MannKind Corp (MNKD) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation second quarter 2007 conference call. At this time all participants are in a listen-only mode. Later instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded today, August 9, 2007.

Joining us today from MannKind are Chairman and CEO, Alfred Mann; President and COO, Hakan Edstrom; and Chief Financial Officer, Dick Anderson. I would now like to turn the call over to Dick Anderson, Chief Financial Officer of MannKind Corporation. Please go ahead.

Good afternoon and thank you for participating in today's call. Before we proceed, please note that comments during this call will include forward-looking statements within the meaning of federal securities laws. It is possible 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 Exchange Act of 1934. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 9, 2007. MannKind's management undertakes no obligation to revise or update any statements to reflect events and circumstances after the date of this call.

As I mentioned on the call last Friday I plan to retire at the end of 2008. A number of investors and analysts have asked why would we make this announcement so early? Under SEC rules we are required to make this announcement as soon as I gave notice to the company, which I did so that we could begin the search for my successor.

I want to reiterate my commitment and express my confidence in our progress over the next year and a half. I will remain fully involved during this period.

Now let's move on to the financials. We moved the release date of our second quarter financial results to today to allow us to continue our review of the financial results for the second quarter and the six months ended June 30, 2007. The change in our release date resulted from our discovery of an over-accrual in the second quarter of certain clinical trial expenses. We reported this to our auditors while we continued with a full review.

This review led to the conclusion that this over-accrual amounted to a material weakness in our internal controls for Q2 related to these clinical trial expenses. We have already made the necessary changes to address the root causes of this problem.

For the second quarter of 2007, total operating expenses were $76.4 million compared to $55.8 million for the second quarter of 2006 and $77.3 million for the fourth quarter of 2007.

Total operating expenses decreased by 3% from the first quarter of 2007 primarily related to the timing of purchases and services in our clinical manufacturing operation.

R&D expenses were $61.5 million for the second quarter of 2007 compared to $45.3 million for the second quarter of 2006, and $63.8 million for the first quarter of 2007 representing a decrease of 4% from the first quarter of 2007, again, related primarily to the timing of purchases and services in our clinical manufacturing operations.

General and administrative expenses were $13.9 million compared to $10.4 million for the second quarter of 2006 and $13.6 million for the first quarter of 2007. Thus, G&A expenses increased 3% from the first quarter of 2007.

At the end of June we had approximately 630 employees, which represented an increase of 7% from the end of the first quarter of this year.

The net loss for the second quarter of 2007, $72.0 million, $0.98 per share based on 73.4 million shares outstanding compared with a net loss of $54.8 million, or $1.10 a share based on 40.6 million shares outstanding for the second quarter of 2006.

The increase in shares outstanding reflects the completion of our public offering of 23 million shares of common stock in the fourth quarter of 2006.

Our cash, cash equivalents and marketable securities at the end of the second quarter of 2007 totaled $284 million that compares to $365.6 million at March 31, 2007, and $436.5 million at December 31, 2006.

Our cash burn for the second quarter was $27.2 million per month compared to $23.6 million for the first quarter of 2007 or an increase of 15% primarily due to expenditures associated with the building of our new commercial manufacturing plant in Danbury, Connecticut.

We anticipate our cash burn will be significantly in the latter half of this year as the clinical trial expenses peak and the rate of construction expands at Danbury.

This afternoon we filed a shelf registration statement covering the future sale of up to $350 million in securities in one or more future offerings if and when the time is right. This registration statement has not been declared effective by the SEC.

With that, I'd now like to turn the call over to Al Mann, our Chairman and Chief Executive Officer, who will comment further about the shelf offering. Al?

Thank you, Dick, and good afternoon, ladies and gentlemen. During our call last Friday we spoke about our progress and I reiterated that I remain very confident of our future and that I am personally committed to supporting the company. We announced on Friday that I have renewed by $150 million loan facility with the company under essentially the same terms as before.

However, our capital strategy requires 12 months of capital at all times. To satisfy this objective, we will need additional funding beyond my $150 million credit line. We have therefore been considering the advisability of an additional financing.

We have long recognized that even with a potential cash infusion of a partnership, we will not need all of our short-term capital requirements. In order words, a partnership would not eliminate the need for additional financing, although, of course, the capital raised would then be somewhat lower.

Given the current status of our partnership discussions and the nervousness and volatility of the capital markets, we concluded it would be prudent to file a shelf registration statement at this time in order to give us the flexibility to proceed when a financing becomes appropriate.

Therefore, we filed a shelf registration statement today covering the future sale of up to $350 million in securities in one or more future offerings if and when the time is right. Moreover, as in the past, I am again willing and committed to purchase up to 50% of the next offering.

We believe the financial community overreacted to Friday's comments on the partnership and financing, although maybe it's restoring a bit today and yesterday. We are very definitely continuing to pursue a partnership. We said in our call on Friday that it is taking longer than we had expected perhaps partly because of concerns with Exubera's performance, to date.

Please understand that our potential partners have recognized the unique characteristics and value of Technosphere Insulin while Exubera brings no incremental clinical no incremental clinical benefits compared to commercial rapid-acting analogs other than the lack of prandial injections.

The partners seem convinced that Technosphere Insulin is a truly differentiated product with very significant benefits in safety and efficacy. Our potential partners have had access to all of our data and are scientifically and medically astute so they, indeed, recognize these benefits.

That said, I would now like to turn the call over to Hakan Edstrom, MannKind's Chief Operating Officer, who will now talk about MannKind's approach to partnering. Hakan?

Thank you, Al, good afternoon. We discussed some of the challenge we'd face in a partnership negotiation during our investor update last Friday, and we certainly do understand your interest in a partnership. But let me comment about our approach to partnering TI.

For some time now, we've been exploring a worldwide development sales and marketing partnership in our ongoing discussions with global pharmaceutical companies. At this point we have reduced the Phase III execution risk by completing the enrollment of all of our trials, which, in turn, increases the likelihood that we will submit the NDA to the FDA in December of 2008.

So, consequently, we now have more options regarding a partnership structure for Technosphere Insulin.

The importance of the U.S. market, the largest and most profitable pharmaceutical market in the world, can be demonstrated by the fact that according to the IMS, the three leading diabetes therapies in calendar year 2006, each had considerably more than 70% of its major market sales from the U.S. market.

Given the late stage of our clinical program for Technosphere Insulin, there is not much left reported to do to have this process other than, of course, to pay some of the costs and to help with the Phase IIIb and IV trials.

For the U.S. submission we, at this time, do not need the leverage or the regulatory capabilities of an eventual partner. We do have a strong and experienced team that has a good relationship with the FDA but, on the other hand, in order to maximize the value of Technosphere Insulin in the U.S., we will certainly need to leverage the commercial capabilities of sophisticated marketing operations.

Accordingly, the most value-enhancing approach for the U.S. market may be a co-promotion partnership, and this is not uncommon for late-stage development candidates. Co-development, co-promotion structures are more typical for early-stage development candidates and a specific example of a late-stage compound partnered with a co-promotion agreement for the U.S. market is actually [Takeras Actov] which was co-promoted with Eli Lilly.

Nonetheless, for markets outside of the U.S. we certainly understand the limits of our capabilities, and we continue to seek a partner that would provide regulatory as well as commercial capabilities in exchange for up front and royalty payments.

In short, given the status of programs, we are somewhat more flexible in a partnership strategy and potential structure, and we expect to create an arrangement that will improve our position while, at the same time, reducing perceived risks to the partner.

As we said on our call last Friday, our trial continues to differentiate Technosphere Insulin from all other therapies, and we continue to make progress on our clinical and commercialization business, and we are meeting our program milestone. We remain on track to file our NDA for Technosphere Insulin in December of 2008.

We are certainly grateful for all of your ongoing support and commitment as we pursue our mission to strive to reach and exceed our goals.

With all that said, I want to thank you for joining us today, and we'd now like to open up the call for your questions. Operator?

Thank you, we will now begin the question-and-answer session. (Operator Instructions) Jeff Meacham, Wachovia.

This is actually Terry Coyne, we're with JP Morgan. Just a quick question on the proceeds from the shelf. Do you guys think that this should be enough to get TI to market, or should we be thinking about another financing in the 2008-2009 timeframe as well?

It was very difficult to hear you. I think you asked about whether there might be other offers in the queue to get their approval. Dick, would you like to comment on that?

Yes, the estimates I've seen from analysts indicate that they expect us to burn about $350 million to maybe $400 million this year, and the company has said that it expense the burn rate this year to be about the same as last year. Those are our two big years.

So if your question is how far would that $350 million take us, I could not say at this time it would take us all the way through 2008, although that certainly would be our target.

Okay, thanks, and then just a quick follow-up -- in terms of your feelings of debt versus equity at this [term] valuation, what are your thoughts there?

Well, we are all sensitive to dilution, and we remember last year that the convert market was very favorable to us, so it is clearly one of the alternatives we would explore.

[Davis Marrs, Balcie].

Just a follow-up on the last question, on the fundraising, in the filing that you must made, though, it says that you estimate that the proceeds would be enough to get you through midway of 2008. But if I heard it correctly, and that's what I'm asking is you said your goal would be through the end of 2008, and so if you could just clarify that, that would be helpful.

There were two different parts to your question. One is, how much cash do we need to actually fund operations, including the capital build, between now and 2008? And there is the going concern consideration that we discussed previously on the call. At the quarterly call back in May at the end of the first quarter, if you remember, I said that I anticipated that our expenses would go up significantly in the second quarter and throughout the rest of this year and, in fact, they went down very slightly in the second quarter. So the company's prediction sometimes can't be right on the mark.

$350 million on top of what we hope to have at year-end, I believe, will take us past next summer. I don't know whether it would take us all the way to end of 2008. It will be somewhere in between would be my best guess at this point. There are still too many variables out there to predict it any more accurately.

And if you didn't have a commercial partner, what do you think the additional cost through the middle of next year to commercialization would be?

The would depend on a number of strategic decisions which we're not prepared to disclose at this point in time. They would relate to what type of launch, what type of sales force, what geography, et cetera. So I really can't answer that.

Let me just make a comment. What Dick is referring to is not how much money we're going to eat up by next year or the second or third -- the middle and third quarter of '08, is really making sure we have 12 months' of cash on hand, because that's our standard.

Elizabeth Bernstein, Banc of America.

Thank you. First, what's the total dollar impact of the over-accrual?

Let me see if I have that here. I believe it was in the range of $6 million plus or minus $1.5 million. I need to remind everyone, though, that that was an over-accrual that we found that never got into the financial statements. For the financial statements as shown today in our Q are correct.

Okay, perfect, and then the second question is would you consider, then, if, indeed, you need cash in the second half of the year, rather than going back to the capital market ahead of a filing, would, I guess, the obvious alternative choice be then drawing down the loan agreement with Mr. Mann?

The loan agreement is there to be used, so it's always an alternative.

Let me add that depending upon the status of our partnerships arrangements and other factors, I have no hesitation to suggest that we might even do a larger loan. I am very sensitive to the dilution to this company.

Elliot Wilbur, CIBC World Markets.

I have what I thought was a simple question but maybe it really doesn't have a very simple answer, and I was going to talk to you, Al, and Dick as well, you can interject, I know you've been on the front lines on this issue also.

But I guess, based on the events of the past couple of days and, really, the last couple of months, do you think there is anything that the company can do to more effectively communicate the fundamental value proposition that you believe Technosphere Insulin presents? Clearly, there still seems to be a substantial gap between your expectations and the marketplace perception. So do you think there is really anything you can do at this point to close that gap, or do you think this is really just a case where, frankly, the text for insulin data is just going to have to speak for itself.

Well, let me say that a lot of the high-ranking diabetologists are trying to help by trying to explain how significant post-meal, post-prandial excursions are. That is becoming the mantra of diabetes care. Even much more -- the problem is that in the -- what we see in the therapy community in the real world is that people don't really get started on this therapy, on insulin therapy, until very late when they have very difficult and challenging fasting glucose levels, and doctors, even though they say they recognize what great value we have in controlling incursions and minimizing and risk of hypoglycemia, they still, it turns out, manage patients with fasting glucose levels that are outrageously high.

Where we need to apply our efforts is trying to continue educating people to understand why the excursions are so critical, why a mage is becoming the -- M-A-G-E -- is becoming the future major factor in diabetes care -- that's on the technical side.

And I think we just have to go through and see what's happening. I mean, people still, even though everybody knows that we have nothing like Exubera, it's true that we use insulin, and it's true that we deliver it by inhalation, and so everybody still has this gnawing feeling that maybe there's some problem because Exubera is doing so poorly.

Hopefully, the marketing program, the director of consumer advertising Pfizer has launched, maybe that will kindle some interest in it but that's, I think, having a major impact on us, certainly, in the less knowledgeable community, in the lay community, and, frankly, in a lot of the potential investors; that they see this, and it scares them.

(Operator Instructions) Hari Sambasivan, Merrill Lynch.

Dick, just a question on the R&D expenditure line. In terms of -- I guess given the fact that the partnership may or may not be delayed, how are you prioritizing your R&D program such as the (inaudible) program and the oncology program, and I'm just wondering about how much you actually allocate to this.

Secondly, I'm also wondering about additional programs such as the Phase IV programs or the planning or the special population studies. What is the timing related to those? Do you wait until you sign a partnership or are they independent of a partnership? How should we think about this?

Hari, I'll address part of your question and defer the second part to Hakan, but from a financial standpoint, our priority is for insulin and Technosphere Insulin. And, seriously, we want to make sure that we have put our resources behind this product, which is now so close to filing and to launch. We'll do whatever we can to make sure that those resources stay on Technosphere Insulin.

Hakan, maybe you could comment on where that fits vis--vis our Phase III and IV thoughts.

Yes, we certainly have looked at what we would like to be our Phase IIIb and Phase IV program, and we have prioritized those studies in regard to those that can be very, very beneficial in terms of making sure that we have a good, strong label upon the approval of the product, and those are getting priorities and we intend, as best we can, to execute those even if we do not have a partnership on board anytime when we start those programs. Others will certainly have to wait for a partnership to come into place.

And, secondly, in regards to some of the specialist population that would go into a filing, we have, as Exubera did, seen some of the difficulties in recruiting some of these special population status, so we may delay those and submit those data during the process of the NDA filing. We have certain priorities in the programs to come up with the strongest label as possible, but, at the same time, conserve times where we do not need those studies' results for the approval.

So is it fair to say that some of these special population studies are not required at the time of filing?

Yes, that's correct.

And in terms of the prioritized Phase IV studies, which ones are you prioritizing in terms of what is absolutely essential for your label and what is not essential?

Again, what we believe is very important is, for instance, the fact that we can be used in combination with or instead of oral, so an earlier introduction of product in the diabetes treatment. That's one area that we are certainly pursuing. The other areas, also, again, we want to very clearly demonstrate beyond our pivotal studies that the hypoglycemia benefits of our product are there, and so that's another study that we are actually planning at this point in time.

Salveen Kochnover, Jefferies & Company.

On the conference call on Friday, you mentioned that in light of the issues surrounding Exubera, a potential partner may look to wait for the Phase III data that's coming in '08. Is there a specific trial that the potential partners are most focused on here?

I would say no. In those partner discussions that we've had and had the opportunity to go through the due diligence, overall, I would say that there is no specific study that seems to be having a greater value than any other one. Of course, they all start with two-year (inaudible) studies is probably the one that is the most studied and certainly that sets the timeline for our finding as well. But I cannot say that it's been expressed in terms of a specific concern for any of the studies.

Michael Tong, Wachovia Securities.

Just a quick question, a follow-up on the Phase IIIb/Phase IV studies. In a sense, how long do you think those will last or, in other words, how late can you start those and still make it into -- possibly make it into the label?

Most of those will be short studies rarely more than six months. Most of them are three- or six-month studies. There may be some that we may want to carry on after that as a follow-on.

So you can possibly start those towards -- closer towards NDA filing?

Yes.

(Operator Instructions) Scott Henry, Oppenheimer.

I just had a question with regards to the financing. It appears the company has an aversion to a going concern letter, which is not that uncommon in the developmental industry. I'm wondering are there any covenants that dictate that position? And, I guess, wouldn't that almost require the financing -- or would require the financing prior to the filing of the 10-K. So sometime, I imagine by early Q1? Any thoughts, please?

Al's loan does not contain any such covenants. I'd have to check back with our legal folks. I don't believe there are any such covenants in our convertible debt, but I don't know that today. That's something we'd have to go back and look at.

I would say that one concern would be the concern of our major investors, that they would be concerned about. If not, then we might relax it a little bit. That's a good point, thank you.

I am showing no further questions at this time.

Well, thank you for joining us today, and I hope we've successfully conveyed the confidence we feel internally about our technology and the progress we've made towards an NDA filing for Technosphere Insulin and please join us again in three months for another update. Thank you and good afternoon.

Thank you all.