MannKind Corporation
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation 2016 Third Quarter Conference Call. As a reminder, this call is recorded November 9, 2016. Joining us today from MannKind are Chief Executive Officer, Matthew Pfeffer; Chief Commercial Officer, Michael Castagna; Chief Medical Officer, Raymond Urbanski; and Principal Accounting Officer, Rose Alinaya. I’ll now turn the call over to Ms. Rose Alinaya, Principal Accounting Officer of MannKind Corporation. Please go ahead.

[Rose Alinaya:]

Thank you. Good afternoon. And thank you for joining us to discuss MannKind’s third quarter 2016 performance. Our third quarter results were released this afternoon and are available on the SEC’s Edgar system and on our corporate website. Before we proceed, I’d like to remind everyone that comments made on this call will include forward-looking statements within the meaning of federal securities laws, which are based upon current expectations that involve risks, changes and circumstances, assumptions and uncertainties. It is possible that the actual results could differ from these stated expectations. For factors which would cause actual results to differ from expectations, please refer to the reports filed by the company with the Securities and Exchange Commission under the Securities and Exchange Act of 1934. The information we provide on this call is provided only as of today, November 9, 2016, and we undertake no obligation to update or revise publicly any forward-looking statements to reflect events or circumstances after the date of this call except is required by law. I will now turn the call over to our CEO, Matt Pfeffer. Matt?

[Matthew Pfeffer:]

Thank you, Rose, and good afternoon to our investors, analysts, members of the diabetes community and Afrezza users. Thank you for joining us on today’s call. I am excited about accomplishments of our leadership team, we have been able to execute on over the last several months. The intense focus to transform the company has resulted in our ability to extend our cash runway out to Q3 of 2017 without causing shareholder dilution, while simultaneously creating financial flexibility for us to take some calculated bets on Afrezza. By now you have seen our earnings release, one of the highlights of which is $126.5 million net income. This release included many new elements, including our first quarter of commercial sales, an income statement recognition of items related to the Sanofi collaboration that previous have been deferred. What is not included our two new agreements, being announced with this call, which I would like to discuss now. Next slide please. First, I am very pleased to announce that we have reached an agreement with Sanofi that contains several key elements. First, Sanofi will forgive the entire amount of our loan from them of $71.6 million and terminate the associated note and security agreement. MannKind’s also release from its obligation to pay a $0.5 million in previously uncharged costs related to the collaboration. Next, Sanofi will purchase $10.2 million worth of insulin from MannKind in early December. Note that this insulin is considered surplus to our current needs and its carried on our books at zero value. Finally, Sanofi will pay an additional $30.6 million in cash to MannKind in early January, cancelling and settling our Insulin Put agreement with them without or having to deliver any further insulin. In addition, it should be noted, that the termination of the promissory note and security agreement allows MannKind to pursue the sale of its Valencia, California facility, an adjoining property, which is now on the market for roughly $25 million, without are being required to use the proceeds to reduce the balance of the loan. So this is another source of non-dilutive liquidity for MannKind. Collectively, as result of this agreement, we have improved our financial position by over a $130 million. This will go long way towards meeting our near-term financial needs. We have also taken steps to reduce our cash requirements to amplify this effect, which brings me to the second agreement we are announcing today. Next slide, as many of you may know, one of our largest financial commitments results from the long-term Insulin Put agreement with Amphastar. I am pleased to announce that collaboratively with Amphastar, we have successfully updated our commitments under the contract and reduced projected spend by over $65 million for the period 2016 through 2018. This will allow us to invest our resources to drive the success of Afrezza. We have also deferred our next purchase of insulin to the fourth quarter of next year. And finally, as described in our 10-Q filing, we enacted the reorganization in September of this year, reducing our headcount by approximately 20%. This step was taken as part of our continuing efforts to reduce overhead and offset increase spend in the commercialization of Afrezza. As a result of these steps, we now have the financial resources to embark on important initiatives, will be discussed in detail by Mike and by Ray. Now that we have launched Afrezza and established our infrastructure, we expect to increase our investment to grow Afrezza sales faster. Based on everything we have planned, we expect our current financial resources to last into Q3 of 2017. I will provide further updates including revenue guidance for 2017 during our Q4 earnings call. With that, I would like to turn the call back over to Rose to run through our financial results reported earlier today, after Rose Michael say a few words about our commercial activities then Ray will discuss planned development activities, as well as our label change for Afrezza. After that I have a few additional comments before opening up for questions. Rose?

[Rose Alinaya:]

Thank you, Matt. Turning now to the financials, the third quarter of 2016 was a significant reporting period for MannKind. Our financials reflect the recognition of several previously deferred amounts related to the Afrezza collaboration, as well as the first quarter of MannKind branded Afrezza product sales. In the third quarter of 2016, we recognized total net revenue of $162.4 million, of which $161.8 million resulted from our ability to satisfy the accounting requirements for revenue recognition this quarter, following the termination of the Sanofi license agreement. The total amount recognized relates to activities from prior periods, which were previously deferred, including the upfront payment of $150 million and milestone payments of $50 million net of $64.8 million of net loss share amounts related to Sanofi, as well as $17.4 million in sales of Afrezza and $9.2 million in sale of raw insulin, both to Sanofi. Additionally, we recognized $22.7 million of previously deferred costs from the collaboration, which consisted of $13.5 million in Afrezza, manufacturing cost for products sold to Sanofi in 2015 and $9.2 million for a change in estimate in our recognized loss on purchase commitments as a result of the sale of raw insulin to Sanofi. We began distributing MannKind branded Afrezza products to major wholesalers during the week of July 25th. This being our first quarter of commercial product sales, we do not have enough sales history to reliably estimate expected product returns at the time of shipment into the distribution channel. As a result, we are currently only recognizing Afrezza revenue at the point prescription units are dispensed to patients based on reported prescription data. This model necessarily recognizes a relatively small percentage of sales into the wholesale and retail channel, and will change as a longer history of product return patterns is established. In the third quarter of 2016, we recognized net revenue related to sales of Afrezza to patients of $600,000. As of September 30, 2016, we had recorded $2 million in the deferred revenue, of which $1.6 million net of estimated gross to net adjustments represents product shipped to our third-party logistics provider and wholesale distributors, but not identified as having been dispensed to patients as of that date. Estimated gross-to-net adjustments for the third quarter of 2016 were approximately 32%, which includes estimates of wholesaler distribution and logistics fees, prompt pay discounts, estimated government rebates and patient discount programs. Deferred revenue also includes $0.4 million we received in advance for the sale of surplus raw materials to a third-party, where delivery was not completed as of September 30, 2016. Cost of goods sold in the third quarter of 2016 includes $0.1 million of manufacturing cost of Afrezza product sold to patients and corresponds to this quarters’ recognized commercial product sales. The remaining portion of cost of goods sold of approximately $4.2 million for the third quarter of 2016 relates to unabsorbed overhead and other costs, a decrease of 48% from the third quarter of 2015. This decrease is primarily due to reduced depreciation as a result of the fixed asset impairment write-down in 2015 and decreased salaries resulting from the reduction in force in 2015, partially offset by a decrease in production costs in 2016. Cost of goods sold or product manufacturing costs were $15.6 million for the nine months ended September 30, 2016, and included under absorbed labor and overhead costs, and a foreign currency exchange loss on purchase commitments for insulin offset by a change in estimates that resulted in a gain on purchase commitments for other material. Corresponding product manufacturing costs for the same period in 2015 were primarily under absorbed labor and overhead costs. Research and development expenses were $3.9 million for the third quarter of 2016, a decrease of 38% from the third quarter of 2015, primarily due to a reduction in force in 2015 along with curtailing certain research and development projects. Research and development expenses were $13.4 million for the nine months ended September 30, 2016, a decrease of 43% compared to the same period in 2015, primarily due to the 2015 RIF along with the reduction in research and development projects, and facility spending offset by lower reimbursable third-party development expense and tax credits. Selling, general and administrative expenses were approximately $13.1 million for the third quarter of 2016, an increase of 14% from the third quarter last year, mainly due to increased costs for the support of sales and marketing of Afrezza. SG&A for the nine months ended September 30, 2016 were $31.6 million, a decrease of 3% from the same period last year. Again primarily due to the 2015 RIF lower telecommunication costs in facility and insurance costs and a lower non-cash stock-based compensation expense, offset by increased sales and marketing costs for Afrezza. Included in the results for the three and nine months ended September 30, 2016 is a non-cash effect of a $13.2 million and a $7.9 million fair value adjustment of the warrant liability related to the registered public offering completed in May 2016. Net income applicable to common stockholders for the third quarter of 2016 increased to $126.5 million, or basic net income of $0.26 per share, compared with a net loss applicable to common stockholders of $31.9 million, or basic net loss of $0.08 per share for the same quarter in 2015. Cash and cash equivalents at September 30, 2016 were $35.5 million, compared to $59.1 million at December 31, 2015. Currently, $30.1 million remains available for borrowing under the amended loan arrangement with The Mann Group along with $50 million still available under the ATM facility. I would now like to turn the call to Mike, our Chief Commercial Officer.

[Michael Castagna:]

Thank you, Rose. Today was an important milestone for the company in order to transform us from a development and manufacturing company into a fully commercialization company. With that said, we have learned a lot about Afrezza since not only taking it back from Sanofi, but also from our own real world experience. Couple things I will share with you before I go into details is, we have learned that patients dropped off Afrezza for two reasons, one was because of cost and two was because of efficacy. And there are other reasons they dropped out, but the two predominant reasons are based on this two factors. One thing I’ll share with you as we continue to improve formulary access, we will see best drop out to the cost, but the efficacy part is important one that you will hear from why we are talking about today. We need to continue to reinforce appropriate titration early on in treatment and as we solve that we’ll continue to see increase in retention of our patients. Since we have launched we believe that continues to get better than it has been in the history. The second part we have learned is almost one out of two patients receive Afrezza as a direct result from asking their doctor to prescribe it and the other half get it because their doctor recommended it. Obviously, with our average out there over the last three months, we want to continue to shift that imbalance that doctors voluntarily want to prescribe it and feel it is a great option for their patients. However, at the same time, we need to continue to increase our focus on driving patients in to ask our product by raising awareness and opportunity. Now let me bridge into why we believe we are position for long-term success. There’s been a couple things happening as we look out in the near-term and the long-term. Number one, CGM technology continues to improve and increase penetration. We all saw the FDA meeting in July for Dexcom, which should continue to enhance that coverage within Medicare at some point in the future. The other thing we saw recently was avidly our system getting approved for the professional addition, which also allows continue glucose monitoring and we see that technology being adopted in the type 2 patients, as well as in the type 1 segment. As people continue to get clarity on what their sugars are doing very single day in real time, we believe they are going to look for additional options to help drive tighter control of their diabetes. The second thing that we look out on is, new innovation continues to reduce injections, as well as fingersticks, while providing real-time feedback. This goes into CGM, but this also goes into some of the new technology we are seeing implantables that continue to reinforce patients on two things, they want to get control their disease for the work they are putting in and they don’t want to remind that they are -- they have a disease they have to leave with everyday. So the more we can continue to drive that seamless integration and help people achieve their outcomes and life that they desire, but in appearance of cunning hearts and leaving life with a disease as oppose to just leaving their life. So we see these two opportunities really transforming diabetes care over the coming years. The third part is, as Afrezza continues to grow and gain momentum, it is a worldwide epidemic, so we will expect to grow with the natural market not only in the U.S. but the rest of the world. Patient awareness and experience with Afrezza is extremely low and I am thankful for that, because if a lot of people had negative experiences we’ll have a lot higher road to overcome. Today, we know that when patient is aware their desire to start Afrezza is extremely high, we have seen this first hand in the numerous community events we have been doing in the last few months. Next, I just want to highlight some key commercial activities that occurred. For those of you who never launch the drug, it usually takes three months to six months for rep to start to make impact. Not to mention, all the activities that takes to actually run and build a pharmaceutical company. I am really proud the team and all the hard work and late nights and weekend that everybody have done in order to establish a commercial infrastructure. This is no easy task and it’s not even easy to do on the budgets that we had or the timeframe that we had. But I am proud that throughout Q3 we continue to get Afrezza off the ground, we continue to work out the Kingston our supply chain, as well as get the feel before they need to do their job. So some of those things are around samples, you think it easy to get a sample at the door, there is a lot of complexity from trying to get the packaging ready, to get them all street, to get the programs adopted and implement it through the salesforce. Then you are contracting with the vendors, as well as payors and reimbursement of third parties. Not to mention, speaker programs, [ph] unchanged acting (18

[Raymond Urbanski:]

Thank you, Mike. It’s important to remember that insulins are characterized and use clinical based on their pharmacokinetic profile. In this regard, Afrezza is unique among all the currently available insulins. The slow absorption of insulin from the subcutaneous tissue remains to be a limiting factor when they are used. This is true also for the current rapid acting analogs where their slow absorption does not make normal physiologic insulin accretion. Afrezza does not have these limitations. Next slide, Afrezza has characteristics of an ultra rapid acting physiomatic insulin. These unique characteristic afforded a key place in a physician [ph] on atrium to treat diabetes. Our recently completed pharmacokinetic and pharmacodynamic study clearly demonstrated Afrezza’s ultra rapid action. Based primarily on these results we have submitted a label change with the FDA. This label revision will clearly differentiate Afrezza from other existing classes of insulin. Discussions with the FDA are ongoing and we are currently expecting a Q4 2017 approval for the label. Next slide, now looking at our clinical development program for Afrezza, we recently met with several of our pediatric starring committee members and are working through some potential protocol changes for the PK portion of this program. In addition, we have identified key partners, which we have announced previous for our pediatric program and they are going to replace and already supporting our activities. Next slide, the subsequent pediatric Phase 3 trial, which with we will file for pediatric indication, we will incorporate evidence not only from the PK study that we have conducted previously, but as well as data from recent publications. These publications as you can see on this slide include dosing simulation work and the Afrezza used with the artificial pancreas. The use of Afrezza with the artificial pancreas is impressive and promising, and an area that we are actively investigating. When you take all of this data around the dosing and titration of Afrezza, it helps to inform us as after the proposed pediatric protocol changes that we will need in the Phase 3 trial, which we believe will substantially improve study recruitment and retention, and thereby, expediting our filing dates. We are planning for study execution to begin in the first quarter of 2017. Next slide, in addition our post-marketing requirement was the long-term safety study. A long-term safety study is still progressing and we are on pace to begin recruitment in the second half of 2017. Currently, we remain in discussions with the FDA on some key protocol elements, including the patient pollution to be enrolled. In addition, we have been able to reduce the operational cost of this study significantly and expect this to be a manageable spend once we finalize the protocol and initiate site selection. Next slide, in addition to our post-marketing requirements, we are also planning on conducting other clinical studies with Afrezza. This is to better define the dosing and titration with the drug especially in new patients. We recently conducted an advisory board, meeting to identify ways to enhance and simplify the initiation of Afrezza in clinical practice. At the ad board they resoundingly felt that Afrezza’s differentiated pharmacokinetic profile made it an invaluable option for the treatment of diabetes. Afrezza clearly offers advantage to keep patients within a tight glucose target range, potentially leaning to less hypo and hyperglycemic episodes. To accomplish this, however, the proper dosing and titration of Afrezza is a paramount importance, because this is one of the areas that we have seen where healthcare providers struggle. To address these issues we are planning a 12-week to 16-week time and range dose optimization study in type 1 diabetics using CGM with Dexcom or the new Abbott Libre system. This study will be conducted in three to five of the most well-respected institutions in the country, an incredibility to the data and providing an immediate impact on clinical practice. We expect study start up to begin in the first quarter of 2017, where we will results sometimes in the fourth quarter. Additionally, we are planning a short pilot study for patients with type 2 diabetes that will allow us to simplify dosing initiation and titration. This will help patients get to the optimal dose quickly and effectively. Next slide, while we have been focusing a great deal of our activities on the near-term goals related to Afrezza, we have not lost sight of what is needed for the mid and long-term success of this company. Our currently candidate is our inhaled epinephrine for the treatment of type 1 hypersensitivity reactions. We believe that by utilizing MannKind’s innovative inhalation technology, we cannot only deliver effective plasma concentrations, but the addition of the direct effect on the pulmonary system will lead to improve clinical outcomes, an inhaled epinephrine in this setting offer several other advantages over the currently available epinephrine oral injectors. This will also provide patients and healthcare providers with another option that offers benefits related to convenience, ease of use and costs. We have a pre-IND meeting scheduled with the FDA in early December and our briefing book for this meeting has already been submitted. I will provide further updates on out type 1 and type 2 study concepts that I just articulated, as well as our epi program on our fourth quarter earnings call. With that, I’d like to turn the call back over to Matt.

[Matthew Pfeffer:]

Thank you, Ray. So, in summary, for the third quarter we began reporting commercial sales and significantly cleaned up our balance sheet, recognizing many items that have previously been deferred, while creating the ability for us to extend our launch runway. Subsequent to quarter end do not reflected in these results, we announced today an important agreement with Sanofi providing near-term cash and improving our overall financial position by over $130 million. We also announced today the completion of our revision to our largest supply agreement, pushing out our next purchase commitments to the fourth quarter of 2017 and reducing our contractual cash burn under that arrangement by $65 million for the period of 2016 through 2018 compared to the prior contract. As a result of these items and steps taken previously, we have extended our financial resources comfortably into the third quarter of 2017. [Ph] Continuing the (43

[Operator:]

Thank you. [Operator Instructions]

[Matthew Pfeffer:]

We are having a technical challenge. So I am asking everybody for bear us, we seem to be having some technical issues getting our question queue organized and pop me in and out, so bear with us for a moment and we will be right there. Okay…

[Operator:]

And our first question, sorry, our first question comes from Stephen Weil from Oppenheimer. Please go ahead.

[Stephen Weil:]

Yes. Hi. This is Steven Weil. MannKind Corporation has many patents for various products [inaudible]. Can you give us any information on things other than Afrezza and the epinephrine.

[Matthew Pfeffer:]

Yeah. We’ve done that multiple times before, I can ask, Ray, if he wants to talk them. We actually, I am laughing a little bit to myself, because Ray, actually had a section answering that very question, which we removed, because we thought the presentation was running little long and we had some other things to talk about. So, Ray, do you want to say couple words on that topic?

[Raymond Urbanski:]

Yes. Certainly, so we have a range of compounds in development, slightly more than 10 on the list, some include NCEs related to sort of pain management, others are B2 type of drugs, which we’ll be looking at, some are related to diabetes such as Symlin, for example, others are related to other disorders like parathyroid hormone, for example. So we have -- we do have a fairly extensive portfolio that we are still looking at to leverage, our innovative oral inhalation technology and the pharmacokinetic profile that will provide. We believe we’ll have several compounds in development in 2017.

[Stephen Weil:]

Thank you.

[Operator:]

[Operator Instructions]

[Matthew Pfeffer:]

Once again I’ll ask everybody to bear with us a little bit. Our typical practice is always been to, we have so many retail investors, it’s impossible to take all the retail investor calls, and so we’ve tried to limit calls to analysts and 5% or more stockholders, and such as that. Today we’ve seem to be getting varied and private investor calls, so we are having little troubles weeding out the other ones. We are getting some questions coming through online now, so while we try to work this out, I guess, since Michael is good enough to hand a couple of it to me right now, I can try to address them. One of the most frequently asked questions they are coming through on the online we ask has to do with delisting. I am not sure what exactly to say about that. I am not terribly concerned about delisting, I think, the news today we’re long way to solving that problem. It’s not going to be an issue till sometime in like the second quarter of next year by which point we have -- we expect to have a lot of this accomplish that will make this whole issue go away. But I can tell you that a reverse split or such as that has not currently on the table. Doesn’t mean we never consider if we came to that. But, currently, we have no plans to do it. And I am hoping our dramatically improved financial position will help resolve some of this issue. I also have question comes through related to some confusion about our cash position and what cash is actually available, so I’ll try to answer that one, because I have actually seen that misrepresenting a bunch of times, because many talk about a requirement under the Deerfield debt agreement that we maintain $25 million worth of cash, and I say, we will take it down to as we work into the quarter, $35 million, that means you really only have $10 million available. That’s not actually true. The way that debt agreement was structured is that included not only cash, but also available burrowing. So as long as we have $25 million or more available from the Mann Group, for example, we don’t have to maintain a minimum cash balance under that agreement. So were we able to work out our other issues. No. It looks like we are done. So, well, with that, I want to thank you all very much for joining our third quarter call. Before I do close, I wanted to acknowledged World Diabetes Day on Monday, November 14th and encourage people associated with MannKind to join me in supporting the diabetes community by making a donation at the ADA or JDRF, participating in a local walk for diabetes or simply by supporting a friend or family member with diabetes. Together we can change lives. So thank you again for your support.

[Operator:]

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participation and you may now disconnect.