for the supply of insulin. In June 2009, we purchased from Pfizer, a portion of its
inventory of bulk insulin and acquired an option to purchase the remainder of Pfizer’s insulin inventory, in
whole or in part, at a specified price to the extent that Pfizer has not otherwise disposed of or used the retained
insulin.
We have obtained FDKP, the precursor raw material for AFREZZA, from two sources, both of which are
major chemical manufacturers with facilities in Europe and North America. We have completed a successful
validation campaign of FDKP at commercial scale. We can also utilize our in-house chemical manufacturing
plant for supplemental capacity. We believe our contract manufacturers have the capacity to supply our
current clinical and future commercial requirements. We have obtained our AFREZZA inhaler and cartridges
from two large plastic molding companies.
We must rely on our suppliers to comply with relevant regulatory and other legal requirements, including
the production of insulin in accordance with the FDA’s cGMP for drug products, and the production of
AFREZZA inhaler and related cartridges in accordance with QSR. The supply of all of these materials may be
limited or the manufacturer may not meet relevant regulatory requirements, and if we are unable to obtain
these materials in sufficient amounts, in a timely manner and at reasonable prices, or if we should encounter
delays or difficulties in our relationships with manufacturers or suppliers, the development or manufacturing
of AFREZZA may be delayed. Any such events could delay market introduction and subsequent sales of
AFREZZA and, if so, our business and results of operations will be harmed and the market price of our
common stock may decline.
We have never manufactured AFREZZA or any other product candidates in commercial quantities, and if
we fail to develop an effective manufacturing capability for our product candidates or to engage
third-party manufacturers with this capability, we may be unable to commercialize these products.
We use our Danbury facility to formulate AFREZZA, fill plastic cartridges with AFREZZA and blister
package the cartridges for our clinical trials. This facility has been fully qualified and undergone regulatory
inspection that is expected to result in approval to manufacture commercially. The manufacture of
pharmaceutical products requires significant expertise and capital investment, including the development of
advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often
encounter difficulties in production, especially in scaling up initial production. These problems include
difficulties with production costs and yields, quality control
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and assurance and shortages of qualified personnel, as well as compliance with strictly enforced federal, state
and foreign regulations. If we engage a third-party manufacturer, we would need to transfer our technology to
that third-party manufacturer and gain FDA approval, potentially causing delays in product delivery. In
addition, our third-party manufacturer may not perform as agreed or may terminate its agreement with us.
Additionally, when we manufacture commercial material on a significantly larger production scale than
the production scale for clinical trial materials, we are required by the FDA to establish that the results
obtained from the clinical trials may reasonably be extrapolated to such commercial material. We have
submitted documentation to the FDA to show correlation to the clinical-scale production materials with no
assurance that approval would be obtained.
Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions, required
approvals or commercialization of our product candidates, entail higher costs and result in our being unable to
effectively commercialize our products. Furthermore, if we or a third-party manufacturer fail to deliver the
required commercial quantities of any product on a timely basis, and at commercially reasonable prices and
acceptable quality, and we were unable to promptly find one or more replacement manufacturers capable of
production at a substantially equivalent cost, in substantially equivalent volume and quality on a timely basis,
we would likely be unable to meet demand for such products and we would lose potential revenues.
We deal with hazardous materials and must comply with environmental laws and regulations, which can
be expensive and restrict how we do business.
Our research and development work involves the controlled storage and use of hazardous materials,
including chemical, radioactive and biological materials. In addition, our manufacturing operations involve
the use of a chemical that is stable and non-hazardous under normal storage conditions, but may form an
explosive mixture under certain conditions. Our operations also produce hazardous waste products. We are
subject to federal, state and local laws and regulations governing how we use, manufacture, store, handle and
dispose of these materials. Moreover, the risk of accidental contamination or injury from hazardous materials
cannot be completely eliminated, and in the event of an accident, we could be held liable for any damages that
may result, and any liability could fall outside the coverage or exceed the limits of our insurance. Currently,
our general liability policy provides coverage up to $1 million per occurrence and $2 million in the aggregate
and is supplemented by an umbrella policy that provides a further $4 million of coverage; however, our
insurance policy excludes pollution coverage and we do not carry a separate hazardous materials policy. In
addition, we could be required to incur significant costs to comply with environmental laws and regulations in
the future. Finally, current or future environmental laws and regulations may impair our research,
development or production efforts.
When we purchased the facilities located in Danbury, Connecticut in 2001, there was a soil cleanup plan in
process. As part of the purchase, we obtained an indemnification from the seller related to the remediation of
the soil for all known environmental conditions that existed at the time the seller acquired the property. The
seller is, in turn, indemnified for these known environmental conditions by the previous owner. We also
received an indemnification from the seller for environmental conditions created during its ownership of the
property and for environmental problems unknown at the time that the seller acquired the property. These
additional indemnities are limited to the purchase price that we paid for the Danbury facilities.
During the construction of our expanded manufacturing facility, we completed the final stages of the soil
cleanup plan in the third quarter of 2008, at a cost of approximately $2.25 million. We are in discussions with
the party responsible for remediation regarding their contribution to past clean-up costs and their obligation to
pay for or indemnify us for any future costs and expenses directly related to the final closure of the
environmental remediation. If we are unable to collect these future costs and expenses, if any, from the
responsible party, our business and results of operations may be harmed.
If we fail to enter into collaborations with third parties, we would be required to establish our own sales,
marketing and distribution capabilities, which could impact the commercialization of our products and
harm our business.
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Our products are intended to be used by a large number of healthcare professionals who will require
substantial education and support. For example, a broad base of physicians, including primary care physicians
and endocrinologists, treat patients with diabetes. A large sales force will be required in order to educate these
physicians about the benefits and advantages of AFREZZA and to provide adequate support for them.
Therefore, we plan to enter into collaborations with one or more pharmaceutical companies to market,
distribute and sell AFREZZA, if it is approved. If we fail to enter into collaborations, we would be required to
establish our own direct sales, marketing and distribution capabilities. Establishing these capabilities can be
time-consuming and expensive. Because we lack experience in selling pharmaceutical products to the
diabetes market, we would be at a disadvantage compared to our potential competitors, all of whom have
substantially more resources and experience than we do. For example, several other companies selling
products to treat diabetes have existing sales forces in excess of 1,500 sales representatives. We, acting alone,
would not initially be able to field a sales force as large as our competitors or provide the same degree of
market research or marketing support. Also, we would not be able to match our competitor’s spending levels
for pre-launch marketing preparation, including medical education. We cannot assure you that we will
succeed in entering into acceptable collaborations, that any such collaboration will be successful or, if not,
that we will successfully develop our own sales, marketing and distribution capabilities.
If any product that we may develop does not become widely accepted by physicians, patients, third-party
payers and the healthcare community, we may be unable to generate significant revenue, if any.
AFREZZA and our other product candidates are new and unproven. Even if any of our product candidates
obtains regulatory approvals, it may not gain market acceptance among physicians, patients, third-party
payers and the healthcare community. Failure to achieve market acceptance would limit our ability to
generate revenue and would adversely affect our results of operations.
The degree of market acceptance of AFREZZA and our other product candidates will depend on many
factors, including the:
• claims for which FDA approval can be obtained, including superiority claims;
• perceived advantages and disadvantages of competitive products;
• willingness and ability of patients and the healthcare community to adopt new technologies;
• ability to manufacture the product in sufficient quantities with acceptable quality and at an acceptable
cost;
• perception of patients and the healthcare community, including third-party payers, regarding the safety,
efficacy and benefits of the product compared to those of competing products or therapies;
• convenience and ease of administration of the product relative to existing treatment methods;
• pricing and reimbursement of the product relative to other treatment therapeutics and methods; and
• marketing and distribution support for the product.
Physicians will not recommend a product until clinical data or other factors demonstrate the safety and
efficacy of the product as compared to other treatments. Even if the clinical safety and efficacy of our product
candidates is established, physicians may elect not to recommend these product candidates for a variety of
factors, including the reimbursement policies of government and third-party payers and the effectiveness of
our competitors in marketing their therapies. Because of these and other factors, any product that we may
develop may not gain market acceptance, which would materially harm our business, financial condition and
results of operations.
If third-party payers do not reimburse consumers for our products, our products might not be used or
purchased, which would adversely affect our revenues.
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Our future revenues and potential for profitability may be affected by the continuing efforts of
governments and third-party payers to contain or reduce the costs of healthcare through various means. For
example, in certain foreign markets the pricing of prescription pharmaceuticals is subject to governmental
control. In the United States, there has been, and we expect that there will continue to be, a number of federal
and state proposals to implement similar governmental controls. We cannot be certain what legislative
proposals will be adopted or what actions federal, state or private payers for healthcare goods and services
may take in response to any healthcare reform proposals or legislation. Such reforms may make it difficult to
complete the development and testing of AFREZZA and our other product candidates, and therefore may
limit our ability to generate revenues from sales of our product candidates and achieve profitability. Further,
to the extent that such reforms have a material adverse effect on the business, financial condition and
profitability of other companies that are prospective collaborators for some of our product candidates, our
ability to commercialize our product candidates under development may be adversely affected.
In the United States and elsewhere, sales of prescription pharmaceuticals still depend in large part on the
availability of reimbursement to the consumer from third-party payers, such as governmental and private
insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and
services. In addition, because each third-party payer individually approves reimbursement, obtaining these
approvals is a time-consuming and costly process. We would be required to provide scientific and clinical
support for the use of any product to each third-party payer separately with no assurance that approval would
be obtained. This process could delay the market acceptance of any product and could have a negative effect
on our future revenues and operating results. Even if we succeed in bringing one or more products to market,
we cannot be certain that any such products would be considered cost-effective or that reimbursement to the
consumer would be available, in which case our business and results of operations would be harmed and the
market price of our common stock could decline.
If product liability claims are brought against us, we may incur significant liabilities and suffer damage to
our reputation.
The testing, manufacturing, marketing and sale of AFREZZA and our other product candidates expose us
to potential product liability claims. A product liability claim may result in substantial judgments as well as
consume significant financial and management resources and result in adverse publicity, decreased demand
for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. We
currently carry worldwide liability insurance in the amount of $10 million. We believe these limits are
reasonable to cover us from potential damages arising from current and previous clinical trials of AFREZZA.
In addition, we carry local policies per trial in each country in which we conduct clinical trials that require us
to carry coverage based on local statutory requirements. We intend to obtain product liability coverage for
commercial sales in the future if AFREZZA is approved. However, we may not be able to obtain insurance
coverage that will be adequate to satisfy any liability that may arise, and because insurance coverage in our
industry can be very expensive and difficult to obtain, we cannot assure you that we will be able to obtain
sufficient coverage at an acceptable cost, if at all. If losses from such claims exceed our liability insurance
coverage, we may ourselves incur substantial liabilities. If we are required to pay a product liability claim our
business and results of operations would be harmed and the market price of our common stock may decline.
If we lose any key employees or scientific advisors, our operations and our ability to execute our business
strategy could be materially harmed.
In order to commercialize our product candidates successfully, we will be required to expand our work
force, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business
development, and sales and marketing. These activities will require the addition of new personnel, including
management, and the development of additional expertise by existing personnel. We face intense competition
for qualified employees among companies in the biotechnology and biopharmaceutical industries. Our
success depends upon our ability to attract, retain and motivate highly skilled employees. We may be unable
to attract and retain these individuals on acceptable terms, if at all.
The loss of the services of any principal member of our management and scientific staff could significantly
delay or prevent the achievement of our scientific and business objectives. All of our employees are “at will”
and we currently do not have employment agreements with any of the principal members of our management
or scientific staff, and we do not have key person life insurance to cover the loss of any of these individuals.
Replacing key employees may be difficult and time-consuming because of the limited number of individuals
in our industry with
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the skills and experience required to develop, gain regulatory approval of and commercialize our product
candidates successfully.
We have relationships with scientific advisors at academic and other institutions to conduct research or
assist us in formulating our research, development or clinical strategy. These scientific advisors are not our
employees and may have commitments to, and other obligations with, other entities that may limit their
availability to us. We have limited control over the activities of these scientific advisors and can generally
expect these individuals to devote only limited time to our activities. Failure of any of these persons to devote
sufficient time and resources to our programs could harm our business. In addition, these advisors are not
prohibited from, and may have arrangements with, other companies to assist those companies in developing
technologies that may compete with our product candidates.
If our Chief Executive Officer is unable to devote sufficient time and attention to our business, our
operations and our ability to execute our business strategy could be materially harmed.
Alfred Mann, our Chairman and Chief Executive Officer, is involved in many other business and
charitable activities. As a result, the time and attention Mr. Mann devotes to the operation of our business
varies, and he may not expend the same time or focus on our activities as other, similarly situated chief
executive officers. If Mr. Mann is unable to devote the time and attention necessary to running our business,
we may not be able to execute our business strategy and our business could be materially harmed.
Our facilities that are located in Southern California may be affected by man-made or natural disasters.
Our headquarters and some of our research and development activities are located in Southern California,
where they are subject to a risk of man-made disasters, terrorism, and an enhanced risk of natural and other
disasters such as fires, power and telecommunications failures, mudslides, and earthquakes. An act of
terrorism, fire, earthquake or other catastrophic loss that causes significant damage to our facilities or
interruption of our business could harm our business. We do not carry insurance to cover losses caused by
earthquakes, and the insurance coverage that we carry for fire damage and for business interruption may be
insufficient to compensate us for any losses that we may incur.
If our internal controls over financial reporting are not considered effective, our business and stock price
could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal
controls over financial reporting as of the end of each fiscal year, and to include a management report
assessing the effectiveness of our internal controls over financial reporting in our annual report on Form 10-K
for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to,
and report on, our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that
our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud involving a company have been, or will be, detected. The design of any
system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot
assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. We cannot assure you that we or our
independent registered public accounting firm will not identify a material weakness in our internal controls in
the future. A material weakness in our internal controls over financial reporting would require management
and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our
internal controls over financial reporting are not considered effective, we may experience a loss of public
confidence, which could have an adverse effect on our business and on the market price of our common stock.
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RISKS RELATED TO REGULATORY APPROVALS
Our product candidates must undergo rigorous nonclinical and clinical testing and we must obtain
regulatory approvals, which could be costly and time-consuming and subject us to unanticipated delays or
prevent us from marketing any products.
Our research and development activities, as well as the manufacturing and marketing of our product
candidates, including AFREZZA, are subject to regulation, including regulation for safety, efficacy and
quality, by the FDA in the United States and comparable authorities in other countries. FDA regulations and
the regulation of comparable foreign regulatory authorities are wide-ranging and govern, among other things:
• product design, development, manufacture and testing;
• product labeling;
• product storage and shipping;
• pre-market clearance or approval;
• advertising and promotion; and
• product sales and distribution.
Clinical testing can be costly and take many years, and the outcome is uncertain and susceptible to varying
interpretations. We cannot be certain if or when the FDA might request additional studies, under what
conditions such studies might be requested, or what the size or length of any such studies might be. The
clinical trials of our product candidates may not be completed on schedule, the FDA or foreign regulatory
agencies may order us to stop or modify our research, or these agencies may not ultimately approve any of
our product candidates for commercial sale. The data collected from our clinical trials may not be sufficient to
support regulatory approval of our various product candidates, including AFREZZA. Even if we believe the
data collected from our clinical trials are sufficient, the FDA has substantial discretion in the approval process
and may disagree with our interpretation of the data. Our failure to adequately demonstrate the safety and
efficacy of any of our product candidates would delay or prevent regulatory approval of our product
candidates, which could prevent us from achieving profitability.
The requirements governing the conduct of clinical trials and manufacturing and marketing of our product
candidates, including AFREZZA, outside the United States vary widely from country to country. Foreign
approvals may take longer to obtain than FDA approvals and can require, among other things, additional
testing and different clinical trial designs. Foreign regulatory approval processes include essentially all of the
risks associated with the FDA approval processes. Some of those agencies also must approve prices of the
products. Approval of a product by the FDA does not ensure approval of the same product by the health
authorities of other countries. In addition, changes in regulatory policy in the United States or in foreign
countries for product approval during the period of product development and regulatory agency review of
each submitted new application may cause delays or rejections.
The process of obtaining FDA and other required regulatory approvals, including foreign approvals, is
expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of
the products involved. We are not aware of any precedent for the successful commercialization of products
based on our technology. On January 26, 2006, the FDA approved the first pulmonary insulin product,
Exubera. This approval has had an impact on and, notwithstanding the voluntary withdrawal of the product
from the market by its manufacturer, could still impact the development and registration of AFREZZA in
different ways. For example, Exubera may be used as a reference for safety and efficacy evaluations of
AFREZZA, and the approval standards set for Exubera may be applied to other products that follow,
including AFREZZA.
On March 16, 2009, we submitted an NDA for AFREZZA, which the FDA accepted for review on
May 16, 2009. The FDA has advised us that it will regulate AFREZZA as a “combination product” because
of the complex nature of the system that includes the combination of a new drug (AFREZZA) and a new
medical device (the AFREZZA inhaler used to administer the insulin). The FDA indicated that the review of
our drug marketing application for AFREZZA will involve several separate review groups of the FDA
including: (1) the Metabolic and Endocrine Drug Products Division; (2) the Pulmonary Drug Products
Division; and (3) the Center for Devices and Radiological Health, which reviews medical devices. The
Metabolic and Endocrine Drug Products Division is the lead group and obtains consulting reviews from the
other two FDA groups. We can make no
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assurances at this time about what impact FDA review by multiple groups will have on the approvability of
our product.
On March 12, 2010, we received a Complete Response letter from the FDA regarding the NDA for
AFREZZA. A Complete Response letter is issued by the FDA’s Center for Drug Evaluation and Research
when the review of a submitted file is completed and questions remain that preclude the approval of the NDA
in its current form. As recommended by the FDA, we will request an End-of-Review meeting with the agency
to discuss our approach for resolving the remaining issues. There can be no assurance that we will be able to
satisfy all of the FDA’s requirements with currently available data or that the FDA will find our proposed
approach acceptable. The FDA could also request that we conduct additional clinical trials to provide
sufficient data for approval of the NDA. There can be no assurance that we will obtain approval of the NDA
in a timely manner or at all.
Also, questions that have been raised about the safety of marketed drugs generally, including pertaining to
the lack of adequate labeling, may result in increased cautiousness by the FDA in reviewing new drugs based
on safety, efficacy, or other regulatory considerations and may result in significant delays in obtaining
regulatory approvals. Such regulatory considerations may also result in the imposition of more restrictive
drug labeling or marketing requirements as conditions of approval, which may significantly affect the
marketability of our drug products. FDA review of AFREZZA as a combination product may lengthen the
product development and regulatory approval process, increase our development costs and delay or prevent
the commercialization of AFREZZA.
We are developing AFREZZA as a new treatment for diabetes utilizing unique, proprietary components.
As a combination product, any changes to either the AFREZZA inhaler, or AFREZZA, including new
suppliers, could possibly result in FDA requirements to repeat certain clinical studies. This means, for
example, that switching to an alternate delivery system, such as our next-generation inhaler, could require us
to undertake additional clinical trials and other studies, which could significantly delay the development and
commercialization of AFREZZA. Our product candidates that are currently in development for the treatment
of cancer also face similar obstacles and costs.
We also must obtain final approval from the FDA for the trade name of our product. The FDA had
informed us that the name previously proposed for our product may be too similar to other drugs on the
market and that we had to propose another trade name for our product. In September 2009, we proposed
AFREZZA as a trade name, which the FDA found conditionally acceptable in December 2009.
We have only limited experience in filing and pursuing applications necessary to gain regulatory
approvals, which may impede our ability to obtain timely approvals from the FDA or foreign regulatory
agencies, if at all.
We will not be able to commercialize AFREZZA or any other product candidates until we have obtained
regulatory approval. Until we prepared and submitted our NDA for AFREZZA, we had no experience as a
company in late-stage regulatory filings, such as preparing and submitting NDAs, which may place us at risk
of delays, overspending and human resources inefficiencies. Any delay in obtaining, or inability to obtain,
regulatory approval could harm our business. We are currently reviewing the Complete Review letter issued
by the FDA regarding the NDA for AFREZZA and working with the FDA to provide the requested
information and data as quickly as possible. As recommended by the FDA, we will request an End-of-Review
meeting with the agency to discuss our approach for resolving the remaining issues. There can be no
assurance that we will be able to satisfy all of the FDA’s requirements with currently available data or that the
FDA will find our proposed approach acceptable. The FDA could also request that we conduct additional
clinical trials to provide sufficient data for approval of the NDA. There can be no assurance that we will
obtain approval of the NDA in a timely manner or at all.
If we do not comply with regulatory requirements at any stage, whether before or after marketing
approval is obtained, we may be subject to criminal prosecution, fined or forced to remove a product from
the market or experience other adverse consequences, including restrictions or delays in obtaining
regulatory marketing approval.
Even if we comply with regulatory requirements, we may not be able to obtain the labeling claims
necessary or desirable for product promotion. We may also be required to undertake post-marketing trials. In
addition, if we or other parties identify adverse effects after any of our products are on the market, or if
manufacturing problems occur, regulatory approval may be withdrawn and a reformulation of our products,
additional clinical trials, changes in labeling of, or indications of use for, our products and/or additional
marketing applications may be required. If we encounter any of the foregoing problems, our business and
results of operations will be harmed and the market price of our common stock may decline.
Even if we obtain regulatory approval for our product candidates, such approval may be limited and we
will be subject to stringent, ongoing government regulation.
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Even if regulatory authorities approve any of our product candidates, they could approve less than the full
scope of uses or labeling that we seek or otherwise require special warnings or other restrictions on use or
marketing or could require potentially costly post-marketing follow-up clinical trials. Regulatory authorities
may limit the segments of the diabetes population to which we or others may market AFREZZA or limit the
target population for our other product candidates. Based on currently available clinical studies, we believe
that AFREZZA may have certain advantages over currently approved insulin products including its
approximation of the natural early insulin secretion normally seen in healthy individuals following the
beginning of a meal. Nonetheless, there are no assurances that these or any other advantages of AFREZZA
will be agreed to by the FDA or otherwise included in product labeling or advertising and, as a result,
AFREZZA may not have our expected competitive advantages when compared to other insulin products.
The manufacture, marketing and sale of any of our product candidates will be subject to stringent and
ongoing government regulation. The FDA may also withdraw product approvals if problems concerning
safety or efficacy of a product occurs following approval. We cannot be sure that FDA and United States
Congressional initiatives pertaining to ensuring the safety of marketed drugs or other developments pertaining
to the pharmaceutical industry will not adversely affect our operations.
We also are required to register our establishments and list our products with the FDA and certain state
agencies. We and any third-party manufacturers or suppliers must continually adhere to federal regulations
setting forth requirements, known as cGMP (for drugs) and QSR (for medical devices), and their foreign
equivalents, which are enforced by the FDA and other national regulatory bodies through their facilities
inspection programs. If our facilities, or the facilities of our manufacturers or suppliers, cannot pass a
preapproval plant inspection, the FDA will not approve the marketing of our product candidates. In
complying with cGMP and foreign regulatory requirements, we and any of our potential third-party
manufacturers or suppliers will be obligated to expend time, money and effort in production, record-keeping
and quality control to ensure that our products meet applicable specifications and other requirements. QSR
requirements also impose extensive testing, control and documentation requirements. State regulatory
agencies and the regulatory agencies of other countries have similar requirements. In addition, we will be
required to comply with regulatory requirements of the FDA, state regulatory agencies and the regulatory
agencies of other countries concerning the reporting of adverse events and device malfunctions, corrections
and removals (e.g., recalls), promotion and advertising and general prohibitions against the manufacture and
distribution of adulterated and misbranded devices. Failure to comply with these regulatory requirements
could result in civil fines, product seizures, injunctions and/or criminal prosecution of responsible individuals
and us. Any such actions would have a material adverse effect on our business and results of operations.
Our insulin supplier does not yet supply human recombinant insulin for an FDA-approved product and
will be subject to an FDA preapproval inspection before the agency will approve a future marketing
application for AFREZZA.
Our insulin supplier for purposes of the AFREZZA NDA sells its product outside of the United States.
However, we can make no assurances that our insulin supplier will be acceptable to the FDA. If we were
required to find a new or additional supplier of insulin, we would be required to evaluate the new supplier’s
ability to provide insulin that meets our specifications and quality requirements, which would require
significant time and expense and could delay the manufacturing and future commercialization of AFREZZA.
We also depend on suppliers for other materials that comprise AFREZZA, including our AFREZZA inhaler
and cartridges. All of our device suppliers must comply with relevant regulatory requirements including QSR.
The FDA is currently in the process of conducting a preapproval inspection of our suppliers. There can be no
assurance, in the conduct of a preapproval inspection of our suppliers, that the agency would find that the
supplier substantially comply with the QSR or cGMP requirements, where applicable. If we or any potential
third-party manufacturer or supplier fails to comply with these requirements or comparable requirements in
foreign countries, regulatory authorities may subject us to regulatory action, including criminal prosecutions,
fines and suspension of the manufacture of our products.
Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials
could delay or prevent us from obtaining regulatory approval or negatively impact public perception of
our product candidates.
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At present, there are a number of clinical trials being conducted by us and other pharmaceutical companies
involving insulin delivery systems. If we discover that AFREZZA is associated with a significantly increased
frequency of adverse events, or if other pharmaceutical companies announce that they observed frequent
adverse events in their trials involving the pulmonary delivery of insulin, we could encounter delays in the
timing of our clinical trials or difficulties in obtaining approval of AFREZZA. As well, the public perception
of AFREZZA might be adversely affected, which could harm our business and results of operations and cause
the market price of our common stock to decline, even if the concern relates to another company’s products or
product candidates.
There are also a number of clinical trials being conducted by other pharmaceutical companies involving
compounds similar to, or competitive with, our other product candidates. Adverse results reported by these
other companies in their clinical trials could delay or prevent us from obtaining regulatory approval or
negatively impact public perception of our product candidates, which could harm our business and results of
operations and cause the market price of our common stock to decline.
RISKS RELATED TO INTELLECTUAL PROPERTY
If we are unable to protect our proprietary rights, we may not be able to compete effectively, or operate
profitably.
Our commercial success depends, in large part, on our ability to obtain and maintain intellectual property
protection for our technology. Our ability to do so will depend on, among other things, complex legal and
factual questions, and it should be noted that the standards regarding intellectual property rights in our fields
are still evolving. We attempt to protect our proprietary technology through a combination of patents, trade
secrets and confidentiality agreements. We own a number of domestic and international patents, have a
number of domestic and international patent applications pending and have licenses to additional patents. We
cannot assure you that our patents and licenses will successfully preclude others from using our technologies,
and we could incur substantial costs in seeking enforcement of our proprietary rights against infringement.
Even if issued, the patents may not give us an advantage over competitors with similar alternative
technologies.
Moreover, the issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain
how much protection, if any, will be afforded by our patents. A third party may challenge the validity or
enforceability of a patent after its issuance by various proceedings such as oppositions in foreign jurisdictions
or re-examinations in the United States. If we attempt to enforce our patents, they may be challenged in court
where they could be held invalid, unenforceable, or have their breadth narrowed to an extent that would
destroy their value.
We also rely on unpatented technology, trade secrets, know-how and confidentiality agreements. We
require our officers, employees, consultants and advisors to execute proprietary information and invention
and assignment agreements upon commencement of their relationships with us. We also execute
confidentiality agreements with outside collaborators. There can be no assurance, however, that these
agreements will provide meaningful protection for our inventions, trade secrets, know-how or other
proprietary information in the event of unauthorized use or disclosure of such information. If any trade secret,
know-how or other technology not protected by a patent were to be disclosed to or independently developed
by a competitor, our business, results of operations and financial condition could be adversely affected.
If we become involved in lawsuits to protect or enforce our patents or the patents of our collaborators or
licensors, we would be required to devote substantial time and resources to prosecute or defend such
proceedings.
Competitors may infringe our patents or the patents of our collaborators or licensors. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be expensive
and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is
not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the
grounds that our patents do not cover its technology. A court may also decide to award us a royalty from an
infringing party instead of issuing an injunction against the infringing activity. An adverse determination of
any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not issuing.
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Interference proceedings brought by the USPTO may be necessary to determine the priority of inventions
with respect to our patent applications or those of our collaborators or licensors. Litigation or interference
proceedings may fail and, even if successful, may result in substantial costs and be a distraction to our
management. We may not be able, alone or with our collaborators and licensors, to prevent misappropriation
of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the
United States. We may not prevail in any litigation or interference proceeding in which we are involved. Even
if we do prevail, these proceedings can be very expensive and distract our management.
Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information could be compromised by
disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be
public announcements of the results of hearings, motions or other interim proceedings or developments. If
securities analysts or investors perceive these results to be negative, the market price of our common stock
may decline.
If our technologies conflict with the proprietary rights of others, we may incur substantial costs as a result
of litigation or other proceedings and we could face substantial monetary damages and be precluded from
commercializing our products, which would materially harm our business.
Over the past three decades the number of patents issued to biotechnology companies has expanded
dramatically. As a result it is not always clear to industry participants, including us, which patents cover the
multitude of biotechnology product types. Ultimately, the courts must determine the scope of coverage
afforded by a patent and the courts do not always arrive at uniform conclusions.
A patent owner may claim that we are making, using, selling or offering for sale an invention covered by
the owner’s patents and may go to court to stop us from engaging in such activities. Such litigation is not
uncommon in our industry.
Patent lawsuits can be expensive and would consume time and other resources. There is a risk that a court
would decide that we are infringing a third party’s patents and would order us to stop the activities covered by
the patents, including the commercialization of our products. In addition, there is a risk that we would have to
pay the other party damages for having violated the other party’s patents (which damages may be increased,
as well as attorneys’ fees ordered paid, if infringement is found to be willful), or that we will be required to
obtain a license from the other party in order to continue to commercialize the affected products, or to design
our products in a manner that does not infringe a valid patent. We may not prevail in any legal action, and a
required license under the patent may not be available on acceptable terms or at all, requiring cessation of
activities that were found to infringe a valid patent. We also may not be able to develop a non-infringing
product design on commercially reasonable terms, or at all.
Moreover, certain components of AFREZZA and/or our cancer vaccines may be manufactured outside the
United States and imported into the United States. As such, third parties could file complaints under 19
U.S.C. Section 337(a)(1)(B), or a 337 action, with the International Trade Commission, or the ITC. A 337
action can be expensive and would consume time and other resources. There is a risk that the ITC would
decide that we are infringing a third party’s patents and either enjoin us from importing the infringing
products or parts thereof into the United States or set a bond in an amount that the ITC considers would offset
our competitive advantage from the continued importation during the statutory review period. The bond could
be up to 100% of the value of the patented products. We may not prevail in any legal action, and a required
license under the patent may not be available on acceptable terms, or at all, resulting in a permanent
injunction preventing any further importation of the infringing products or parts thereof into the United
States. We also may not be able to develop a non-infringing product design on commercially reasonable
terms, or at all.
Although we own a number of domestic and foreign patents and patent applications relating to AFREZZA
and cancer vaccine products under development, we have identified certain third-party patents having claims
relating to pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial
manufacture and sale of AFREZZA. We have also identified third-party patents disclosing methods of use
and compositions of matter related to cancer vaccines that also may trigger an allegation of infringement upon
the commercial manufacture and sale of our cancer therapy. If a court were to determine that our insulin
products or cancer therapies were infringing
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any of these patent rights, we would have to establish with the court that these patents were invalid or
unenforceable in order to avoid legal liability for infringement of these patents. However, proving patent
invalidity or unenforceability can be difficult because issued patents are presumed valid. Therefore, in the
event that we are unable to prevail in an infringement or invalidity action we will have to either acquire the
third-party patents outright or seek a royalty-bearing license. Royalty-bearing licenses effectively increase
production costs and therefore may materially affect product profitability. Furthermore, should the patent
holder refuse to either assign or license us the infringed patents, it may be necessary to cease manufacturing
the product entirely and/or design around the patents, if possible. In either event, our business would be
harmed and our profitability could be materially adversely impacted.
Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information could be compromised by
disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be
public announcements of the results of hearings, motions or other interim proceedings or developments. If
securities analysts or investors perceive these results to be negative, the market price of our common stock
may decline.
In addition, patent litigation may divert the attention of key personnel and we may not have sufficient
resources to bring these actions to a successful conclusion. At the same time, some of our competitors may be
able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. An adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent us from manufacturing and selling our products or result in
substantial monetary damages, which would adversely affect our business and results of operations and cause
the market price of our common stock to decline.
We may not obtain trademark registrations for our potential trade names.
We have not selected trade names for some of our products and product candidates; therefore, we have not
filed trademark registrations for our potential trade names for our products in all jurisdictions, nor can we
assure that we will be granted registration of those potential trade names for which we have filed. Although
we intend to defend any opposition to our trademark registrations, no assurance can be given that any of our
trademarks will be registered in the United States or elsewhere or that the use of any of our trademarks will
confer a competitive advantage in the marketplace. Furthermore, even if we are successful in our trademark
registrations, the FDA has its own process for drug nomenclature and its own views concerning appropriate
proprietary names. It also has the power, even after granting market approval, to request a company to
reconsider the name for a product because of evidence of confusion in the marketplace. We cannot assure you
that the FDA or any other regulatory authority will approve of any of our trademarks or will not request
reconsideration of one of our trademarks at some time in the future.
RISKS RELATED TO OUR COMMON STOCK
Our stock price is volatile.
The current turbulence in the U.S. and global financial markets could adversely affect our stock price and
our ability to raise additional capital through the sale of equity and/or debt securities. The stock market,
particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical
and biotechnology stocks, and this trend may continue. The volatility of pharmaceutical and biotechnology
stocks often does not relate to the operating performance of the companies represented by the stock. Our
business and the market price of our common stock may be influenced by a large variety of factors, including:
• the progress and results of our clinical trials;
• general economic, political or stock market conditions;
• announcements by us or our competitors concerning clinical trial results, acquisitions, strategic alliances,
technological innovations, newly approved commercial products, product discontinuations, or other
developments;
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• the availability of critical materials used in developing and manufacturing AFREZZA or other product
candidates;
• developments or disputes concerning our patents or proprietary rights;
• the expense and time associated with, and the extent of our ultimate success in, securing regulatory
approvals;
• announcements by us concerning our financial condition or operating performance;
• changes in securities analysts’ estimates of our financial condition or operating performance;
• general market conditions and fluctuations for emerging growth and pharmaceutical market sectors;
• sales of large blocks of our common stock, including sales by our executive officers, directors and
significant stockholders; and
• discussion of AFREZZA, our other product candidates, competitors’ products, or our stock price by the
financial and scientific press, the healthcare community and online investor communities such as chat
rooms.
Any of these risks, as well as other factors, could cause the market price of our common stock to decline.
If other biotechnology and biopharmaceutical companies or the securities markets in general encounter
problems, the market price of our common stock could be adversely affected.
Public companies in general and companies included on the Nasdaq Stock Market in particular have
experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. There has been particular volatility in the market prices of
securities of biotechnology and other life sciences companies, and the market prices of these companies have
often fluctuated because of problems or successes in a given market segment or because investor interest has
shifted to other segments. These broad market and industry factors may cause the market price of our
common stock to decline, regardless of our operating performance. We have no control over this volatility
and can only focus our efforts on our own operations, and even these may be affected due to the state of the
capital markets.
In the past, following periods of large price declines in the public market price of a company’s securities,
securities class action litigation has often been initiated against that company. Litigation of this type could
result in substantial costs and diversion of management’s attention and resources, which would hurt our
business. Any adverse determination in litigation could also subject us to significant liabilities.
Our Chief Executive Officer and principal stockholder can individually control our direction and policies,
and his interests may be adverse to the interests of our other stockholders. After his death, his stock will
be left to his funding foundations for distribution to various charities, and we cannot assure you of the
manner in which those entities will manage their holdings.
At February 19, 2010, Mr. Mann beneficially owned approximately 42.3% of our outstanding shares of
capital stock. We believe members of Mr. Mann’s family beneficially owned approximately an additional 1%
of our outstanding shares of common stock, although Mr. Mann does not have voting or investment power
with respect to these shares. By virtue of his holdings, Mr. Mann can and will continue to be able to
effectively control the election of the members of our board of directors, our management and our affairs and
prevent corporate transactions such as mergers, consolidations or the sale of all or substantially all of our
assets that may be favorable from our standpoint or that of our other stockholders or cause a transaction that
we or our other stockholders may view as unfavorable.
Subject to compliance with United States federal and state securities laws, Mr. Mann is free to sell the
shares of our stock he holds at any time. Upon his death, we have been advised by Mr. Mann that his shares
of our capital stock will be left to the Alfred E. Mann Medical Research Organization, or AEMMRO, and
AEM Foundation for Biomedical Engineering, or AEMFBE, not-for-profit medical research foundations that
serve as funding
40
Source: MANNKIND CORP, 10-K, March 16, 2010
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organizations for Mr. Mann’s various charities, including the Alfred Mann Foundation, or AMF, and the
Alfred Mann Institute at the University of Southern California, the Technion-Israel Institute of Technology,
and at Purdue University, and that may serve as funding organizations for any other charities that he may
establish. The AEMMRO is a membership foundation consisting of six members, including Mr. Mann, his
wife, three of his children and Dr. Joseph Schulman, the chief scientist of the AEMFBE. The AEMFBE is a
membership foundation consisting of five members, including Mr. Mann, his wife, and the same three of his
children. Although we understand that the members of AEMMRO and AEMFBE have been advised of
Mr. Mann’s objectives for these foundations, once Mr. Mann’s shares of our capital stock become the
property of the foundations, we cannot assure you as to how those shares will be distributed or how they will
be voted.
The future sale of our common stock or the conversion of our senior convertible notes into common stock
could negatively affect our stock price.
Substantially all of the outstanding shares of our common stock are available for public sale, subject in
some cases to volume and other limitations or delivery of a prospectus. If our common stockholders sell
substantial amounts of common stock in the public market, or the market perceives that such sales may occur,
the market price of our common stock may decline. Likewise the issuance of additional shares of our common
stock upon the conversion of some or all of our senior convertible notes could adversely affect the trading
price of our common stock. In addition, the existence of these notes may encourage short selling of our
common stock by market participants. Furthermore, if we were to include in a company-initiated registration
statement shares held by our stockholders pursuant to the exercise of their registrations rights, the sale of
those shares could impair our ability to raise needed capital by depressing the price at which we could sell our
common stock.
In addition, we will need to raise substantial additional capital in the future to fund our operations. If we
raise additional funds by issuing equity securities or additional convertible debt, the market price of our
common stock may decline and our existing stockholders may experience significant dilution.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of
us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
We are incorporated in Delaware. Certain anti-takeover provisions under Delaware law and in our
certificate of incorporation and amended and restated bylaws, as currently in effect, may make a change of
control of our company more difficult, even if a change in control would be beneficial to our stockholders.
Our anti-takeover provisions include provisions such as a prohibition on stockholder actions by written
consent, the authority of our board of directors to issue preferred stock without stockholder approval, and
supermajority voting requirements for specified actions. In addition, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which generally prohibits stockholders owning 15%
or more of our outstanding voting stock from merging or combining with us in certain circumstances. These
provisions may delay or prevent an acquisition of us, even if the acquisition may be considered beneficial by
some of our stockholders. In addition, they may frustrate or prevent any attempts by our stockholders to
replace or remove our current management by making it more difficult for stockholders to replace members
of our board of directors, which is responsible for appointing the members of our management.
Because we do not expect to pay dividends in the foreseeable future, you must rely on stock appreciation
for any return on your investment.
We have paid no cash dividends on any of our capital stock to date, and we currently intend to retain our
future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to
pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will also depend on
our financial condition, results of operations, capital requirements and other factors and will be at the
discretion of our board of directors. Furthermore, we may in the future become subject to contractual
restrictions on, or prohibitions against, the payment of dividends. Accordingly, the success of your investment
in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our
common stock will appreciate in value after the offering or even maintain the price at which you purchased
your shares, and you may not realize a return on your investment in our common stock.
41
Source: MANNKIND CORP, 10-K, March 16, 2010
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In 2001, we acquired a facility in Danbury, Connecticut that included two buildings comprising
approximately 190,000 square feet encompassing 17.5 acres. In September 2008, we completed the
construction of approximately 140,000 square feet of new manufacturing space providing us with two
buildings totaling approximately 328,000 square feet, housing our research and development, administrative
and manufacturing functions, primarily for AFREZZA, filling and packaging. We believe the Danbury
facility will have sufficient space to satisfy potential commercial demand for the launch of AFREZZA and,
with the expansion completed, the first few years thereafter for AFREZZA and other AFREZZA-related
products.
We own and occupy approximately 147,000 square feet of laboratory, office and manufacturing space in
Valencia, California. The facility contains our principal executive offices and houses our research and
development laboratories for our cancer and other programs. We also use this facility to provide support for
the development of our AFREZZA programs.
We lease approximately 59,000 square feet of office space in Paramus, New Jersey pursuant to a lease that
ends in May 2010, with an option to extend the lease through May 2012.
Item 3. Legal Proceedings
None.
Item 4. (Removed and Reserved)
42
Source: MANNKIND CORP, 10-K, March 16, 2010
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Common Stock Market Price
Our common stock has been traded on the Nasdaq Global Market under the symbol “MNKD” since
July 28, 2004. The following table sets forth for the quarterly periods indicated, the high and low sales prices
for our common stock as reported by the Nasdaq Global Market.
Year ended December 31, 2008
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2009
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$ 8.62
$ 6.44
$ 5.25
$ 4.30
$ 4.09
$ 9.25
$12.30
$ 9.94
$4.25
$1.86
$2.39
$2.61
$2.00
$3.35
$6.62
$5.02
The closing sales price of our common stock on the Nasdaq Global Market was $10.10 on February 19,
2010 and there were 188 registered holders of record as of that date.
Performance Measurement Comparison
The material in this section is not “soliciting material,” is not deemed “filed” with the SEC and shall not
be incorporated by reference by any general statement incorporating by reference this Annual Report on
Form 10-K into any of our filings under the Securities Act of 1933, as amended, or the Securities Act, or the
Exchange Act of 1934, as amended, or the Exchange Act, except to the extent we specifically incorporate this
section by reference.
43
Source: MANNKIND CORP, 10-K, March 16, 2010
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Performance Measurement Comparison
The following graph illustrates a comparison of the cumulative total stockholder return (change in stock
price plus reinvested dividends) of our common stock with (i) the Nasdaq Composite Index and (ii) the
Nasdaq Biotechnology Index. The comparisons in the graph are required by the SEC and are not intended to
forecast or be indicative of possible future performance of our common stock.
Assumes a $100 investment, on December 31, 2004, in (i) our common stock, (ii) the securities
comprising the Nasdaq Composite Index and (iii) the securities comprising the Nasdaq Biotechnology Index.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all
available funds and any future earnings for use in the operation and expansion of our business. Accordingly,
we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our board of directors.
Recent Sales of Unregistered Securities
Not applicable.
Use of Proceeds
None.
44
Source: MANNKIND CORP, 10-K, March 16, 2010
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Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our consolidated
financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which are included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data:
2005
Year Ended December 31,
2008
2007
2006
(In thousands, except per share amounts)
2009
Revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense)
Interest expense on note
payable to principal
stockholder
Interest expense on senior
convertible notes
Interest income
Loss before provision for
income taxes
Income taxes
Net loss
Deemed dividends related to
beneficial conversion feature
of convertible preferred stock
Accretion on redeemable
preferred stock
Net loss applicable to common
$
— $
100 $
10 $
20 $
—
95,347
22,775
118,122
(118,122)
78
191,796
42,001
233,797
(233,697)
208
256,844
50,523
307,367
(307,357)
(197)
250,442
55,343
305,785
(305,765)
(62)
156,331
53,447
209,778
(209,778)
51
—
(1,511)
—
(12)
(5,679)
—
3,707
(222)
4,679
(3,408)
17,775
(2,327)
5,129
(4,768)
70
(114,337)
(1)
(114,338)
(230,543)
(5)
(230,548)
(293,187)
(3)
(293,190)
(303,037)
(2)
(303,039)
(220,104)
—
(220,104)
—
—
—
—
—
—
—
—
—
—
stockholders
$ (114,338) $ (230,548) $ (293,190) $ (303,039) $ (220,104)
Basic and diluted net loss per
share
$
(2.87) $
(4.52) $
(3.66) $
(2.98) $
(2.07)
Shares used to compute basic
and diluted net loss per share
39,871
50,970
80,038
101,561
106,534
Balance Sheet Data:
2005
2006
As of December 31,
2007
(In thousands)
2008
2009
Cash, cash equivalents and
marketable securities
Working capital
Total assets
Deferred compensation and
other liabilities
Senior convertible notes
Note payable to related party
Deficit accumulated during
the development stage
Total stockholders’ equity
$ 145,634 $ 436,479 $
128,507
228,371
404,588
539,737
368,285 $
311,154
543,443
46,492 $
503
282,459
29
—
—
24
111,267
—
24
111,761
—
—
112,253
30,000
32,494
8,813
247,397
—
112,765
165,000
(557,301)
(787,849)
(1,081,039)
(1,384,078)
(1,604,182)
(deficit)
206,977
383,487
364,100
86,734
(59,221)
45
Source: MANNKIND CORP, 10-K, March 16, 2010
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.
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, is an
ultra rapid-acting insulin. In March 2009, we submitted an NDA to the FDA requesting approval of
AFREZZA for the treatment of adults with type 1 or type 2 diabetes for the control of hyperglycemia. The
FDA accepted our NDA for filing in May 2009. On March 12, 2010, we received a Complete Response letter
from the FDA regarding the NDA for AFREZZA. A Complete Response letter is issued by the FDA’s Center
for Drug Evaluation and Research when the review of a submitted file is completed and questions remain that
preclude the approval of the NDA in its current form. As recommended by the FDA, we will request an
End-of-Review meeting with the agency to discuss our approach for resolving the remaining issues. There can
be no assurances that we will be able to satisfy all of the FDA’s requirements with currently available data or
that the FDA will find our proposed approach acceptable. The FDA could also request that we conduct
additional clinical trials to provide sufficient data for approval of the NDA. No assurances can be made that
we will obtain approval of the NDA in a timely manner or at all.
We are a development stage enterprise and have incurred significant losses since our inception in 1991. As
of December 31, 2009, we have incurred a cumulative net loss of $1.6 billion and accumulated deficit in
stockholders’ equity of $59.2 million. To date, we have not generated any product revenues and have funded
our operations primarily through the sale of equity securities and convertible debt securities. As discussed
below in “Liquidity and Capital Resources,” if we are unable to obtain additional funding in the future, there
will be 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. We cannot predict when, if ever, we could conclude an
agreement with a partner. 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;
• increase our manufacturing capacity for AFREZZA to meet our currently anticipated
commercial production needs;
• expand our cancer research, discovery and development programs;
• expand our proprietary Technosphere platform technology and develop additional
applications for the pulmonary delivery of other drugs; and
• enter into sales and marketing collaborations with other companies, if available on
commercially reasonable terms, or develop these capabilities ourselves.
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, the results of our research and development efforts,
competition from other products and technologies and uncertainties associated with obtaining and enforcing
patent rights.
46
Source: MANNKIND CORP, 10-K, March 16, 2010
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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. Included in research and development expenses for the year ended December 31, 2009
were purchases of insulin totaling $12.1 million.
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 the majority of 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 manufacturing process 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.
CRITICAL ACCOUNTING POLICIES
We have based our discussion and analysis of our financial condition and results of operations on our
financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses. We evaluate our estimates and
judgments on an ongoing basis. We base our estimates on historical experience and on various assumptions
that we believe to be reasonable under the circumstances, the results of which form the basis for making
estimates of expenses such as stock option expenses and judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different assumptions or conditions. The
significant accounting policies that are critical to the judgments and estimates used in the preparation of our
financial statements are described in more detail below.
Impairment of long-lived assets
Assessing long-lived assets for impairment requires us to make assumptions and judgments regarding the
carrying value of these assets. We evaluate long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. The assets are considered to
be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the
following events or changes in circumstances:
• significant changes in our strategic business objectives and utilization of the assets;
47
Source: MANNKIND CORP, 10-K, March 16, 2010
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• a determination that the carrying value of such assets cannot be recovered through undiscounted cash
flows;
• loss of legal ownership or title to the assets; or
• the impact of significant negative industry or economic trends.
If we believe our assets to be impaired, the impairment we recognize is the amount by which the carrying
value of the assets exceeds the fair value of the assets. Any write-downs would be treated as permanent
reductions in the carrying amount of the asset and an operating loss would be recognized. In addition, we base
the useful lives and related amortization or depreciation expense on our estimate of the useful lives of the
assets. If a change were to occur in any of the above-mentioned factors or estimates, our reported results
could materially change.
To date, we have had recurring operating losses, and the recoverability of our long-lived assets is
contingent upon executing our business plan. If we are unable to execute our business plan, we may be
required to write down the value of our long-lived assets in future periods.
Clinical trial expenses
Our clinical trial accrual process seeks to account for expenses resulting from our obligations under
contract with vendors, consultants, and clinical site agreements in connection with conducting clinical trials.
The financial terms of these contracts are subject to negotiations which vary from contract to contract and
may result in payment flows that do not match the periods over which materials or services are provided to us
under such contracts. Our objective is to reflect the appropriate trial expenses in our financial statements by
matching period expenses with period services and efforts expended. We account for these expenses
according to the progress of the trial as measured by patient progression and the timing of various aspects of
the trial. We determine accrual estimates through discussions with internal clinical personnel and outside
service providers as to the progress or state of completion of trials, or the services completed. Service
provider status is then compared to the contractual obligated fee to be paid for such services. During the
course of a clinical trial, we adjust our rate of clinical expense recognition if actual results differ from our
estimates. In the event that we do not identify certain costs that have begun to be incurred or we
underestimate or overestimate the level of services performed or the costs of such services, our reported
expenses for a period would be too low or too high. The date on which certain services commence, the level
of services performed on or before a given date and the cost of the services are often judgmental. We make
these judgments based upon the facts and circumstances known to us in accordance with generally accepted
accounting principles.
Stock-based compensation
We account for stock-based compensation in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 718 (“ASC 718”) Compensation- Stock
Compensation, previously FASB Statement No. 123R, Accounting for Stock-Based Compensation. ASC 718
requires all share-based payments to employees, including grants of stock options and the compensatory
elements of employee stock purchase plans, to be recognized in the income statement based upon the fair
value of the awards at the grant date. We use the Black-Scholes option valuation model to estimate the grant
date fair value of employee stock options and the compensatory elements of employee stock purchase plans.
Accounting for income taxes
We must make management judgments when determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At
December 31, 2009, we have established a valuation allowance of $575.7 million against all of our net
deferred tax asset balance, due to uncertainties related to our deferred tax assets as a result of our history of
operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these estimates in future periods, we may need to
change the valuation allowance, which could materially impact our financial position and results of
operations.
48
Source: MANNKIND CORP, 10-K, March 16, 2010
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RESULTS OF OPERATIONS
Years ended December 31, 2009 and 2008
Revenues
During the year ended December 31, 2009 we recognized no revenue, and during the year ended
December 31, 2008, we recognized $20,000 in revenue under a license agreement. We do not anticipate sales
of any product prior to regulatory approval and commercialization of AFREZZA.
Research and Development Expenses
The following table provides a comparison of the research and development expense categories for the
years ended December 31, 2009 and 2008 (dollars in thousands):
Clinical
Manufacturing
Research
Research and development tax credit
Stock-based compensation expense
Research and development expenses
Year Ended
December 31,
2009
$ 44,163
82,116
19,259
(1,322)
12,115
$ 156,331
2008
$ 114,922
92,935
30,081
(1,846)
14,350
$ 250,442
$ Change
% Change
$
$
(70,759)
(10,819)
(10,822)
524
(2,235)
(94,111)
(62)%
(12)%
(36)%
(28)%
(16)%
(38)%
The decrease in research and development expenses for the year ended December 31, 2009, as compared
to the year ended December 31, 2008, was primarily due to decreased costs associated with the clinical
development of AFREZZA as we completed our pivotal AFREZZA trials during 2008, including decreased
raw material purchases and clinical supplies costs, offset by a loss on disposal of approximately $12.8 million
in manufacturing expense related to the abandonment of MedTone specific assets, which would no longer be
used as we pursue the commercialization of the next-generation device. The decrease in research expenses
reflects reduced salary-related and other research costs as a result of a reduction in force that we implemented
in April 2009. We anticipate that our research and development expenses will increase in 2010 as a result of
our obligation to purchase an increased amount of insulin as well as increased costs associated with the
development of our commercial inhaler.
The research and development tax credit recognized for the years ended December 31, 2009 and 2008
partially offsets our research and development expenses. The State of Connecticut provides an opportunity to
exchange certain research and development income tax credit carryforwards for cash in exchange for forgoing
the carryforward of the research and development credits. Estimated amounts receivable under the program
are recorded as a reduction of research and development expenses. During the years ended December 31,
2009 and 2008, research and development expenses were offset by $1.3 million and $1.8 million,
respectively, in connection with the program.
General and Administrative Expenses
The following table provides a comparison of the general and administrative expense categories for the
years ended December 31, 2009 and 2008 (dollars in thousands):
Salaries, employee related and other general
expenses
Stock-based compensation expense
General and administrative expenses
Year Ended
December 31,
2009
2008
$ Change
% Change
$ 45,343
8,104
$ 53,447
$ 44,900
10,443
$ 55,343
$
$
443
(2,339)
(1,896)
1%
(22)%
(3)%
The decrease in general and administrative expenses for the year ended December 31, 2009, as compared
to the year ended December 31, 2008, was primarily due to decreased stock compensation expense and the
purchase of
49
Source: MANNKIND CORP, 10-K, March 16, 2010
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patents from Emisphere Technologies, Inc. during the first quarter of 2008, offset by increased professional
fees related to the recently completed transaction with Pfizer during the second quarter of 2009 and
partnership efforts during the third quarter of 2009. We expect general and administrative expenses to remain
effectively the same in 2010.
Interest Income and Expense
Interest income for the year ended December 31, 2009 decreased $5.1 million as compared to the year
ended December 31, 2008 primarily due to lower cash and cash equivalent balances as we used cash to fund
operating and capital expenditures. Interest expense for the year ended December 31, 2008 was related to the
convertible notes issued in December 2006 and amortization of the debt issuance costs, partially offset by
capitalized interest related to construction in progress. Interest expense for the year ended December 31, 2009
also included interest related to amounts borrowed under the loan agreement with our principal stockholder in
December 2008.
Years ended December 31, 2008 and 2007
Revenues
During the year ended December 31, 2008 and 2007, we recognized $20,000 and $10,000, respectively, in
revenue under a license agreement.
Research and Development Expenses
The following table provides a comparison of the research and development expense categories for the
years ended December 31, 2008 and 2007 (dollars in thousands):
Clinical
Manufacturing
Research
Research and development tax credit
Stock-based compensation expense
Research and development expenses
Year Ended
December 31,
2008
$ 114,922
92,935
30,081
(1,846)
14,350
$ 250,442
2007
$ 124,655
86,473
36,720
(753)
9,749
$ 256,844
$ Change
(9,733)
6,462
(6,639)
(1,093)
4,601
(6,402)
$
$
% Change
(8)%
7%
(18)%
145%
47%
(2)%
The decrease in research and development expenses for the year ended December 31, 2008, as compared
to the year ended December 31, 2007, was primarily due to decreased costs associated with the clinical
development of AFREZZA as we completed our pivotal AFREZZA trials during 2008, offset by increases in
manufacturing costs associated with preparations for commercial scale manufacturing of AFREZZA,
including the expansion, qualification and validation of our commercial manufacturing processes and
facilities.
During the years ended December 31, 2008 and 2007, research and development expenses were offset by
$1.8 million and $0.8 million, respectively, in connection with the Connecticut program to exchange certain
research and development income tax credit carryforwards for cash.
General and Administrative Expenses
The following table provides a comparison of the general and administrative expense categories for the
years ended December 31, 2008 and 2007 (dollars in thousands):
Salaries, employee related and other general
expenses
Stock-based compensation expense
General and administrative expenses
Year Ended
December 31,
2008
2007
$ Change
% Change
$ 44,900
10,443
$ 55,343
50
$ 42,627
7,896
$ 50,523
$
$
2,273
2,547
4,820
5%
32%
10%
Source: MANNKIND CORP, 10-K, March 16, 2010
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The increase in general and administrative expenses for the year ended December 31, 2008, as compared
to the year ended December 31, 2007, was primarily due to increased salary-related expenses and consulting
fees.
Interest Income and Expense
Interest income for the year ended December 31, 2008 decreased $12.6 million as compared to the year
ended December 31, 2007 primarily due to lower cash balances as we used cash to fund operating and capital
expenditures. Interest expense for the year ended December 31, 2007 was related to the convertible notes
issued in December 2006 and amortization of the debt issuance costs, partially offset by capitalized interest
related to construction in progress. Interest expense for the year ended December 31, 2008 also included
interest related to amounts borrowed under the loan agreement with our principal stockholder in
December 2008.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the sale of equity securities and convertible debt
securities and borrowings under our related party loan.
In October 2007, we entered into a loan arrangement with our principal stockholder allowing us to borrow
up to a total of $350.0 million. On February 26, 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 will be payable
quarterly in arrears. Principal repayment is due on December 31, 2011. At any time after January 1, 2010, the
lender can require us to prepay up to $200.0 million in advances that have been outstanding for at least
12 months. If the lender exercises this right, we will have until the earlier of 180 days after the lender
provides written notice or December 31, 2011 to prepay such advances. The principal stockholder has agreed
not to exercise his prepayment right if such prepayment would require the use of existing working capital
resources to repay the loan. In the event of a default, all unpaid principal and interest either becomes
immediately due and payable or may be accelerated at the lender’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. Any borrowings under the loan arrangement will be unsecured. The
loan arrangement contains no financial covenants. There are no warrants associated with the loan
arrangement, nor are advances convertible into our common stock. As of December 31, 2009, the amount
borrowed and outstanding under the arrangement was $165.0 million.
During the year ended December 31, 2009, we used $184.1 million of cash for our operations compared to
using $271.3 million for our operations in the year ended December 31, 2008. We had a net loss of
$220.1 million for the year ended December 31, 2009, of which $38.9 million consisted of non-cash charges
such as depreciation and amortization, and stock-based compensation. We expect our negative operating cash
flow to continue at least until we obtain regulatory approval and achieve commercialization of AFREZZA.
We used $3.1 million of cash in investing activities during the year ended December 31, 2009, compared
to $99.9 million for the years ended December 31, 2008. For the years ended December 31, 2009 and 2008,
$18.9 million and $82.5 million, respectively, were used to purchase machinery and equipment to expand our
manufacturing operations and our quality systems that support clinical trials for AFREZZA.
Our financing activities generated $189.5 million of cash for the year ended December 31, 2009, compared
to $30.6 million for the same period in 2008. For the year ended December 31, 2009, cash from financing
activities was primarily from the common stock offering completed in August 2009 and related party
borrowings as well as the exercise of stock options.
As of December 31, 2009, we had $32.5 million in cash, cash equivalents and marketable securities
(including a $2.0 million certificate of deposit held as collateral for foreign exchange hedging instruments).
Although we believe our existing cash resources, including the $185.0 million remaining available under our
loan arrangement with an entity controlled by our principal stockholder, will be sufficient to fund our
anticipated cash requirements into the first quarter of 2011, we will require significant additional financing in
the future to fund our operations and if we are unable to do so, there will be substantial doubt about our ability
to continue as a going concern. Accordingly, we expect that we will need to raise additional capital, either
through the sale of equity and/or debt securities, the entry into a strategic business collaboration with a
pharmaceutical or biotechnology company or the establishment of other
51
Source: MANNKIND CORP, 10-K, March 16, 2010
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funding facilities, in order to continue the development and commercialization of AFREZZA and other
product candidates and to support our other ongoing activities.
We intend to use our capital resources to continue the development and commercialization of AFREZZA,
if approved, and to develop additional applications for our proprietary Technosphere platform technology. In
addition, portions of our capital resources will be devoted to expanding our other product development
programs for the treatment of different types of cancers. We are expending a portion of our capital to scale up
our manufacturing capabilities in our Danbury facilities. We also intend to use our capital resources for
general corporate purposes, which may include in-licensing or acquiring additional technologies.
We have held extensive discussions with a number of pharmaceutical companies concerning a potential
strategic business collaboration for AFREZZA. We cannot predict when, if ever, we could conclude an
agreement with a partner. 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.
If we enter into a strategic business collaboration with a pharmaceutical or biotechnology company, we
would expect, as part of the transaction, to receive additional capital. In addition, we expect to pursue the sale
of equity and/or debt securities, or the establishment of other funding facilities. Issuances of debt or additional
equity could impact the rights of our existing stockholders, dilute the ownership percentages of our existing
stockholders and may impose restrictions on our operations. These restrictions could include limitations on
additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to
create liens, pay dividends, redeem our stock or make investments. We also may seek to raise additional
capital by pursuing opportunities for the licensing, sale or divestiture of certain intellectual property and other
assets, including our Technosphere technology platform. There can be no assurance, however, that any
strategic collaboration, sale of securities or sale or license of assets will be available to us on a timely basis or
on acceptable terms, if at all. If we are unable to raise additional capital, we may be required to enter into
agreements with third parties to develop or commercialize products or technologies that we otherwise would
have sought to develop independently, and any such agreements may not be on terms as commercially
favorable to us.
However, we cannot provide assurances that our plans will not change or that changed circumstances will
not result in the depletion of our capital resources more rapidly than we currently anticipate. If planned
operating results are not achieved or we are not successful in raising additional capital through equity or debt
financing or entering a business collaboration, we may be required to reduce expenses through the delay,
reduction or curtailment of our projects, including AFREZZA development activities, or further reduction of
costs for facilities and administration, and there will be substantial doubt about our ability to continue as a
going concern.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
Our contractual obligations represent future cash commitments and liabilities under agreements with third
parties, and exclude contingent liabilities for which we cannot reasonably predict future payments.
Accordingly, the table below excludes contractual obligations relating to milestone and royalty payments due
to third parties, all of which are contingent upon certain future events. The expected timing of payment of the
obligations presented below is estimated based on current information. Future payments relate to operating
lease obligations (including facility leases executed in March 2005 and November 2005), the senior
convertible notes, and open purchase order and supply commitments consisted of the following at
December 31, 2009 (in thousands):
52
Source: MANNKIND CORP, 10-K, March 16, 2010
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Contractual Obligations
Open purchase order and supply
commitments(1)
Senior Convertible Note
Obligations(2)
Note Payable to Principal
Stockholder(3)
Operating lease obligations
Total contractual obligations $
Less Than
One Year
Payments Due in
More Than
1-3 Years
3-5 Years
5 Years
Total
$
34,904
$
90,164
$
—
$
—
$ 125,068
4,372
8,757
119,372
—
132,501
7,975
798
48,049
$
172,976
14
271,911
$
—
2
119,374
$
—
—
—
180,951
814
$ 439,334
(1) The amounts included in open purchase order and supply commitments are subject to performance under
the purchase order or contract by the supplier of the goods or services and do not become our obligation
until such performance is rendered. The amount shown is principally for the purchase of materials for our
clinical trials, the acquisition of manufacturing equipment, and commitments related to the expansion of
our manufacturing plant and the purchase of raw materials under long-term supply agreements.
(2) The senior convertible note obligation amounts include future interest payments at a fixed rate of 3.75%
and payment of the notes in full upon maturity in 2013.
(3) The obligation for the note payable to the principal stockholder includes future principal and interest
payments related to the $165.0 million of borrowings as of December 31, 2009. Interest is paid based on
a fixed rate equal to the one-year LIBOR rate on the date of advance plus 3% and the principal payment
is due on December 31, 2011.
RELATED PARTY TRANSACTIONS
For a description of our related party transactions see Note 15 — Related Party Transactions in the notes to
our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In October of 2009, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue
No. 08-1 Revenue Arrangements with Multiple Deliverables, and issued Accounting Standards Update
(“ASU”) 2009-13 which amends the guidance in ASC 605-25 on multiple-element revenue arrangements.
This guidance addresses the unit of accounting for arrangements involving multiple deliverables and how
arrangement consideration should be allocated to the separate units of accounting, when applicable. The ASU
is effective for fiscal year beginning on or after June 15, 2010. Early adoption is permitted. Adoptions of this
guidance is expected to have a significant effect on how revenue arrangements entered into subsequent to
January 1, 2011 are reflected in the financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates impacting our short-term investment
portfolio as well as the interest rate on our credit facility with an entity controlled by our principal
stockholder. The interest rate on our credit facility with our principal stockholder is 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.
Our current policy requires us to maintain a highly liquid short-term investment portfolio consisting mainly of
U.S. money market funds and investment-grade corporate, government and municipal debt. None of these
investments is entered into for trading purposes. Our cash is deposited in and invested through highly rated
financial institutions in North America. Our short-term investments at December 31, 2009 are comprised
mainly of a certificate of deposit and a common stock investment. We have entered into a foreign exchange
hedging transaction as part of our risk management program. We continue to utilize our $350.0 million credit
facility to fund operations. As of December 31, 2009, the amount borrowed and outstanding under the credit
facility was $165.0 million. The interest rate is fixed at the time of the draw. If interest rates were to increase
from levels at December 31, 2009 we could experience a higher level of interest expense than assumed in our
current operating plan.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Items 15(a)(1) and (2) of Part IV of this Annual
Report on Form 10-K.
53
Source: MANNKIND CORP, 10-K, March 16, 2010
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Our chief executive officer and chief financial officer performed an evaluation under the supervision and
with the participation of our management, of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e)of the Exchange Act) as of December 31, 2009. Based on that evaluation, our
chief executive officer and chief financial officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in
Internal Control — Integrated Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2009. Deloitte & Touche LLP, the independent registered public
accounting firm that audited the financial statements included in this 2009 Form 10-K, has issued an
attestation report on our internal control over financial reporting as of December 31, 2009, which is included
herein.
54
Source: MANNKIND CORP, 10-K, March 16, 2010
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MannKind Corporation
Valencia, California
We have audited the internal control over financial reporting of MannKind Corporation (the “Company”)
as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the financial statements as of and for the year ended December 31, 2009 of the
Company and our report dated March 16, 2010 expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 16, 2010
55
Source: MANNKIND CORP, 10-K, March 16, 2010
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Item 9B. Other Information.
None.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will
file our Proxy Statement within 120 days after the end of our fiscal year pursuant to Regulations 14A for our
2010 Annual Meeting of Stockholders, and the information included in the Proxy Statement is incorporated
herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
(a) Executive Officers — For information regarding the identification and business experience of our
executive officers, see “Executive Officers” in Part I, Item 1 of this Annual Report on Form 10-K.
(b) Directors — The information required by this Item regarding the identification and business experience
of our directors and corporate governance matters is contained in the section entitled “Proposal 1- Election of
Directors” and “Corporate Governance Principles and Board and Committee Matters” in the Proxy Statement,
and is incorporated herein by reference.
Additional information required by this Item is incorporated by reference to this section entitled
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Business Conduct and Ethics Policy that applies to our directors and
employees (including our principal executive officer, principal financial officer, principal accounting officer
and controller), and have posted the text of the policy on our website (www.mannkindcorp.com) in connection
with “Investors” materials. In addition, we intend to promptly disclose on our website (i) the nature of any
amendment to the policy that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver,
including an implicit waiver, from a provision of the policy that is granted to one of these specified
individuals, the name of such person who is granted the waiver and the date of the waiver.
Item 11. Executive Compensation
The information under the caption “Executive Compensation” in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information under the captions “Security Ownership of Certain Beneficial Owners and Management”
and “Executive Compensation — Securities Authorized for Issuance under Equity Compensation Plans” in
the Proxy Statement is incorporated herein by this reference.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information under the caption “Certain Transactions” and “Corporate Governance Principles and
Board and Committee Matters” in the Proxy Statement is incorporated herein by reference. With the
exception of the information specifically incorporated by reference from the Proxy Statement in this Annual
Report on Form 10-K, the Proxy Statement shall not be deemed to be filed as part of this report. Without
limiting the foregoing, the information under the captions “Report of the Audit Committee of the Board of
Directors” and “Report of the Compensation Committee of the Board of Directors” in the Proxy Statement is
not incorporated by reference.
Item 14. Principal Accounting Fees and Services
The information under the caption “Principal Accounting Fees and Services” in the Proxy Statement is
incorporated herein by reference.
56
Source: MANNKIND CORP, 10-K, March 16, 2010
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of, or incorporated by reference into, this Annual Report on
Form 10-K:
(1)(2) Financial Statements and Financial Statement Schedules. The following Financial Statements of
MannKind Corporation, Financial Statement Schedules and Report of Independent Registered Public
Accounting Firm are included in a separate section of this report beginning on page F-2:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
62
63
64
65
70
72
All financial statement schedules have been omitted because the required information is not applicable
or not present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements or the notes thereto.
(3) Exhibits. The exhibits listed under Item 15(b) hereof are filed with, or incorporated by reference into,
this Annual Report on Form 10-K. Each management contract or compensatory plan or arrangement is
identified separately in Item 15(b) hereof.
(b) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Annual
Report on Form 10-K:
57
Source: MANNKIND CORP, 10-K, March 16, 2010
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Exhibit
Number
2.1**(14)
2.2**(14)
3.1(1)
3.2(12)
3.3(9)
4.1(10)
4.2(3)
4.3(3)
4.4(1)
4.5(1)
10.1(15)
10.2(12)
10.3(2)
10.4**(4)
10.5*(1)
10.6*(8)
10.7*(5)
10.8*(5)
10.9*(11)
10.10*(11)
10.11*(11)
10.12*(11)
10.13*(11)
10.14*(11)
10.15*(11)
10.16*(11)
10.17*(11)
10.18*(11)
10.19*(11)
10.20*(11)
Exhibit Index
Description of Document
LIP Asset or Business Sale and Purchase Agreement, dated March 6, 2009, by and among
Pfizer Manufacturing Frankfurt GmbH, Pfizer Inc., MannKind Deutschland GmbH and
MannKind, as amended on April 3, 2009.
Insulin Sale and Purchase Agreement, dated March 6, 2009, by and among Pfizer
Manufacturing Frankfurt GmbH, Pfizer Inc. and MannKind.
Amended and Restated Certificate of Incorporation.
Certificate of Amendment of Amended and Restated Certificate of Incorporation.
Amended and Restated Bylaws.
Indenture, by and between MannKind and Wells Fargo Bank, N.A., dated November 1, 2006.
First Supplemental Indenture, by and between MannKind and Wells Fargo Bank, N.A., dated
December 12, 2006.
Form of 3.75% Senior Convertible Note due 2013.
Form of common stock certificate.
Registration Rights Agreement, dated October 15, 1998 by and among CTL ImmunoTherapies
Corp., Medical Research Group, LLC, McLean Watson Advisory Inc. and Alfred E. Mann, as
amended.
Promissory Note made by MannKind in favor of The Mann Group LLC dated February 26,
2009.
Agreement, dated September 13, 2006, between MannKind and Torcon, Inc.
Securities Purchase Agreement, dated August 2, 2005 by and among MannKind and the
purchasers listed on Exhibit A thereto.
Supply Agreement, dated December 31, 2004, between MannKind and Vaupell, Inc.
Form of Indemnity Agreement entered into between MannKind and each of its directors and
officers.
Description of Officers’ Incentive Program.
Description of 2006 executive officer salaries.
Description of 2006 non-employee director compensation.
Executive Severance Agreement, dated October 10, 2007, between MannKind and Hakan
Edstrom.
Executive Severance Agreement, dated October 10, 2007, between MannKind and David
Thomson.
Executive Severance Agreement, dated October 10, 2007, between MannKind and Peter
Richardson.
Executive Severance Agreement, dated October 10, 2007, between MannKind and Juergen
Martens.
Executive Severance Agreement, dated October 10, 2007, between MannKind and Diane
Palumbo.
Executive Severance Agreement, dated April 21, 2008, between MannKind and Matthew J.
Pfeffer.
Change of Control Agreement, dated October 10, 2007, between MannKind and Hakan
Edstrom.
Change of Control Agreement, dated October 10, 2007, between MannKind and David
Thomson.
Change of Control Agreement, dated October 10, 2007, between MannKind and Peter
Richardson.
Change of Control Agreement, dated October 10, 2007, between MannKind and Juergen
Martens.
Change of Control Agreement, dated October 10, 2007, between MannKind and Diane
Palumbo.
Change of Control Agreement, dated April 21, 2008, between MannKind and Matthew J.
Pfeffer.
10.21*(13) Agreement dated December 20, 2007, between MannKind and Richard L. Anderson.
10.22*(7)
10.23*(1)
10.24*(6)
10.25*(8)
2004 Equity Incentive Plan, as amended.
Form of Stock Option Agreement under the 2004 Equity Incentive Plan.
Form of Phantom Stock Award Agreement under the 2004 Equity Incentive Plan.
2004 Non-Employee Directors’ Stock Option Plan and form of stock option agreement there
under.
10.26*(1)
10.27*(1)
10.28*(1)
2004 Employee Stock Purchase Plan and form of offering document there under.
Pharmaceutical Discovery Corporation 1991 Stock Option Plan.
Source: MANNKIND CORP, 10-K, March 16, 2010
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Pharmaceutical Discovery Corporation 1999 Stock Plan and form of stock option plan there
under.
AlleCure Corp. 2000 Stock Option and Stock Plan.
CTL Immunotherapies Corp. 2000 Stock Option and Stock Plan.
2001 Stock Awards Plan.
10.29*(1)
10.30*(1)
10.31*(1)
10.32**(16) Supply Agreement, dated November 16, 2007, between MannKind and N.V. Organon.
10.33**(14)
Insulin Maintenance and Call-Option Agreement, dated June 19, 2009, by and among Pfizer
Manufacturing Frankfurt GmbH, Pfizer Inc. and MannKind.
Consent of Independent Registered Public Accounting Firm
23.1
58
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Exhibit
Number
31.1
31.2
32
Description of Document
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to
Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as amended and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350)
Indicates management contract or compensatory plan.
*
** Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the SEC.
(1) Incorporated by reference to MannKind’s Registration Statement on Form S-1 (File No. 333-115020)
filed with the SEC on April 30, 2004, as amended.
(2) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on
August 5, 2005.
(3) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on
December 12, 2006.
(4) Incorporated by reference to MannKind’s Current Report on Form 8-K (File No. 000-50865) filed
with the SEC on February 23, 2005.
(5) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on
February 22, 2006.
(6) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on
December 14, 2005.
(7) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on June 9,
2009.
(8) Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on
March 16, 2006.
(9) Incorporated by reference to MannKind’s Current Report on Form 8-K filed with the SEC on
November 19, 2007.
(10) Incorporated by reference to MannKind’s Registration Statement on Form S-3 (File No. 333-138373)
filed with the SEC on November 2, 2006.
(11) Incorporated by reference to MannKind’s Current Report on Form 8-K, as amended, filed with the
SEC on October 16, 2007.
(12) Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on
August 9, 2007.
(13) Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on
December 20, 2007.
(14) Incorporated by reference to MannKind’s Quarterly Report on Form 10-Q filed with the SEC on
May 4, 2009.
(15) Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on
February 27, 2009.
(16) Incorporated by reference to MannKind’s Annual Report on Form 10-K filed with the SEC on
March 14, 2008.
59
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
MANNKIND CORPORATION
By: /s/ Alfred E. Mann
Alfred E. Mann
Chief Executive Officer
Dated: March 16, 2010
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Hakan S. Edstrom, Matthew Pfeffer and David Thomson, and each of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in
his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and
any other documents in connection therewith, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Alfred E. Mann
Alfred E. Mann
/s/ Hakan S. Edstrom
Hakan S. Edstrom
/s/ Matthew J. Pfeffer
Matthew J. Pfeffer
A. E. Cohen
/s/ Ronald J. Consiglio
Ronald J. Consiglio
/s/ Michael Friedman, M.D.
Michael Friedman, M.D.
/s/ Kent Kresa
Kent Kresa
/s/ David H. MacCallum
David H. MacCallum
Henry L. Nordhoff
/s/ James S. Shannon
James S. Shannon, M.D.,
MRCP(UK)
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
President, Chief Operating Officer and
Director
Corporate Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
60
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
March 16, 2010
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
61
62
63
64
65
70
72
Source: MANNKIND CORP, 10-K, March 16, 2010
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of MannKind Corporation
Valencia, California
We have audited the accompanying consolidated balance sheets of MannKind Corporation (a development
stage company) (the “Company”) as of December 31, 2008 and 2009 and the related consolidated statements
of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2009 and for the period from February 14, 1991 (date of inception) to December 31, 2009.
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of
MannKind Corporation as of December 31, 2008 and 2009, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009 and for the period from February 14, 1991
(date of inception) to December 31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,
based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2010 expressed an
unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 16, 2010
62
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
State research and development credit exchange receivable —
current
Prepaid expenses and other current assets
Total current assets
Property and equipment — net
State research and development credit exchange receivable — net of
current portion
Other assets
Total
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Senior convertible notes
Note payable to related party
Total liabilities
Commitments and contingencies Stockholders’ equity (deficit):
Undesignated preferred stock, $0.01 par value — 10,000,000 shares
authorized; no shares issued or outstanding at December 31, 2008
and 2009
Common stock, $0.01 par value — 150,000,000 shares authorized at
December 31, 2008 and 2009; 102,008,096 and 113,025,291
shares issued and outstanding at December 31, 2008 and 2009,
respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Deficit accumulated during the development stage
Total stockholders’ equity (deficit)
Total
December 31,
2008
2009
(In thousands, except
share data)
$
$
$
27,648
18,844
1,500
5,983
53,975
226,436
1,500
548
282,459
15,630
37,842
53,472
112,253
30,000
195,725
$
$
$
30,019
2,475
1,500
3,672
37,666
208,229
918
584
247,397
6,519
22,334
28,853
112,765
165,000
306,618
—
—
1,020
1,469,497
295
(1,384,078)
86,734
282,459
$
1,130
1,544,112
(281)
(1,604,182)
(59,221)
247,397
$
See notes to consolidated financial statements.
63
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
2007
Year Ended December 31,
2008
2009
$
10
(In thousands, except per share data)
$
— $
20
$
256,844
50,523
250,442
55,343
—
—
307,367
(307,357)
(197)
—
—
305,785
(305,765)
(62)
156,331
53,447
—
—
209,778
(209,778)
51
—
(12)
(5,679)
(3,408)
17,775
(2,327)
5,129
(4,768)
70
(293,187)
(3)
(293,190)
(303,037)
(2)
(303,039)
(220,104)
—
(220,104)
—
—
—
—
—
—
Cumulative
Period from
February 14,
1991 (Date of
Inception) to
December 31,
2009
2,988
1,153,813
299,289
19,726
151,428
1,624,256
(1,621,268)
(1,892)
(7,202)
(10,725)
36,931
(1,604,156)
(26)
(1,604,182)
(22,260)
(952)
$ (293,190)
$ (303,039)
$ (220,104) $
(1,627,394)
$
(3.66)
$
(2.98)
$
(2.07)
80,038
101,561
106,534
Revenue
Operating expenses:
Research and development
General and administrative
In-process research and
development costs
Goodwill impairment
Total operating expenses
Loss from operations
Other income (expense)
Interest expense on note payable to
principal stockholder
Interest expense on senior convertible
notes
Interest income
Loss before provision for income
taxes
Income taxes
Net loss
Deemed dividend related to beneficial
conversion feature of convertible
preferred stock
Accretion on redeemable preferred
stock
Net loss applicable to common
stockholders
Net loss per share applicable to
common stockholders — basic and
diluted
Shares used to compute basic and
diluted net loss per share applicable
to common stockholders
See notes to consolidated financial statements.
64
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Series B
Convertible
Preferred Stock
Series C
Convertible
Preferred Stock
Shares
Amount Shares
Amount
Series C
Series C Convertible
Convertible Preferred
Preferred
Stock
Issuable
Stock
Subscriptions
Receivable Shares
Common Stock
Notes
Additional Receivable Receivable
from
Paid-In
Notes
Deficit
Accumulated
During the
from Comprehensive Development
Other
Amount Capital
Stockholders Officers
Income
Stage
Total
Issuance of common stock
for cash
Net loss
—
—
$
— —
— —
$
BALANCE, FEBRUARY
29, 1992
Issuance of common
stock for cash and
services
Capital contribution
Net loss
BALANCE, FEBRUARY
28, 1993
Issuance of common
stock for cash
Issuance of stock for
notes receivable
Net loss
BALANCE, FEBRUARY
28, 1994
Issuance of common
stock for cash and
services
Collection of stock
subscription
Net loss
BALANCE, DECEMBER
—
— —
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
— —
—
— —
—
—
—
— —
— —
— —
—
— —
31, 1994
Issuance of common
stock for services
—
Exercise of stock options —
—
Stock compensation
—
Net loss
BALANCE, DECEMBER
31, 1995
Issuance of common
stock for cash and
services
—
Exercise of stock options —
—
Stock compensation
—
Net loss
BALANCE, DECEMBER
31, 1996
Issuance of common
stock for cash and
services
—
Stock compensation
—
Exercise of stock options —
Conversion of notes
payable
Net loss
—
—
BALANCE, DECEMBER
31, 1997
Issuance of common
stock for cash and
services
—
Stock compensation
—
Exercise of stock options —
Conversion of notes
payable
Net loss
BALANCE, DECEMBER
31, 1998
Issuance of common
stock
Conversion of notes
payable
Net loss
—
—
—
—
—
—
BALANCE, DECEMBER
31, 1999
Conversion of notes
payable
—
—
—
— —
—
— —
—
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— —
— $
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
998
—
—
998
—
—
—
73
—
—
—
1,071
—
—
—
11
8
10 $
—
10
1
—
—
11
—
—
—
890 $
—
890
887
20
—
1,797
526
400
—
— $
—
—
—
—
—
—
—
(400)
—
—
1,090
11
2,723
(400)
—
—
—
36
—
—
—
1,126
—
—
—
—
—
1
—
—
—
—
—
11
—
—
—
—
1,805
—
—
4,528
8
22
384
—
—
400
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
(911)
900
(911)
(911)
(11)
—
—
(1,175)
888
20
(1,175)
(2,086)
(278)
—
526
—
(1,156)
—
(1,156)
(3,242)
(908)
—
1,805
—
(2,004)
400
(2,004)
(5,246)
(707)
—
—
—
(2,815)
8
22
384
(2,815)
—
1,127
11
4,942
—
—
—
(8,061)
(3,108)
—
—
—
—
1
3
—
—
—
—
—
—
59
12
126
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,570)
59
12
126
(2,570)
—
1,131
11
5,139
—
—
—
(10,631)
(5,481)
—
—
—
—
—
548
—
27
12
—
6
—
—
—
—
190
2
135
60
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
196
2
135
—
(2,280)
60
(2,280)
—
1,718
17
5,526
—
—
—
(12,911)
(7,368)
—
—
—
—
—
2,253
—
68
215
—
23
—
1
2
—
12,703
150
24
1,200
—
—
4,254
43
19,603
—
—
—
162
80
—
2
1
—
532
994
—
—
4,496
46
21,129
—
63
1
1,073
65
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,726
150
25
—
(3,331)
1,202
(3,331)
(16,242)
3,404
—
534
—
(5,679)
995
(5,679)
(21,921)
(746)
—
1,074
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
Series B
Convertible
Preferred Stock
Series C
Convertible
Preferred Stock
Shares
Amount Shares
Amount
Series C
Series C Convertible
Convertible Preferred
Preferred
Stock
Issuable
Stock
Subscriptions
Receivable Shares
Additional
Receivable Receivable
Other
Notes
Notes
Deficit
Accumulated
During the
Common Stock
Paid-In
Amount Capital
from
from Comprehensive Development
Stockholders Officers
Income
Stage
Total
193
15,000 —
—
—
—
—
—
—
—
—
—
—
15,000
Issuance of
Series B
preferred stock
for cash
Issuance of
common stock
for cash,
services and
notes
Discount on notes
below market
rate
—
—
Accrued interest
on notes
Purchase of
Series A
redeemable
convertible
preferred stock —
—
— —
— —
— —
— —
Amount in excess
of redemption
obligation
Accretion to
—
— —
redemption
value on
Series A
redeemable
convertible
preferred stock —
Stock-based
compensation —
—
Net loss
— —
— —
— —
193
15,000 —
—
— —
—
— —
BALANCE,
DECEMBER 31,
2000
Issuance of
common stock
for cash
Cash received for
common stock
to be issued
Issuance of
common stock
for services
Exercise of stock
—
options
—
Accrued interest
on notes
Payments on notes
receivable
Accretion to
—
—
redemption
value on
Series A
redeemable
convertible
preferred stock —
Stock-based
compensation —
Issuance of put
option by
stockholder
Record merger of
entities
Net loss
—
—
—
— —
— —
— —
— —
— —
— —
— —
— —
— —
BALANCE,
DECEMBER 31,
2001
Issuance of
common stock
for cash
Issuance of
common stock
for cash already
received
Issuance of stock
award to
employee
Cash received for
common stock
issuable
Accrued interest
on notes
Payments on notes
receivable
Beneficial
193
15,000 —
—
— —
—
— —
—
— —
—
—
—
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,690
46
33,945
(2,358)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
241
(117)
—
—
—
(993)
—
—
—
999
—
—
—
—
—
(149)
9,609
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31,633
—
—
241
(117)
—
(993)
—
999
—
(149)
—
(24,661)
9,609
(24,661)
—
9,249
93
65,613
(2,234)
—
—
(46,582)
31,890
—
3,052
30
78,000
—
—
—
—
—
—
—
—
—
—
—
—
—
3
1
—
—
—
—
—
—
—
—
3,900
—
—
—
—
—
—
—
—
—
—
—
60
13
—
—
(239)
1,565
(2,949)
171,154
—
—
—
(189)
28
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
78,030
—
3,900
—
—
—
—
60
13
(189)
28
—
—
(239)
1,565
—
(2,949)
—
(48,245)
171,154
(48,245)
—
12,305
123
317,117
(2,395)
—
—
(94,827)
235,018
—
3,922
40
58,775
—
—
—
—
58,815
—
234
—
—
—
—
3
—
—
—
2
—
—
—
—
(2)
—
—
84
98
—
—
—
—
—
(229)
1,314
—
—
—
—
—
—
—
—
—
—
—
—
—
—
84
98
(229)
1,314
conversion
feature of
Series B
convertible
preferred stock —
Deemed dividend
related to
beneficial
conversion
feature of
Series B
convertible
preferred stock —
Accretion to
redemption
value on
Series A
redeemable
convertible
preferred stock —
Stock-based
compensation —
Put option
redemption by
stockholder
Net loss
—
—
— —
—
—
—
—
—
1,421
—
—
—
—
1,421
— —
—
—
—
—
—
(1,421)
—
—
—
—
(1,421)
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
66
—
—
—
—
(251)
268
1,921
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(251)
268
—
(206,265)
1,921
(206,265)
Source: MANNKIND CORP, 10-K, March 16, 2010
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Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
Series B
Convertible
Preferred Stock
Series C
Convertible
Preferred Stock
Shares
Amount
Shares
Amount
BALANCE,
Series C
Series C Convertible
Convertible Preferred
Preferred
Stock
Issuable
Stock
Subscriptions
Receivable
Additional
Receivable Receivable
Other
Notes
Notes
Deficit
Accumulated
During the
Common Stock
Paid-In
Amount Capital
Shares
from
from Comprehensive Development
Stockholders Officers
Income
Stage
Total
DECEMBER 31,
2002
Issuance of
Series C
convertible
preferred stock
subscriptions
Cash collected on
Series C
convertible
preferred stock
subscriptions
Issuance of
common stock
for cash
Non-cash
compensation
expense of
officer resulting
from
stockholder
contribution
Issuance of
common stock
for cash already
received
Notes receivable
by stockholder
issued to
officers
Accrued interest
on notes
Beneficial
conversion
feature of
Series B
convertible
preferred stock
Deemed dividend
related to
beneficial
conversion
feature of
Series B
convertible
preferred stock
Accretion to
redemption
value on
Series A
redeemable
convertible
preferred stock
Stock-based
compensation
Put shares sold to
majority
stockholder
Net loss
BALANCE,
DECEMBER 31,
2003
Issuance of
Series C
convertible
preferred stock
for cash
Issuance of
Series C
convertible
preferred stock
for cash already
received
Exercise of stock
options
Exercise of
warrants
Accrued interest
on notes
Repayment of
notes receivable
by stockholder
issued to
officers
Repayment of
stock note
receivable
Conversion of
Series A
convertible
preferred stock
to common
stock
Conversion of
Series B
convertible
preferred stock
to common
stock
Conversion of
Series C
convertible
preferred stock
to common
stock
Issuance of
common shares
in exchange for
warrants
Issuance of
common shares
under
Employee
Stock Purchase
Plan
Net proceeds from
initial public
offering
Beneficial
conversion
feature of
Series B
193
15,000
—
—
—
—
16,464
165
378,010
(1,310)
—
—
(301,092)
90,773
—
—
—
—
—
—
—
—
50,000
(50,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
31,847
—
—
—
—
—
—
—
3,494
35
49,965
—
—
—
—
—
31,847
—
50,000
—
—
—
—
—
—
—
70
—
—
—
—
70
—
—
—
—
—
17
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
225
—
—
(225)
(102)
(3)
—
—
—
—
—
(105)
—
—
—
—
—
—
—
—
1,017
—
—
—
—
1,017
—
—
—
—
—
—
—
—
(1,017)
—
—
—
—
(1,017)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(253)
4,501
623
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(253)
—
4,501
—
(65,879)
623
(65,879)
193
15,000
—
—
50,000
(18,153)
19,975
200
433,141
(1,412)
(228)
—
(366,971)
111,577
—
—
356
18,153
(18,153)
18,153
—
—
—
—
—
—
—
18,153
—
—
—
—
—
—
—
624
31,847
(31,847)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
86
4
—
—
—
—
—
—
1,079
46
—
—
—
—
(107)
—
—
—
—
—
—
—
(225)
—
228
—
(90)
(1)
(1,518)
1,519
—
—
—
—
—
—
—
—
—
—
1,079
—
—
46
(107)
—
—
3
—
—
—
—
—
—
—
891
9
5,239
—
—
—
—
5,248
(193)
(15,000)
—
—
—
—
811
8
14,992
—
—
—
—
—
—
—
—
—
—
—
(980)
(50,000)
—
—
4,464
45
49,955
—
—
—
—
—
—
—
—
—
—
22
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36
—
430
—
—
—
—
6,557
—
66
—
83,110
19,822
—
—
—
—
—
—
—
—
430
—
—
83,176
19,822
Source: MANNKIND CORP, 10-K, March 16, 2010
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convertible
preferred stock
Deemed dividends
related to
beneficial
conversion
feature of
Series B and
Series C
convertible
preferred stock
—
—
—
—
—
—
—
—
(19,822)
—
—
—
—
(19,822)
67
Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
Series B
Convertible
Preferred Stock
Series C
Convertible
Preferred Stock
Shares
Amount Shares
Amount
Series C
Series C Convertible
Convertible Preferred
Preferred
Stock
Issuable
Stock
Subscriptions
Receivable Shares
Additional
Receivable Receivable
Notes
Notes
Deficit
Accumulated
During the
from Comprehensive Development
Other
Common Stock
from
Paid-In
Capital
Amount
Stockholders Officers
Income
Stage
Total
Accretion to
redemption
value on
Series A
redeemable
convertible
preferred stock —
Stock-based
compensation —
—
Net loss
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(60)
6,810
—
—
—
—
—
—
—
—
—
—
—
(60)
—
(75,992)
6,810
(75,992)
—
— —
—
—
—
32,756
327
592,999
—
—
—
(442,963)
150,363
—
— —
—
—
—
24
—
245
—
—
—
—
245
BALANCE,
DECEMBER 31,
2004
Issuance of
common shares
in exchange for
warrants
Issuance of
common shares
under
Employee
Stock Purchase
Plan
Exercise of stock
—
— —
options
—
— —
Issuance of stock
awards to
consultants
Issuance of stock
and warrants
for cash
Stock-based
—
— —
—
— —
compensation —
—
Net loss
— —
— —
BALANCE,
DECEMBER 31,
2005
—
— —
Exercise of
warrants
Issuance of
common shares
under
Employee
Stock Purchase
Plan
Exercise of stock
options
Cancellation of
common shares
for stock notes
receivable
Issuance of stock
for cash
Issuance of
—
— —
—
—
—
—
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
58
304
—
40
1
3
1
494
1,948
—
—
—
—
(146)
—
—
—
17,132
171
170,063
—
—
—
—
—
—
(1,828)
—
—
50,314
503
763,775
—
339
3
2,691
—
—
86
263
1
3
980
2,309
—
(844)
(8)
8
—
23,000
230
384,440
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
495
1,951
—
(145)
—
170,234
—
(114,338)
(1,828)
(114,338)
(557,301)
206,977
—
2,694
—
—
981
2,312
—
—
—
384,670
common shares
from the release
of restricted
stock units
—
— —
—
—
—
102
1
(341)
—
—
—
—
(340)
Issuance of
common shares
pursuant to
research
agreement
—
— —
Stock-based
compensation —
—
Net loss
— —
— —
—
—
—
—
—
—
—
—
—
100
—
—
1
—
—
2,073
14,667
—
—
—
—
—
—
—
—
—
—
—
2,074
—
(230,548)
14,667
(230,548)
BALANCE,
DECEMBER 31,
2006
—
— —
—
—
—
73,360
734
1,170,602
—
—
—
(787,849)
383,487
Issuance of
common shares
under
Employee
Stock Purchase
Plan
Exercise of stock
—
— —
options
—
— —
Issuance of stock
awards to
consultants
Issuance of stock
for cash
Issuance of
—
—
— —
— —
—
—
—
—
—
—
—
—
—
—
124
607
1
6
1,064
4,917
—
30
—
123
—
27,014
270
249,480
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,065
4,923
—
123
—
249,750
common shares
from the release
of restricted
stock units
—
— —
—
—
—
146
2
(526)
—
—
—
—
(524)
Issuance of
common shares
pursuant to
research
agreement
—
— —
Stock-based
compensation —
—
Net loss
— —
— —
—
—
—
—
—
—
—
—
—
100
—
—
1
—
—
943
17,522
—
—
—
—
—
—
—
—
—
—
—
944
—
(293,190)
17,522
(293,190)
BALANCE,
DECEMBER 31,
2007
—
Issuance of
— —
—
—
—
101,381
1,014
1,444,125
—
—
—
(1,081,039)
364,100
common shares
under
Employee
Stock Purchase
Plan
Issuance of stock
awards to
consultants
Issuance of
—
— —
—
— —
common shares
from the release
of restricted
stock units
—
Stock-based
— —
compensation —
— —
—
—
—
—
—
—
—
—
—
349
4
896
—
—
—
30
—
(18)
—
—
—
—
248
—
2
—
(317)
24,811
—
—
—
—
—
—
—
—
—
900
—
(18)
—
(315)
—
24,811
Source: MANNKIND CORP, 10-K, March 16, 2010
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68
Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)
Comprehensive loss:
Net loss
Unrealized gain
(loss) on
available-for-sale
securities
Comprehensive loss
BALANCE, DECEMBER
31, 2008
Issuance of common
shares under
Employee Stock
Purchase Plan
Issuance of stock for
cash
Issuance of common
shares from the
release of restricted
stock units
Exercise of stock
options
Stock-based
compensation
Comprehensive loss:
Net loss
Unrealized gain
(loss) on
available-for-sale
securities
Unrealized gain
Series B
Convertible
Preferred Stock
Series C
Convertible
Preferred Stock
Shares
Amount Shares
Amount
Series C
Series C Convertible
Convertible Preferred
Preferred
Stock
Issuable
Stock
Subscriptions
Receivable Shares
Additional
Receivable Receivable
Notes
Notes
Deficit
Accumulated
During the
from Comprehensive Development
Other
Common Stock
from
Paid-In
Capital
Amount
Stockholders Officers
Income
Stage
Total
—
— —
—
—
—
—
—
—
—
—
—
(303,039)
(303,039)
—
— —
—
—
—
—
—
—
—
—
295
—
295
(302,744)
—
— —
—
—
—
102,008
1,020
1,469,497
—
—
295
(1,384,078)
86,734
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
323
8,360
2,240
94
—
—
—
—
3
84
22
1
—
—
—
—
1,397
59,640
(7,023)
382
20,219
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,400
—
59,724
—
(7,001)
—
383
—
20,219
(220,104)
(220,104)
—
—
(581)
—
(581)
—
—
5
—
5
(220,680)
(loss) on foreign
currency translation —
— —
Comprehensive loss
BALANCE, DECEMBER
31, 2009
—
$
— —
$
—
—
—
113,025
$
1,130 $
1,544,112 $
— $
— $
(281) $
(1,604,182) $
(59,221)
See notes to consolidated financial statements.
69
Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
2007
Years Ended December 31,
2008
2009
(In thousands)
Cumulative
Period from
February 14,
1991 (Date of
Inception) to
December 31,
2009
$ (293,190)
$ (303,039)
$ (220,104) $
(1,604,182)
8,973
17,645
944
12,287
24,793
—
18,725
20,219
—
79,139
99,842
3,018
7,047
213
12,869
23,575
—
—
—
—
—
(237)
—
—
—
—
(12)
—
—
—
5
1,587
(669)
582
2,654
(186)
16,265
(6,885)
—
3,613
—
(14,620)
2,311
(36)
(6,371)
6,395
(24)
(12,271)
—
(191)
19,726
151,428
229
1,110
(2,418)
(2,072)
(584)
5,989
21,483
(2)
(245,146)
(271,288)
(184,083)
(1,203,910)
(169,801)
286,725
(78,262)
(63,651)
46,100
(82,453)
(2,000)
17,800
(18,852)
(792,601)
790,565
(310,709)
—
70
—
284
38,662
(99,934)
(3,052)
(312,461)
255,738
902
61,507
1,202,055
—
70
—
—
50,000
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization
Stock-based compensation expense
Stock expense for shares issued
pursuant to research agreement
Loss on sale, abandonment/disposal
or impairment of property and
equipment
Accrued interest on investments, net
of amortization of premiums
(discounts)
In-process research and development
Goodwill impairment
Loss on available-for-sale securities
Other, net
Changes in assets and liabilities:
State research and development
credit exchange receivable
Prepaid expenses and other current
assets
Other assets
Accounts payable
Accrued expenses and other
current liabilities
Other liabilities
Net cash used in operating
activities
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of marketable securities
Sales of marketable securities
Purchase of property and equipment
Proceeds from sale of property and
equipment
Net cash (used in) provided by
investing activities
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common stock and warrants
Collection of Series C convertible
preferred stock subscriptions
receivable
Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
Years Ended December 31,
2008
2007
2009
(In thousands)
Cumulative
Period from
February 14,
1991 (Date of
Inception) to
December 31,
2009
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,000
3,900
(1,028)
623
4,220
1,742
30,000
135,000
235,000
—
—
—
—
—
—
—
—
—
—
(70,000)
3,460
(1,667)
—
111,267
(524)
(317)
(7,001)
(8,182)
Issuance of Series B convertible preferred
stock for cash
Cash received for common stock to be
issued
Repurchase of common stock
Put shares sold to majority stockholder
Borrowings under lines of credit
Proceeds from notes receivables
Borrowings on notes payable from
principal stockholder
Principal payments on notes payable to
principal stockholder
Borrowings on notes payable
Principal payments on notes payable
Payable to stockholder
Proceeds from senior convertible notes
Payment of employment taxes related to
vested restricted stock units
Net cash provided by financing
activities
255,214
30,585
189,506
1,546,390
NET (DECREASE) INCREASE IN
CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS,
$ 48,730
$ (340,637)
$
2,371 $
30,019
319,555
368,285
27,648
—
END OF PERIOD
$ 368,285
$
27,648
$ 30,019 $
30,019
SUPPLEMENTAL CASH FLOWS
DISCLOSURES:
Cash paid for income taxes
Interest paid in cash
Accretion on redeemable convertible
$
3
4,348
$
2
4,313
$
— $
8,131
preferred stock
Issuance of common stock upon
conversion of notes payable
Increase in additional paid-in capital
resulting from merger
Issuance of common stock for notes
receivable
Issuance of put option by stockholder
Put option redemption by stockholder
Issuance of Series C convertible
preferred stock subscriptions
Issuance of Series A redeemable
convertible preferred stock
Conversion of Series A redeemable
convertible preferred stock
Non-cash construction in progress
and property and equipment
Non-cash transfer from property and
equipment to other current assets
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,219
1,600
6,597
—
—
—
—
—
—
—
—
—
—
620
—
26
18,487
(952)
3,331
171,154
2,758
(2,949)
1,921
50,000
4,296
(5,248)
620
—
Source: MANNKIND CORP, 10-K, March 16, 2010
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In connection with the Company’s initial public offering, all shares of Series B and Series C convertible
preferred stock, in the amount of $15.0 million and $50.0 million, respectively, automatically converted into
common stock in August 2004.
See notes to consolidated financial statements.
71
Source: MANNKIND CORP, 10-K, March 16, 2010
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Table of Contents
MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Description of business and basis of presentation
Business — MannKind Corporation (the “Company”) is a biopharmaceutical company focused on the
discovery, development and commercialization of therapeutic products for diseases such as diabetes and
cancer. The Company’s lead product candidate, AFREZZA, is an ultra rapid-acting insulin. In March 2009,
the Company submitted a new drug application (“NDA”) to the U.S. Food and Drug Administration (“FDA”)
requesting approval of AFREZZA for the treatment of adults with type 1 or type 2 diabetes for the control of
hyperglycemia. In March 2010, the FDA provided a complete response letter regarding this NDA, requesting
additional information. Currently, AFREZZA remains under regulatory review. AFREZZA consists of the
Company’s proprietary Technosphere particles onto which insulin molecules are loaded. These loaded
particles are then aerosolized and inhaled deep into the lung using the Company’s AFREZZA inhaler.
Basis of Presentation — The Company is considered to be in the development stage as its primary
activities since incorporation have been establishing its facilities, recruiting personnel, conducting research
and development, business development, business and financial planning, and raising capital. Since its
inception through December 31, 2009 the Company has reported accumulated net losses of $1.6 billion,
which include a goodwill impairment charge of $151.4 million (see Note 2), and cumulative negative cash
flow from operations of $1.2 billion. It is costly to develop therapeutic products and conduct clinical trials for
these products. At December 31, 2009 the Company’s capital resources consisted of cash, cash equivalents,
and marketable securities of $32.5 million (including a $2.0 million certificate of deposit held as collateral for
foreign exchange hedging instruments) and $185.0 million of available borrowings under the loan agreement
with an entity controlled by the Company’s principal stockholder (see Note 7). Based upon the Company’s
current expectations, management believes the Company’s existing capital resources will enable it to continue
planned operations into the first quarter of 2011. However, the Company cannot provide assurances that its
plans will not change or that changed circumstances will not result in the depletion of its capital resources
more rapidly than it currently anticipates. Accordingly, the Company expects that it will need to raise
additional capital, either through the sale of equity and/or debt securities, a strategic business collaboration
with a pharmaceutical company or the establishment of other funding facilities, in order to continue the
development and commercialization of AFREZZA and other product candidates and to support its other
ongoing activities.
On December 12, 2001, the stockholders of AlleCure Corp. (“AlleCure”) and CTL ImmunoTherapies
Corp. (“CTL”) voted to exchange their shares for shares of Pharmaceutical Discovery Corporation (“PDC”).
Upon approval of the merger, PDC then changed its name to MannKind Corporation. PDC was incorporated
in the State of Delaware on February 14, 1991. The stockholders of PDC did not vote on the merger. At the
date of the merger, Mr. Alfred Mann owned 76% of PDC, 59% of AlleCure and 69% of CTL. Accordingly,
only the minority interest of AlleCure and CTL was stepped up to fair value using the purchase method of
accounting. As a result of this purchase accounting, in-process research and development of $19.7 million and
goodwill of $151.4 million were recorded at the entity level. The historical basis of PDC and the historical
basis relating to the ownership interests of Mr. Mann in AlleCure and CTL have been reflected in the
financial statements. For periods prior to December 12, 2001, the results of operations have been presented on
a combined basis. All references in the accompanying financial statements and notes to the financial
statements to number of shares, sales price and per share amounts of the Company’s capital stock have been
retroactively restated to reflect the share exchange ratios for each of the entities that participated in the
merger.
For periods subsequent to December 12, 2001, the accompanying financial statements have been presented
on a consolidated basis and include the wholly-owned subsidiaries, AlleCure and CTL. On December 31,
2002, AlleCure and CTL merged with and into MannKind and ceased to be separate entities.
Segment Information — In accordance with Accounting Standards Codification (“ASC”) 280-10-50
Segment Reporting, Overall, Disclosure, previously Financial Accounting Standards Board (“FASB”)
Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, operating
segments are identified as components of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision-maker in making decisions regarding resource
allocation and assessing performance. To date, the Company has viewed its operations and manages its
business as one segment operating entirely in the United States of America.
72
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Summary of significant accounting policies
Financial Statement Estimates — The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents — The Company considers all highly liquid investments with a purchased
maturity date of three months or less to be cash equivalents.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to
concentration of credit risk consist of cash and cash equivalents and marketable securities. Cash and cash
equivalents consist primarily of interest-bearing accounts and are regularly monitored by management and
held in high credit quality institutions. Marketable securities consist of a $2.0 million certificate of deposit
held as collateral for foreign exchange hedging instruments, and a common stock investment.
Marketable Securities — The Company accounts for marketable securities as available for sale, in
accordance with ASC 320-10 Investments- Debt and Equity Securities, Overall, previously FASB Statement
No. 115, Accounting for Certain Debt and Equity Securities. Unrealized holding gains and losses for
available-for-sale securities are reported as a separate component of stockholders’ equity until realized. The
Company reviews the portfolio for other than temporary impairment in accordance with ASC 320-10-35
Investment- Debt and Equity Securities Overall Subsequent Measurement, previously Emerging Issues Task
Force (“EITF”) Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments and FASB Staff Position No. 115-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments.
State Research and Development Credit Exchange Receivable — The State of Connecticut provides
certain companies with the opportunity to exchange certain research and development income tax credit
carryforwards for cash in exchange for foregoing the carryforward of the research and development credits.
The program provides for an exchange of research and development income tax credits for cash equal to 65%
of the value of corporation tax credit available for exchange. Estimated amounts receivable under the program
are recorded as a reduction of research and development expenses.
Fair Value of Financial Instruments — The carrying amounts of financial instruments, which include cash
equivalents, marketable securities and accounts payable, approximate their fair values due to their relatively
short maturities. The fair value of the note payable to related party cannot be reasonably estimated as the
Company would not be able to obtain a similar credit arrangement in the current economic environment. The
senior convertible notes had a carrying value of $112.3 and $112.8 million and an estimated fair value of
$53.9 and $80.3 million as of December 31, 2008 and 2009, respectively, which is calculated based on quoted
prices in an active market (Level 1 in the fair value hierarchy).
Goodwill and Identifiable Intangibles — As a result of the merger with AlleCure and CTL on
December 12, 2001, as described in Note 1, goodwill of $151.4 million was recorded at the entity level in
2001. Upon adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, or ASC 350-10
Intangibles- Goodwill and Other Overall, the Company adopted a policy of testing goodwill and intangible
assets with indefinite lives for impairment at least annually, as of December 31, with any related impairment
losses being recognized in earnings when identified. In December 2002 the Company concluded that the
major AlleCure product development program should be terminated and that the clinical trials of the CTL
product should be halted and returned to the research stage. As a result of this determination, the Company
closed the CTL facility and reduced headcount for AlleCure and CTL by approximately 50%. In connection
with the annual test for impairment of goodwill as of December 31, 2002, the Company determined that on
the basis of the internal study, the goodwill recorded for the AlleCure and CTL units was potentially
impaired. The Company performed the second step of the annual impairment test as of December 31, 2002
for each of the potentially impaired reporting units and estimated the fair value of the AlleCure and CTL
programs using the expected present value of future cash flows which were expected to be negligible.
Accordingly, the goodwill balance of $151.4 million was determined to be fully impaired and an impairment
loss
73
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
was recorded in 2002. Subsequent to December 31, 2002, the Company had no goodwill or intangibles with
indefinite lives included on its balance sheet.
Property and Equipment — Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets. Leasehold improvements are
amortized over the term of the lease or the service lives of the improvements, whichever is shorter. Assets
under construction are not depreciated until placed into service.
Impairment of Long-Lived Assets — The Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in
accordance with ASC 360-10-35 Property Plant and Equipment Overall Subsequent Measurement,
previously FASB Statement No. 144, Accounting for the Impairment or Disposal of Long Lived-Assets.
Assets are considered to be impaired if the carrying value may not be recoverable based upon management’s
assessment of the following events or changes in circumstances:
• significant changes in the Company’s strategic business objectives and utilization of the assets;
• a determination that the carrying value of such assets can not be recovered through undiscounted cash
flows;
• loss of legal ownership or title to the assets; or
• the impact of significant negative industry or economic trends.
If the Company believes an asset to be impaired, the impairment recognized is the amount by which the
carrying value of the assets exceeds the fair value of the assets. Any write-downs would be treated as
permanent reductions in the carrying amount of the asset and an operating loss would be recognized. No asset
impairment was recognized during the year ended December 31, 2009. During the years ended December 31,
2007 and 2008, asset impairments of approximately $6.6 million and $0.5 million, respectively, were
recognized as described in Note 5 — Property and Equipment.
Accounts Payable and Accrued Expenses — All liabilities, including accounts payable and accrued
expenses, are recorded consistent with the definition of liabilities and accrual accounting.
Income Taxes —Deferred income tax assets and liabilities are recorded for the expected future tax
consequences of temporary differences between the financial statement carrying amounts and the income tax
basis of assets and liabilities. A valuation allowance is recorded to reduce net deferred income tax assets to
amounts that are more likely than not to be realized (see Note 14).
Income tax positions are considered for uncertainty in accordance with ASC 740-10-25 Income Taxes
Overall Recognition, previously FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes —
an interpretation of FASB Statement No. 109 (“FIN 48”). The Company believes that its income tax filing
positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in
a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been
recorded.
Significant management judgment is involved in determining the provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against net deferred tax assets. Due to uncertainties
related to deferred tax assets as a result of the history of operating losses, a valuation allowance has been
established against the gross deferred tax asset balance. The valuation allowance is based on management’s
estimates of taxable income by jurisdiction in which the Company operates and the period over which
deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the
Company adjusts these estimates in future periods, a change in the valuation allowance may be needed, which
could materially impact the Company’s financial position and results of operations.
74
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contingencies — Contingencies are recorded in accordance with ASC 450 Contingencies, previously
FASB Statement No. 5, Accounting for Contingencies. Accordingly, the Company records a loss contingency
for a liability when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated.
Stock-Based Compensation — As of December 31, 2009, the Company had three active stock-based
compensation plans, which are described more fully in Note 10. The Company accounts for all share-based
payments to employees, including grants of stock awards and the compensatory elements of the employee
stock purchase plan in accordance with ASC 718 Compensation- Stock Compensation (“ASC 718”),
previously FASB Statement No. 123R Share-based Payment. ASC 718 requires all share-based payments to
employees, including grants of stock options and the compensatory elements of employee stock purchase
plans, to be recognized in the income statement based upon the fair value of the awards at the grant date. The
Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee
stock options and the compensatory elements of employee stock purchase plans.
Warrants — The Company has issued warrants to purchase shares of its common stock. Warrants have
been accounted for as equity in accordance with the provisions of ASC 815-40 Derivatives and Hedging,
Contracts in an Entity’s Own Stock, previously EITF Issue No. 00-19: Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.
Comprehensive Income (Loss) — Other Comprehensive Income (loss) (OCI) is recorded in accordance
with ASC 220-10-45 Comprehensive Income, Overall, Other Presentation, previously FASB Statement
No. 130, “Reporting Comprehensive Income”, which requires that all components of comprehensive income
(loss) be reported in the financial statements in the period in which they are recognized. OCI includes certain
changes in stockholders’ equity that are excluded from net income. Specifically, the Company includes in
OCI unrealized gains and losses on its available-for-sale securities and cumulative translation gains and
losses.
Research and Development Expenses — Research and development expenses consist primarily of costs
associated with the clinical trials of the Company’s product candidates, manufacturing supplies and other
development materials, including raw material purchases of insulin, compensation and other expenses for
research and development personnel, costs for consultants and related contract research, facility costs, and
depreciation. Research and development costs, which are net of any tax credit exchange recognized for the
Connecticut state research and development credit exchange program, are expensed as incurred consistent
with ASC 730-10 Research and Development, Overall, previously FASB Statement No. 2, Accounting for
Research and Development Costs.
Clinical Trial Expenses — Clinical trial expenses, which are reflected in research and development
expenses in the accompanying statements of operations, result from obligations under contracts with vendors,
consultants, and clinical site agreements in connection with conducting clinical trials. The financial terms of
these contracts are subject to negotiations which vary from contract to contract and may result in payment
flows that do not match the periods over which materials or services are provided to the Company under such
contracts. The appropriate level of trial expenses are reflected in the Company’s financial statements by
matching period expenses with period services and efforts expended. These expenses are recorded according
to the progress of the trial as measured by patient progression and the timing of various aspects of the trial.
Clinical trial accrual estimates are determined through discussions with internal clinical personnel and outside
service providers as to the progress or state of completion of trials, or the services completed. Service
provider status is then compared to the contractually obligated fee to be paid for such services. During the
course of a clinical trial, the Company may adjust the rate of clinical expense recognized if actual results
differ from management’s estimates. The date on which certain services commence, the level of services
performed on or before a given date and the cost of the services are often judgmental.
Interest Expense — Interest costs are expensed as incurred, except to the extent such interest is related to
construction in progress, in which case interest is capitalized. Interest expense, net, for the years ended
December 31, 2007, 2008 and 2009 was $3.4 million, $2.3 million and $10.4 million, respectively. Interest
costs capitalized for the years ended December 31, 2008 and 2009 were $2.5 million and $0.1 million,
respectively.
75
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Loss Per Share of Common Stock — Basic net loss per share excludes dilution for potentially dilutive
securities and is computed by dividing loss applicable to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted net loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock. Potentially dilutive securities are excluded from the computation of diluted net loss per
share for all of the periods presented in the accompanying statements of operations because the reported net
loss in each of these periods results in their inclusion being antidilutive.
Potentially dilutive securities outstanding are summarized as follows:
Exercise of common stock options
Conversion of senior convertible notes into
common stock
Exercise of common stock warrants
Vesting of restricted stock units
2007
6,886,657
5,117,523
2,882,873
1,359,662
December 31,
2008
5,591,101
5,117,523
2,882,873
5,947,408
2009
6,403,498
5,117,523
2,882,873
3,419,533
Exit or Disposal Activities — The obligations related to exit or disposal obligations, including reductions
in force, are accounted for in accordance with ASC 420-10-30 Exit or Disposal Cost Obligations, Initial
Measurement (“ASC 420-10-30”), previously FASB Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities and EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Costs to Exit and Disposal Activity (Including Certain Costs Incurred in a
Restructuring). In accordance with ASC 420-10-30, a liability for costs associated with an exit or disposal
activity is recognized when the liability is incurred and establishes that fair value is the objective for initial
measurements of the liability.
Recently Issued Accounting Standards — In October of 2009, the FASB ratified the EITF consensus on
EITF Issue No. 08-1 Revenue Arrangements with Multiple Deliverables, and issued Accounting Standards
Update (“ASU”) 2009-13 which amends the guidance in ASC 605-25 on multiple-element revenue
arrangements. This guidance addresses the unit of accounting for arrangements involving multiple
deliverables and how arrangement consideration should be allocated to the separate units of accounting, when
applicable. The ASU is effective for fiscal year beginning on or after June 15, 2010. Early adoption is
permitted. Adoptions of this guidance is expected to have a significant effect on how revenue arrangements
entered into subsequent to January 1, 2011 are reflected in the financial statements.
3. Investment in securities
The following is a summary of the available-for-sale securities classified as current assets (in thousands).
December 31,
2008
Gross
Unrealized
Cost Basis
Gain
Fair Value
December 31,
2009
Gross
Unrealized
Loss
Fair
Value
Cost
Basis
$18,549
$295
$18,844
$2,761
$(286)
$2,475
Available-for-sale
securities
The Company’s available-for-sale securities at December 31, 2008 consist principally of US agency
securities, which are stated at fair value based on quoted prices for similar securities in active markets (Level
2 in the fair value hierarchy). The Company’s available-for-sale securities at December 31, 2009 consist
principally of a $2.0 million certificate of deposit with a maturity greater than 90 days, held as collateral for
foreign exchange hedging instruments, and a common stock investment. The certificate of deposit is stated at
fair value based on quoted prices for similar instruments in an active market (Level 2 in the fair value
hierarchy) and the common stock investment is stated at fair value based on quoted prices in an active market
(Level 1 in the fair value hierarchy). The Company’s policy is to maintain a highly liquid short-term
investment portfolio. Proceeds from the sales and maturities of available-for-sale securities amounted to
approximately $286.7 million, $46.1 million and $17.8 million for the years ended December 31, 2007, 2008
and 2009, respectively. Gross realized gains and losses for available-for-sale securities were insignificant for
the years ended December 31, 2007, 2008 and 2009. Gross realized gains and losses
76
Source: MANNKIND CORP, 10-K, March 16, 2010
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Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for available-for-sale securities are recorded as other income (expense). The cost of securities sold is based on
the specific identification method. Unrealized gains and losses for available-for-sale securities were a gain of
$295,000 for the year ended December 31, 2008 and a loss of $581,000 for the year ended December 31,
2009. Unrealized gains and losses are included in other comprehensive income (loss).
4. State research and development credit exchange receivable
The State of Connecticut provides certain companies with the opportunity to exchange certain research and
development income tax credit carryforwards for cash in exchange for forgoing the carryforward of the
research and development income tax credits. The program provides for an exchange of research and
development income tax credits for cash equal to 65% of the value of corporation tax credit available for
exchange. Estimated amounts receivable under the program are recorded as a reduction of research and
development expenses. During the years ended December 31, 2007, 2008 and 2009, research and
development expenses were offset by $0.8 million, $1.8 million and $1.3 million, respectively, in connection
with the program.
5. Property and equipment
Property and equipment consist of the following (dollar amounts in thousands):
Land
Buildings
Building improvements
Machinery and equipment
Furniture, fixtures and office equipment
Computer equipment and software
Leasehold improvements
Construction in progress
Less accumulated depreciation and amortization
Property and equipment — net
Estimated
Useful
Life
(Years)
—
39-40
5-40
3-15
5-10
3
December 31,
2008
$
5,273
53,786
111,346
70,633
6,622
14,818
184
15,165
277,827
(51,391)
$ 226,436
2009
$
5,273
54,966
113,188
72,958
5,312
15,840
172
6,261
273,970
(65,741)
$ 208,229
Leasehold improvements are amortized over four years which is the shorter of the term of the lease or the
service lives of the improvements. Depreciation and amortization expense related to property and equipment
for the years ended December 31, 2007, 2008 and 2009, and the cumulative period from February 14, 1991
(date of inception) to December 31, 2009 was $8.5 million, $11.8 million, $18.2 million and $77.6 million,
respectively. Capitalized interest during the years ended December 31, 2007, 2008 and 2009 was $1.4 million,
$2.5 million and $0.1 million, respectively.
In December 2007, the Company determined that machinery being built for commercial manufacturing use
would no longer be used for this purpose and had no other further alternative use other than for research
related to AFREZZA. Accordingly, the Company expensed to research and development the $5.0 million
carrying value of the machinery previously included in construction in progress. Additionally, in
November 2007, the Company initiated a plan to sell certain manufacturing machines. A charge in the amount
of $1.6 million is reflected in the research and development expenses in the accompanying statement of
operations for the year ended December 31, 2007 to write down the machines being held for sale to their
estimated fair value of $1.6 million. In December 2008, the Company determined that software previously
purchased would no longer be utilized, resulting in an impairment charge of $459,000.
77
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December of 2009, the Company recognized a loss on disposal of approximately $12.8 million in
research and development expense related to the abandonment of first-generation inhaler specific assets
which would no longer be used as the Company pursued the commercialization of the next-generation device.
6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are comprised of the following (in thousands):
Salary and related expenses
Research and clinical trial costs
Accrued interest
Construction in progress
Other
Accrued expenses and other current liabilities
7. Related-party loan arrangement
December 31,
2008
$ 12,452
13,438
204
3,327
8,421
$ 37,842
2009
$ 13,362
3,169
2,065
203
3,535
$ 22,334
In October 2007, the Company entered into a $350.0 million loan arrangement with its principal
stockholder. Under the arrangement, the Company can borrow up to a total of $350.0 million. On
February 26, 2009, the promissory note underlying the loan arrangement was revised as a result of the
principal stockholder being licensed as a finance lender under the California Finance Lenders Law.
Accordingly, the lender was revised to The Mann Group LLC, an entity controlled by the Company’s
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 will
be payable quarterly in arrears. Principal repayment is due on December 31, 2011. At any time after
January 1, 2010, the principal stockholder can require the Company to prepay up to $200.0 million in
advances that have been outstanding for at least 12 months. If the principal stockholder exercises this right,
the Company will have until the earlier of 180 days after the principal stockholder provides written notice or
December 31, 2011 to prepay such advances. The principal stockholder has agreed not to exercise his
prepayment right if such prepayment would require the use of existing working capital resources to repay the
loan. In the event of a default, all unpaid principal and interest either becomes immediately due and payable
or may be accelerated at the principal stockholder’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. Any borrowings under the loan arrangement will be unsecured. The loan
arrangement contains no financial covenants. There are no warrants associated with the loan arrangement, nor
are advances convertible into the Company’s common stock.
The amount outstanding under the arrangement was $30.0 million and $165.0 million at December 31,
2008 and 2009, respectively. As of December 31, 2009, the Company had accrued interest of $1.9 million
related to the amount outstanding.
8. Senior convertible notes
On December 12, 2006, the Company completed an offering of $115.0 million aggregate principal amount
of 3.75% Senior Convertible Notes due 2013 (the “Notes”), including $15.0 million aggregate principal
amount of the Notes sold pursuant to the underwriters’ over-allotment option that was exercised in full. The
Notes are governed by the terms of an indenture dated as of November 1, 2006 and a First Supplemental
Indenture, dated as of December 12, 2006. The Notes bear interest at the rate of 3.75% per year on the
principal amount of the Notes, payable in cash semi-annually in arrears on June 15 and December 15 of each
year, beginning June 15, 2007. The Company had accrued interest of $192,000 and $192,000 related to the
Notes for the years ended December 31, 2008 and 2009, respectively. The Notes are general, unsecured,
senior obligations of the Company and effectively rank junior in right of payment to all of the Company’s
secured debt, to the extent of the value of the assets securing such debt, and to the debt and all other liabilities
of the Company. The maturity date of the Notes is December 15,
78
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2013 and payment is due in full on that date for unconverted securities. Holders may convert, at any time
prior to the close of business on the business day immediately preceding the stated maturity date, any
outstanding Notes into shares of the Company’s common stock at an initial conversion rate of 44.5002 shares
per $1,000 principal amount of Notes, which is equal to a conversion price of approximately $22.47 per share,
subject to adjustment. Except in certain circumstances, if the Company undergoes a fundamental change:
(1) the Company will pay a make-whole premium on the Notes converted in connection with a fundamental
change by increasing the conversion rate on such Notes, which amount, if any, will be based on the
Company’s common stock price and the effective date of the fundamental change, and (2) each holder of the
Notes will have the option to require the Company to repurchase all or any portion of such holder’s Notes at a
repurchase price of 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid
interest, if any.
The Company incurred approximately $3.7 million in debt issuance costs which are recorded as an offset
to the debt in the accompanying balance sheet. These costs are being amortized to interest expense using the
effective interest method over the term of the Notes.
9. Common and preferred stock
Private Placements — On August 5, 2005, the Company closed a $175.0 million private placement of
common stock and the concurrent issuance of warrants for the purchase of additional shares of common stock
to accredited investors including the Company’s principal stockholder who purchased $87.3 million of the
private placement. The Company sold 17,132,000 shares of common stock in the private placement, together
with warrants to purchase up to 3,426,000 shares of common stock at an exercise price of $12.228 per share
which became exercisable on February 1, 2006 and expire on August 5, 2010. In connection with this private
placement, the Company paid $4.5 million in commissions to the placement agents and incurred $300,000 in
other offering expenses which resulted in net proceeds of approximately $170.2 million.
On October 2, 2007, the Company sold 15,940,489 shares of the Company’s common stock to its principal
stockholder at a price per share of $9.41 and 11,074,197 shares of common stock to other investors at a price
per share of $9.03. The sale of common stock resulted in aggregate net proceeds to the Company of
approximately $249.8 million after deducting offering expenses.
Public Equity Offering — On December 12, 2006, the Company closed the sale of 20,000,000 shares of its
common stock at a public offering price of $17.42 per share and on December 19, 2006, closed the sale of an
additional 3,000,000 shares of its common stock at a public offering price of $17.42 per share pursuant to an
over-allotment option granted to the underwriters of the offering. Approximately 5.8 million shares were sold
to certain of the Company’s officers and directors, including 5.75 million shares sold to the principal
stockholder. In connection with this offering, the Company paid approximately $15.0 million in underwriting
fees and incurred approximately $1.1 million in other offering expenses which resulted in net proceeds of
approximately $384.7 million.
On August 5, 2009, the Company closed the sale of 8,360,000 shares of its common stock, including
960,000 shares sold pursuant to the full exercise of an over-allotment option previously granted to the
underwriters of the offering, at a public offering price of $7.35 per share. The Company’s principal
stockholder purchased 1,000,000 of these shares from the underwriters at a price per share of $8.11. The sale
of common stock resulted in aggregate net proceeds to the Company of approximately $59.7 million after
deducting offering expenses.
Common Stock — In May 2007, the Company’s stockholders approved an increase in the Company’s
authorized shares of common stock from 90,000,000 to 150,000,000. As of December 31, 2009, 113,025,291
shares of common stock are issued and outstanding.
79
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had reserved shares of common stock for issuance as follows:
Exercise of common stock options
Conversion of senior convertible notes into common stock
Exercise of common stock warrants
Vesting of restricted stock units
December 31,
2008
5,591,101
5,117,523
2,882,873
5,947,408
19,538,905
December 31,
2009
6,403,498
5,117,523
2,882,873
3,419,533
17,823,427
Preferred Stock — The Company is authorized to issue 10,000,000 shares of preferred stock. As of
December 31, 2009, no shares of preferred stock are issued and outstanding.
Registration rights — In August 2007, the registration rights of the holders of 17,132,000 shares of
common stock together with warrants to purchase up to 2,882,873 shares of common stock, all of which were
issued in the August 2005 private placement, expired. All of the warrants remained outstanding as of
December 31, 2009.
10. Stock award plans
As of December 31, 2009, the Company has three active stock-based compensation plans— the 2004
Equity Incentive Plan (the “Plan”), the 2004 Non-Employee Directors’ Stock Option Plan (the “NED Plan”),
and the 2004 Employee Stock Purchase Plan (the “ESPP”). The Plan provides for the granting of stock
awards including stock options and restricted stock units, to employees, directors and consultants. The NED
Plan provides for the automatic, non-discretionary grant of options to the Company’s non-employee directors.
Awards also remain outstanding at December 31, 2009 under the following inactive plans: the CTL Plan and
the AlleCure Plan. There are also options outstanding to the Company’s principal stockholder at
December 31, 2009 that were not granted under any plan; these options were granted during the year ended
December 31, 2002, vested over four years, and have an exercise price of $25.23 per share. The following
table summarizes information about the Company’s stock-based award plans as of December 31, 2009:
2004 Equity Incentive Plan
2004 Non-Employee Directors’ Stock Option
Plan
CTL and AlleCure Plans
Options outside of any plan granted to
principal stockholder
Total
Outstanding
Options
5,602,292
537,500
22,735
240,971
6,403,498
Outstanding
Restricted
Stock Units
3,419,533
Shares Available
for
Future Issuance
6,105,566
294,500
3,419,533
6,400,066
The Company’s board of directors determines eligibility, vesting schedules and exercise prices for stock
awards granted under the Plan. The NED Plan provides for automatic, non-discretionary grant of options to
the Company’s non-employee directors. Options and other stock awards under the Plan and the NED Plan
expire not more than ten years from the date of the grant and are exercisable upon vesting. Stock options
generally vest over four years. Current stock option grants vest and become exercisable at the rate of 25%
after one year and ratably on a monthly basis over a period of 36 months thereafter. Restricted stock units
generally vest at a rate of 25% per year over four years with consideration satisfied by service to the
Company. Certain performance-based awards vest upon achieving three pre-determined performance
milestones which are expected to occur over periods ranging from 27 months to 42 months from the date of
grant. The Plan provides for full acceleration of vesting if an employee is terminated within thirteen months
of a change in control, as defined.
On February 6, 2008, the Compensation Committee approved a management proposal designed to
encourage employee retention. The proposal involved the issuance of restricted stock units to the majority of
employees and executive officers of the Company. A total of 1,678,674 restricted stock units were granted
under the Plan. These units fully vested on June 30, 2009. Stock compensation expense associated with these
grants was recorded on a straight line basis from February 6, 2008 through June 30, 2009 and was
approximately $11.0 million.
Source: MANNKIND CORP, 10-K, March 16, 2010
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On May 22, 2008, the Company’s stockholders approved an amendment to the Plan to increase the number
of shares of common stock available for issuance under the plan by 5,000,000 shares.
On July 9, 2008, the Company announced an Offer to Exchange Outstanding Options to Purchase
Common Stock (the “Offer”) under which the Company offered eligible employees the opportunity to
exchange up to an aggregate of 5,417,840 shares underlying their out-of-the money stock options, on a grant
by grant basis, for a reduced number
80
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of restricted stock units. The Offer expired on August 6, 2008. Pursuant to the Offer, the Company accepted
for exchange options to purchase an aggregate of 4,493,509 shares of the Company’s common stock and
issued restricted stock units covering an aggregate of 2,246,781 shares of the Company’s common stock. For
the restricted stock units issued pursuant to the offer, both the remaining estimated unamortized stock
compensation expense related to the exchanged options of approximately $13.9 million and the estimated
incremental stock compensation expense resulting from the exchange of approximately $3.7 million is being
amortized over the vesting periods of the restricted stock units.
In March 2004, the Company’s board of directors approved the ESPP, which became effective upon the
closing of the Company’s initial public offering. Initially, the aggregate number of shares that could be sold
under the plan was 2,000,000 shares of common stock. On January 1 of each year, for a period of ten years
beginning January 1, 2005, the share reserve automatically increases by the lesser of: 700,000 shares, 1% of
the total number of shares of common stock outstanding on that date, or an amount as may be determined by
the board of directors. However, under no event can the annual increase cause the total number of shares
reserved under the ESPP to exceed 10% of the total number of shares of capital stock outstanding on
December 31 of the prior year. On January 1, 2007, 2008 and 2009 the ESPP share reserve was increased by
700,000, 700,000 and 700,000 shares, respectively. In November 2006, the Company’s board of directors
approved a decrease of 2.6 million shares to the reserve in order to make additional shares available for the
Company’s December 2006 offerings (see Note 1 — Description of Business and Basis of Presentation—
Public Offerings). As of December 31, 2009, 1,354,970 shares were available for issuance under the ESPP.
For the years ended December 31, 2007, 2008 and 2009 the Company sold 124,011, 349,317 and 322,518
shares, respectively, of its common stock to employees participating in the ESPP.
In accordance with ASC 718, share-based payment transactions are recognized as compensation cost based
on the fair value of the instrument on the date of grant. The Company accounts for non-employee stock-based
compensation expense based on the estimated fair value of the options, determined using the Black-Scholes
option valuation model and amortizes such expense on a straight-line basis. In November 2004, pursuant to
assignment agreements with two consultants, the Company issued 200 shares of its common stock under the
Plan. The Company agreed to issue 99,800 additional shares upon the achievement of certain milestones
specified in consulting agreements and for the year ended December 31, 2004, the Company recorded
approximately $1.1 million in stock-based compensation expense related to these agreements. In
November 2005, 39,800 of the 99,800 shares were issued to the consultants and the Company decreased
stock-based compensation expense by approximately $146,000 based on the fair market value of the shares
when issued. In September 2007, the next milestone was considered probable and the Company decreased
stock compensation expense by approximately $115,000 based on the fair market value of the shares. In
October 2007, the second milestone was met and 30,000 shares were issued. In December 2007, the third
milestone was considered probable of achievement and the Company recognized stock compensation expense
of approximately $238,000. In January 2008, the final milestone was met and 30,000 shares were issued. As
of December 31, 2009, there were 313,191 options outstanding to consultants.
During the years ended December 31, 2007, 2008 and 2009 the Company recorded stock-based
compensation expense related to its stock award plans and the ESPP of $17.6 million, $24.8 million and
$20.2 million respectively.
Total stock-based compensation expense/(benefit) recognized in the accompanying statements of
operations is as follows (in thousands):
Employee-related
Consultant-related
Total
2007
$ 17,513
132
$ 17,645
Year Ended December 31,
2008
$ 24,716
77
$ 24,793
2009
$ 19,653
566
$ 20,219
Total stock-based compensation expense/(benefit) recognized in the accompanying statements of
operations is included in the following categories (in thousands):
81
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Research and development
General and administrative
Total
2007
$ 9,749
7,896
$ 17,645
Year Ended December 31,
2008
$ 14,350
10,443
$ 24,793
2009
$ 12,115
8,104
$ 20,219
Included in stock compensation expense is approximately $165,100 in expense related to the modification
of stock awards for two individuals during the year ended December 31, 2009. Under the terms of the
modification of stock awards, these individuals’ options that were granted during their association with the
Company will continue to vest over their respective modification periods.
The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of
employee stock options. The expected life of the option is estimated using the “simplified” method as
provided in SEC Staff Accounting Bulletin No. 107 (SAB No. 107). Under this method, the expected life
equals the arithmetic average of the vesting term and the original contractual term of the options. The
Company estimates volatility using the historical volatility of its stock. The Company has selected risk-free
interest rates based on U.S. Treasury Securities with an equivalent expected term in effect on the date the
options were granted. Additionally, the Company uses historical data and management judgment to estimate
stock option exercise behavior and employee turnover rates to estimate the number of stock option awards
that will eventually vest. The Company calculated the fair value of employee stock options for the years
ended December 31, 2008 and 2009 using the following assumptions:
Risk-free interest rate
Expected lives
Volatility
Dividends
Year Ended December 31,
2008
2.64% — 3.69%
5.6 — 6.1 years
55% — 77%
—
2009
2.16% — 3.07%
5.8 — 6.1 years
78% — 80%
—
The following table summarizes information about stock options outstanding:
Outstanding at January 1, 2007
Granted
Exercised
Forfeit
Expired
Outstanding at December 31, 2007
Granted
Exercised
Forfeit
Expired
Outstanding at December 31, 2008
Granted
Exercised
Forfeit
Expired
Outstanding at December 31, 2009
Vested or expected to vest at
December 31, 2009
Exercisable at December 31, 2009
Weighted
Average
Grant
Date
Fair Value
per Share
$5.86
$2.25
$5.15
Weighted
Average
Exercise
Price
per Share
13.94
10.48
8.11
14.11
12.66
13.64
3.43
0.00
12.56
13.86
6.97
7.41
4.06
3.67
10.43
7.20
7.32
9.86
Aggregate
Intrinsic
Value ($000)
$ 1,252
$ 1,292
$20,422
$19,201
$ 6,931
Number
of
Shares
6,216,698
1,639,845
(606,833)
(252,016)
(111,036)
6,886,658
3,903,370
—
(2,669,230)
(2,529,697)
5,591,101
1,156,400
(94,413)
(153,383)
(96,207)
6,403,498
6,089,899
2,938,321
82
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested stock options for the year ended December 31, 2009,
is presented below:
Nonvested at January 1, 2009
Granted
Vested
Forfeited
Nonvested at December 31, 2009
Number
of
Shares
3,986,022
1,156,400
(1,523,862)
(153,383)
3,465,177
Weighted
Average
Grant Date
Fair Value
per Share
2.64
$
5.15
$
3.05
$
2.41
$
3.32
$
Cash received from the exercise of options during the years ended December 31, 2007 and 2009 was
approximately $4.9 million and $383,000, respectively. There were no stock options exercised during the year
ended December 31, 2008. The weighted-average remaining contractual terms for options outstanding, vested
or expected to vest, and exercisable at December 31, 2009 was 8.9 years, 7.4 years and 5.9 years,
respectively.
A summary of restricted stock units activity for the years ended December 31, 2007, 2008 and 2009 is
presented below:
Outstanding at January 1, 2007
Granted
Vested
Forfeited
Outstanding at December 31, 2007
Granted
Vested
Forfeited
Outstanding at December 31, 2008
Granted
Vested
Forfeited
Outstanding at December 31, 2009
Number
of
Shares
776,653
876,575
(202,009)
(91,557)
1,359,662
5,135,000
(328,449)
(218,805)
5,947,408
1,095,900
(3,145,375)
(478,400)
3,419,533
Weighted
Average
Grant Date
Fair Value
per Share
16.26
9.81
15.63
13.54
12.36
6.63
12.94
8.43
7.51
7.46
7.56
5.33
7.50
The total fair value of restricted stock units vested during the years ended December 31, 2007, 2008 and
2009 was $1.9 million, $1.2 million and $23.6 million, respectively. The weighted-average remaining
contractual terms for restricted stock units outstanding at December 31, 2009 was 8.8 years. As of
December 31, 2009, there were 49,988 restricted stock units outstanding to five consultants.
As of December 31, 2009, there was $12.1 million and $22.4 million of unrecognized compensation cost
related to options and restricted stock units, respectively, which is expected to be recognized over the
weighted average vesting period of 2.3 years.
11. Warrants
During 1995 and 1996, the Company issued warrants to purchase shares of common stock. The warrants
contain provisions for the adjustment of the exercise price and the number of shares issuable upon the
exercise of the warrant in the event the Company declares any stock dividends or effects any stock split,
reclassification or
83
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consolidation of its common stock. The warrants also contain a provision that provides for an adjustment to
the exercise price and the number of shares issuable in the event that the Company issues securities for a per
share price less than a specified price. As of December 31, 2004, warrants to purchase 131,628 shares of
common stock were outstanding. During the second quarter ended June 30, 2005, warrants to purchase
110,888 shares of common stock were exchanged for 24,210 shares of common stock resulting in stock-based
compensation expense of $245,000 based on a fair market value of the common stock of $10.12 per share.
Warrants to purchase 8,304 shares of common stock expired during 2005. The remaining warrants to
purchase 12,459 shares of common stock at a weighted average exercise price of $12.64 per share all expired
unexercised on December 1, 2007.
In connection with the sale of common stock in the private placement which closed on August 5, 2005, the
Company concurrently issued warrants to purchase up to 3,426,000 shares of common stock at an exercise
price of $12.228 per share. See also Note 9 — Common and Preferred Stock — Private Placement. These
warrants became exercisable on February 1, 2006 and expire in August 2010. During the year ended
December 31, 2006, approximately 543,000 warrants were exercised and net settled for approximately
339,000 shares. As of December 31, 2009, warrants to purchase 2,882,873 shares of common stock remained
outstanding. As of December 31, 2009, all warrants were exercisable.
12. Commitments and contingencies
Operating Leases — The Company leases certain facilities and equipment under various operating leases,
which expire at various dates through 2013. Future minimum rental payments required under operating leases
are as follows at December 31, 2009 (in thousands):
Year Ending December 31,
2010
2011
2012
After 2012
Total minimum lease payments
$ 798
10
4
2
$ 814
Rent expense under all operating leases for the years ended December 31, 2007, 2008 and 2009 was
approximately $1.5 million, $1.7 million and $2.1 million, respectively.
Capital Leases — The Company’s capital leases were not material for the years ended December 31,
2007, 2008 and 2009.
Supply Agreement — In November 2007, the Company entered into a long-term supply agreement with
Organon N.V. (“Organon”) pursuant to which Organon will manufacture and supply specified quantities of
recombinant human insulin. The initial term of this supply agreement will end on December 31, 2012 and can
be automatically extended for consecutive two-year terms under specified circumstances. As of December 31,
2009, the Company has annual purchase commitments through the remaining initial term aggregating to
approximately $100 million. These purchases are expected to be delivered from 2010 through 2012. If the
Company terminates the supply agreement following failure to obtain or maintain regulatory approval of
AFREZZA or either party terminates the agreement following the parties’ inability to agree after any
regulatory authority mandated changes to product specifications that relate specifically to the use of insulin in
AFREZZA, the Company will be required to pay Organon a specified termination fee if Organon is unable to
sell certain quantities of insulin to other parties.
Guarantees and Indemnifications — In the ordinary course of its business, the Company makes certain
indemnities, commitments and guarantees under which it may be required to make payments in relation to
certain transactions. The Company, as permitted under Delaware law and in accordance with its Bylaws,
indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the
officer or director is or was serving at the Company’s request in such capacity. The term of the
indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future
indemnification is unlimited; however, the Company has a director and officer insurance policy that may
enable it to recover a portion of any future amounts paid. The Company believes the fair value of these
indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in
the accompanying consolidated balance sheets. However, the Company accrues for losses for any known
contingent liability, including those that may arise from indemnification provisions, when future payment is
probable. No such losses have been recorded to date.
Source: MANNKIND CORP, 10-K, March 16, 2010
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84
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation — The Company is involved in various legal proceedings and other matters. In accordance with
ASC 450 Contingencies, previously FASB Statement No. 5, Accounting for Contingencies, the Company
would record a provision for a liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated.
Licensing Arrangement — On October 12, 2006, the Company entered into an agreement with The
Technion Research and Development Foundation Ltd. (“TRDF”), an Israeli corporation affiliated with the
Technion-Israel Institute of Technology (the “Technion”) to license certain technology from TRDF and to
collaborate with TRDF in the further research in and the development and commercialization of such
technology. In exchange for the rights that the Company obtained under this agreement, the Company agreed
to pay to TRDF aggregate license fees of $3.0 million and to issue to TRDF a total of 300,000 shares of the
Company’s common stock. The license fees were to be paid and the shares issued in three equal installments.
The first installment occurred on October 18, 2006. The second installment was paid on December 3, 2007.
The third installment was scheduled to occur, subject to the accomplishment of certain milestones, on
October 12, 2008. The Company had also agreed to pay royalties to TRDF with respect to sales of certain
products that contain or use the licensed technology or are covered by patents included in the licensed
technology or are discovered through the use of the licensed technology. The Company agreed to pay up to
$6.0 million of the royalties in advance upon the receipt of specified regulatory approvals. The Company
agreed to pay to TRDF specified percentages of any lump-sum sub-license payments that the Company
received if it decided to sub-license the technology. The Company had also agreed to pay a total of $2.0
million to TRDF in three nearly equal installments to fund sponsored research to be conducted at TRDF by a
team led by a faculty member at Technion. The initial sponsored research payment was made upon signing of
the agreement. The second sponsored research payment occurred on December 3, 2007 and the third
sponsored research payment was scheduled to occur, subject to the accomplishment of certain milestones, on
October 12, 2008. The Company had also agreed to retain the services of the Technion faculty member as a
consultant, for which the Company agreed to pay the consultant $60,000 per year and granted the individual
an option to purchase 60,000 shares of the Company’s common stock. Under the terms of the agreement, the
Company issued 100,000 shares of common stock to TRDF on October 12, 2006 and November 29, 2007,
respectively. Additionally, $1.6 million in license fees were paid on October 18, 2006 and December 3, 2007,
respectively. In August of 2008, the Company ended its agreement with TRDF and made no further payments
for licensing fees in 2008.
13. Employee benefit plans
The Company administers a 401(k) Savings Retirement Plan (the “MannKind Retirement Plan”) for its
employees. For the years ended December 31, 2007, 2008 and 2009, the Company contributed $821,000,
$914,000 and $824,000 respectively, to the MannKind Retirement Plan.
14. Income taxes
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established
when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized.
Components of the net deferred tax asset as of December 31, 2008 and 2009 are approximately as follows (in
thousands):
Deferred Tax Assets:
Net operating loss carryforwards
Research and development credits
Accrued expenses
Non-qualified stock option expense
Depreciation
Total gross deferred tax assets
Valuation allowance
Net deferred tax assets
85
December 31,
2008
2009
$ 424,497
37,415
38,187
21,546
3,916
525,561
(525,561)
$
—
$ 462,913
44,597
42,143
20,024
6,047
575,724
(575,724)
—
$
Source: MANNKIND CORP, 10-K, March 16, 2010
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Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for
the years ended December 31, 2007, 2008 and 2009:
Federal tax benefit rate
State tax benefit, net of federal benefit
Permanent items
Intercompany transfer of intellectual property
Other
Valuation allowance
Effective income tax rate
2007
35.0%
—
—
—
—
(35.0)
0.0%
December 31,
2008
35.0%
—
—
—
—
(35.0)
0.0%
2009
35.0%
—
—
(18.0)
—
(17.0)
0.0%
As required by ASC 740 Income Taxes (“ASC 740”), formerly FASB Statement No. 109, management of
the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred
tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more
likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the net
deferred tax assets have been fully reserved. Management reevaluates the positive and negative evidence on
an annual basis. During the years ended December 31, 2007, 2008 and 2009, the change in the valuation
allowance was $135.4 million, $138.1 million and $50.2 million, respectively, for income taxes.
At December 31, 2009, the Company had federal and state net operating loss carryforwards of
approximately $1.2 billion and $710.1 million available, respectively, to reduce future taxable income and
which will expire at various dates beginning in 2010 and 2012, respectively. As a result of the Company’s
initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382
occurred in August 2004. As a result, federal net operating loss and credit carry forwards of approximately
$216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is
cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the
Section 382 limitation for those years. The federal net operating losses generated subsequent to the
Company’s initial public offering in August 2004 are currently not subject to any such limitation as there
have been no ownership changes since August 2004 within the meaning of Internal Revenue Code
Section 382. At December 31, 2009, the Company had research and development credits of $53.5 million that
expire at various dates through 2030.
The Company has evaluated the impact of ASC 740, previously FIN 48, on its financial statements, which
was effective beginning January 1, 2007. The evaluation of a tax position in accordance with this guidance is
a two-step process. The first step is recognition: The enterprise determines whether it is more-likely-than-not
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether a tax position has met the
more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined
by the appropriate taxing authority that would have full knowledge of all relevant information. The second
step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to
determine the amount of benefit to recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized
in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no longer met. The Company believes
that its income tax filing positions and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain
income tax positions have been recorded. The cumulative effect, if any, of applying ASC 740 is to be reported
as an adjustment to the opening balance of retained earnings in the year of adoption. The Company did not
record a cumulative effect adjustment related to the adoption of ASC 740. Tax years since 1993 remain
subject to examination by the major tax jurisdictions in which the Company is subject to tax.
86
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Related party transactions
The Company issued 8,550,446 shares of its common stock to its principal stockholder during the year
ended December 31, 2005 for proceeds of approximately $87.3 million. In connection with this issuance, the
board of directors approved the issuance of warrants to purchase 1,710,091 shares of the Company’s common
stock at $12.228 per share, which expire on August 2, 2010. The issuance of shares and warrants to the
principal stockholder was on terms identical to the other purchasers in the private placement, as approved by
the Company’s board of directors.
During the year ended December 31, 2006 the principal stockholder purchased 5,750,000 shares of
common stock at $17.42 per share in the Company’s December 2006 equity offering on terms identical to
other purchasers resulting in proceeds of approximately $100.1 million to the Company. In connection with
the equity offering the Company paid $280,000 in filing fees related to the principal stockholder’s filings
made pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976. During the year ended
December 31, 2006, the Company borrowed $70.0 million from its principal stockholder under the loan
arrangement described in Note 7. On December 12, 2006, in connection with the completion of their equity
and convertible debt offerings, the Company paid principal and interest of $70.0 million and $1.6 million,
respectively, under the loan arrangement.
On October 2, 2007, the Company sold 15.9 million shares of the Company’s common stock to its
principal stockholder at a price per share of $9.41 and 11.1 million shares of common stock to other investors
at a price per share of $9.03. The sales of common stock resulted in aggregate net proceeds to the Company of
approximately $249.8 million after deducting offering expenses. Also, on October 2, 2007, the Company
entered into a loan arrangement with its principal stockholder to borrow up to a total of $350.0 million. On
February 26, 2009, the promissory note underlying the loan arrangement was revised as a result of the
principal stockholder being licensed as a finance lender under the California Finance Lenders Law.
Accordingly, the lender was revised to The Mann Group LLC, an entity controlled by the Company’s
principal stockholder. As of December 31, 2009, the Company had borrowed $165.0 million under this
agreement and had accrued interest of $1.9 million for the year ended December 31, 2009. See Note 7—
Related-Party Loan Arrangement.
On August 5, 2009, the Company closed the sale of 8,360,000 shares of its common stock, including
960,000 shares sold pursuant to the full exercise of an over-allotment option previously granted to the
underwriters of the offering, at a public offering price of $7.35 per share. The Company’s principal
stockholder purchased 1,000,000 of these shares from the underwriters at a price per share of $8.11. The sale
of common stock resulted in aggregate net proceeds to the Company of approximately $59.7 million after
deducting offering expenses.
Alfred E. Mann, who is the Company’s principal stockholder and chief executive officer, has established
the Alfred Mann Institute for Biomedical Development at the Technion (“AMI-Technion”) to expedite the
translation of intellectual property and technology of the Technion into commercial medical products for the
public benefit. Over a period of several years, Mr. Mann will establish a $100 million endowment for
AMI-Technion. Mr. Mann does not directly or indirectly have any interest in TRDF (see Note 12 —
Commitments and Contingencies — Licensing Arrangement).
In connection with certain meetings of the Company’s board of directors and on other occasions when the
Company’s business necessitated air travel for the Company’s principal stockholder and other Company
employees, the Company utilized the principal stockholder’s private aircraft, and the Company paid the
charter company that manages the aircraft on behalf of the Company’s majority stockholder approximately
$105,090, $130,000 and $136,800, respectively, for the years ended December 31, 2007, 2008 and 2009 on
the basis of the corresponding cost of commercial airfare. These payments were approved by the audit
committee of the board of directors.
The Company has entered into indemnification agreements with each of its directors and executive
officers, in addition to the indemnification provided for in its amended and restated certificate of
incorporation and amended and restated bylaws (see Note 12 — Commitments and Contingencies —
Guarantees and Indemnifications).
87
Source: MANNKIND CORP, 10-K, March 16, 2010
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MANNKIND CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Selected quarterly financial data (unaudited)
The following unaudited selected quarterly financial data has been prepared on the same basis as the
audited information and includes all adjustments necessary to present fairly the information set forth in the
Company’s consolidated financial statements and notes herein. As a development stage enterprise, the
Company has experienced fluctuations in its quarterly results related to the development of its lead product
candidate, AFREZZA, and in its expansion of the product candidate portfolio. The Company expects these
fluctuations to continue in the future. Due to these and other factors, the quarterly operating results are not
indicative of the Company’s future performance.
2008
Net loss
Net loss applicable to common
stockholders
Net loss per share applicable to
common stockholders — basic and
diluted
Weighted average common shares used
to compute basic and diluted net loss
per share applicable to common
stockholders
2009
Net loss
Net loss applicable to common
stockholders
Net loss per share applicable to
common stockholders — basic and
diluted
Weighted average common shares used
to compute basic and diluted net loss
per share applicable to common
stockholders
$
$
$
$
$
$
March 31
June 30
September 30
(In thousands, except per share data)
December 31
(71,421)
(71,421)
$
$
(79,826)
(79,826)
$
$
(68,496)
(68,496)
$
$
(83,295)
(83,295)
(0.70)
$
(0.79)
$
(0.67)
$
(0.82)
101,409
101,427
101,647
101,758
March 31
June 30
September 30
(In thousands, except per share data)
December 31
(59,412)
(59,412)
$
$
(55,604)
(55,604)
$
$
(45,555)
(45,555)
$
$
(59,533)
(59,533)
(0.58)
$
(0.54)
$
(0.42)
$
(0.53)
102,030
102,322
108,779
112,860
88
Source: MANNKIND CORP, 10-K, March 16, 2010
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-145282 on Form S-3 and
Registration Statement Nos. 333-117811, 333-127876, 333-137332, 333-149049 and 333-160225 on Form
S-8 of our report dated March 16, 2010, relating to the consolidated financial statements of MannKind
Corporation (a development stage company), and of our report dated March 16, 2010 relating to the
effectiveness of MannKind Corporation’s internal control over financial reporting, appearing in the Annual
Report on Form 10-K of MannKind Corporation for the year ended December 31, 2009.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 16, 2010
Source: MANNKIND CORP, 10-K, March 16, 2010
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Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Alfred E. Mann, certify that:
1. I have reviewed this Annual Report on Form 10-K of MannKind Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Alfred E. Mann
Alfred E. Mann
Chief Executive Officer and
Chairman of the Board of Directors
Date: March 16, 2010
Source: MANNKIND CORP, 10-K, March 16, 2010
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Exhibit 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Matthew J. Pfeffer, certify that:
1. I have reviewed this Annual Report on Form 10-K of MannKind Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Matthew J. Pfeffer
Matthew J. Pfeffer
Corporate Vice President and
Chief Financial Officer
Date: March 16, 2010
Source: MANNKIND CORP, 10-K, March 16, 2010
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Exhibit 32
CERTIFICATION 1
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States
Code (18 U.S.C. §1350), Alfred E. Mann, Chief Executive Officer of MannKind Corporation (the
“Company”), and Matthew J. Pfeffer, Chief Financial Officer of the Company, each hereby certifies that, to
the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2009, to which this
Certification is attached as Exhibit 32 (the “Annual Report”) fully complies with the requirements of
Section 13(a) or Section 15(d) of the Exchange Act, and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
In Witness Whereof, the undersigned have set their hands hereto as of the 16th day of March 2010.
/s/ Alfred E. Mann
Alfred E. Mann
Chief Executive Officer
/s/ Matthew J. Pfeffer
Matthew J. Pfeffer
Corporate Vice President and Chief Financial Officer
1 This certification accompanies the Annual Report on Form 10-K to which it relates, is not deemed filed
with the Securities and Exchange Commission and is not to be incorporated by reference into any filing
of MannKind Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended (whether made before or after the date of this the Annual Report on Form 10-K to
which this certification relates), irrespective of any general incorporation language contained in such
filing.
_____________________________________
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Source: MANNKIND CORP, 10-K, March 16, 2010
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