MannKind Corp (MNKD) 2010 Q4 法說會逐字稿

At this time we would like to thank all participants for holding and you will be on a listen only mode until the question and answer session of today's call.

Also, the call is being recorded. If you have any objections you may disconnect at this time.

Thank you, sir. You may begin.

All right, thank you very much. This is Matt Pfeffer, the Chief Financial Officer of Mannkind Corporation and I'd like to welcome you to today's call. With me today, are Chairman and CEO, Alfred Mann, our President & COO, Hakan Edstrom and our Chief Scientific Officer Dr. Peter Richardson.

So, I am going to start and then turn the call over to Hakan to continue. First, I want to summarize our financial results for both the fourth quarter of 2010 as reported earlier today, and then Hakan will provide an operational overview and then Peter will address the clinical and regulatory matters.

Then finally Al will comment on the current situation and our outlook going forward. We will then open the call for your questions.

Before we proceed further, please note the comments made during this call will include forward-looking statements within the meaning of the federal securities laws including statements regarding our plans to complete the development and commercialization of AFREZZA. It's possible that the actual results could differ from these stated expectations. For factors which could 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, February 10, 2011. MannKind's management undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

Let's start with the financials. For the fourth quarter of 2010, total operating expenses were $32.1 million compared to $55.8 million for the fourth quarter of 2009, and $42.5 million for the previous quarter of this year.

Research and development expenses were $24.2 million for the fourth quarter of 2010, compared to $43.1 million for the fourth quarter of 2009, and $31.4 million for the third quarter of this year.

The decrease in R&D expenses for the fourth quarter of 2010, compared to the same quarter in 2009, was primarily due to the non recurrence of the write off of previously capitalized costs related to our first generation inhaler, MedTone, recorded in the prior year quarter as well as decreased costs associated with the clinical development of AFREZZA.

The decrease in R&D expenses this quarter from last quarter, was primarily due to a reduction in raw materials purchased in the current quarter. General and administrative expenses were $7.9 million for the fourth quarter of 2010, compared to $12.7 million for the fourth quarter of 2009 and $11.1 million for the previous quarter of this year.

Net loss applicable for common stock holders for the fourth quarter of 2010 was $38.3 million or $0.33 per share. Compared with the net loss applicable to common stock holders of $59.5 million or $0.53 per share for the fourth quarter of 2009. For the year ended December 31, 2010, total operating expenses were $152.6 million compared to $209.8 million for 2009.

R&D expenses were $112.3 million at 2010, down $44.1 million in 2009. Primarily due to the non recurrence of a $12.8 million loss on the previously mentioned write-off of fixed assets in 2009, decreased costs associated with the clinical development of AFREZZA, and reduced salary related and other research costs as result of the April 2009 reduction in force.

These reductions were partially offset by increased raw materials purchases. G&A expenses decreased by $13.1 million to $40.3 million for 2010.

As compared to 2009, primarily due to decreased salary related costs resulting from the April 2009 reduction in force. As well as the non recurrence of costs related to the Insulin acquisition transaction with Pfizer during the second quarter of 2009 and decreased professional fees related to market studies conducted in 2009.

Net loss applicable to common stock holders for 2010 was $170.6 million or $1.50 per share compared with the net loss applicable to common stockholders of $220.1 million or $2.07 per share for 2009. Our cash, cash equivalents and marketable securities at the end of the year, totaled $70.4 million which compares to $98.0 million at September 30, 2010, and $32.5 million, December 31, 2009. Our cash on hand and the remaining credit facility from Al to $168.4 million as of December 31, 2010.

As promised in our previous call, and as we reported earlier today, we have already taken significant steps to reduce our planned spending including a reduction in force of 179 employees or approximately 41% of our work force. This will reduce our payroll spending by about a third.

We also terminated our long term insulin supply agreement with Organon. Severance and related costs of $6 million as well as non-cancellable cost under the Organon purchase agreement, we currently expect that these and other measure will extend our financial resources including the $98 million still available in the credit facility from Al to fund our operations to roughly the end of 2011.

With that, I would like to turn this call over to Hakan Edstrom, our President and Chief Operating Officer, who will comment on our current operations.

Thank you, Matt. Good afternoon.

As you can imagine the receipt of the CRL put us into full contingency plan mode. We are certainly resolved to pursue the approval of AFREZZA, however the focus right now is on a realistic and achievable plan to get from here to approval. The contingency actions are fully underway. As you have heard we have terminated our insulin supply agreement with Organon.

We have ample quantities of insulin, even without taking into account the Frankfurt insulin that we purchased from Pfizer. So this termination will not interfere with our ability to conduct the clinical trials requested by the FDA or supply commercial material, as we transition to the Frankfurt insulin.

As well, earlier today, we implemented a significant reduction of staff at all of our sites reducing the head count by approximately 179 people representing about a 45% reduction of our employee base.

We are also in the process of performing a detailed internal review of projects, ongoing activities and spending priorities. Our goal is to ensure that we can manage our existing resources to the greatest extent possible through the period of time required to conduct the additional clinical study.

Of course, we still need the FDA guidance in order to plan and conduct those additional clinical studies. And Peter will provide more information about our plans to interact with the agency in the very near future. Upon receipt of this guidance, our next planned action is to arrange meetings with the potential partners.

The intent of those meetings will be to share with them the details of the CRL, our plans going forward and to get their perspective on the regulatory path to approval as it relates to partnership negotiations.

In the coming months, we will certainly continue to pursue partnership opportunities and we will also explore other funding options and alternative transactions.

However, our main focus for the present, is the deliberate and judicious management of our existing financial resources as we pursue approval of AFREZZA.

From an operations view-point, we are ready to resume the clinical trials as soon as we have a confirmed alignment with the FDA. Our manufacturing group has all of the MedTone seed supplies on hand and is certainly ready to supply the Dreamboat cartridges and inhalers in ample quantities.

In transitioning over to Peter, I want to emphasize that while the CRL certainly was an unpleasant surprise, the organization has responded admirably and is ready to bring AFREZZA the rest of the way. Peter?

Thank you, Hakan. And good afternoon.

As you may imagine, this has been a busy and challenging period for the organization. The contingency plans that we had put in place has allowed us to move quickly and decisively in preparing to address the agency's request laid out in the response.

We won't know all of the details until we have received further feedback from the FDA and are assured that we are fully aligned on the approach we will take in the clinical trials.

We have agreed with them that we will seek their specific review of the protocols and meet with them as suggested as an end of review meeting.

As you know, we have put in place studies which in terms of their basic design, appear to fully meet the agency's request to study the safety and efficacy of the new device in the clinic and showing adequate titration with AFREZZA under relatively stable insulin dose for 12 weeks.

These two studies, Affinity One in type one patients and Affinity Two in type two patients have adjusted to meet the agency's instructions will form the basis of our response and we are positioned to be able to execute these studies efficiently as a result of having trial supplies and investigative sites already in place.

Affinity One has not so far started recruitment and Affinity Two has screened sufficient patients to anticipate approximately 40 or 45 patients being randomized. A major challenge in revising these protocols is how to introduce the comparisons with our MedTone model C inhaler to allow a head-to-head comparison pulmonary safety for generation 2.

Our proposal is to introduce the MedTone arm in both of these studies and have determined that the logistics of doing so would be practical given supplies of devices we have presently available.

However, given that we wish to do all that is possible to ensure that the details of the design meet the agency's requirements, we will not do this until we have had a detailed review of the proposal with the agency to ensure that our approach is acceptable.

We have deferred the start of recruitment to Affinity One and have suspended streaming of additional patients in Affinity Two until we have completed the review of the protocols with the agency and have fully clarified what is needed at an end of review meeting. We will use this time to confirm that we have achieved the short term titration goals we require in the existing patients in Affinity Two and review with FDA whether we will be able to use them in the final study.

Meanwhile, we will be working to prepare sites, supplies and the necessary logistics to conduct this program expeditiously as soon as we have full clarity from the FDA on the acceptance of our clinical approach. Although it is impossible to give definitive times to the conduct of these studies, we would anticipate being able to restart enrollment soon after we have conducted our meeting and have received feedback from the division reviewers.

We are presently submitting our questions to the agency and will be submitting our revised protocol in the next few days. The present studies are planned to randomize about 360 patients each. Randomizing half to the new device and half to injected rapid-acting analog.

We are proposing to add a further 75 patients in each study using MedTone inhalers that was originally used in the long term pulmonary safety study. We intend to expedite enrollment, but recruitment is expected to require at least six months.

Although only 12 weeks of stable treatment is required, the entire treatment times in screening through to completion is expected to be approximately six months.

Upon completion, we will, of course, need to assemble our resubmission, we should take around two to three months.

We will be looking at ways to optimize and shorten our execution of the studies and have put in place capabilities to collect the data electronically and manage investigative sites directly. Which should lead to benefits in cost, time and quality.

The manpower reductions that Hakan has spoken about will not empower our ability to manage these studies for the human resources that remain focused on this task.

As we look at other programs in research and development, we will be looking at various approaches to ensuring the viability of the assets we have in terms of the tentative platform on our oncology pipeline whilst preserving cash and resources on the AFREZZA program.

I would now like to turn the call over to Al.

Thank you, Peter.

Now that we've had about three weeks to deal with the reality of the CRL, I'm a little less discouraged the about the setback and somewhat more optimistic. Yes, the CRL presents some challenges to us we must now address. And, yes, the impact of the delay in approval is very serious.

But we believe the CRL indicates a path to approval and we will work with the FDA to further clarify this path. The principal comment in the new CRL is directed at confirmation of the lowering of Hb1c with a new device and a bridge for pulmonary function between a new inhaler and the previous device.

The additional clinical studies are similar to the two phase IIIb Affinity trials we had already been implementing for marketing purposes. The rest of the FDA letter sets forth readily accessible requirements such as additional patient usability and handling evaluations for the new device and further instructions regarding product packaging and marketing.

As I said, the protocol for the trials called for in the CRL map, quite nicely into the protocols for the first two Affinity trials except when we went to add a MedTone cord to at least one of the trials in order to bridge pulmonary function effect in the head-to-head comparison of the new device or the clinical device. Our team has prepared proposed amendments to the protocols which are being submitted to FDA in anticipation of our meeting.

When we initiated the Affinity trial series, our intention had been only to complete preparations, contract with clinical investigators, gain approvals from the RBs and then conduct small 50 to 60 patient pre-trials of the largest studies. For Affinity Two, this initial stage was well underway. The data from this stage will give us some very useful information about the more aggressive titration protocols that we have adopted for these trials.

For Affinity One, we initiated sites, but have not yet enrolled any patients. Given the CRL, we have stopped further enrollment of both studies until we meet with the FDA and will then proceed to do full trials. We have planned these trials to better demonstrate the true benefits of AFREZZA.

A challenge in registration trials for a prandial insulin is o get investigators to reduce vaccine levels closer to normal. Other companies have faced this problem before.

In the Affinity trials, passing blood glucose will be titrated during the run-in period until there's a hypo event or until fasting blood glucose is between 100 and 120 milligrams per deciliter. And dosing the AFREZZA will be adjusted to keep the postprandial rise in 90 to 120 minutes to under 140 milligrams per deciliter. With this titration protocol, the expectation is that the AFREZZA cords will achieve much better HB1Cs with a higher probability that most patients on AFREZZA will reach HB1C's of under 7% and possibly under 6.5%.

As Peter said, we are preparing for a meeting with the FDA regarding the trials and the path forward to approval. We want to make sure that the final study protocols meet all the opening concerns of the agency for the to be marketed configuration. In particularly, want to reach agreement on the size of the trial and inclusion of the head-to-head comparison of pulmonary function with a new device of the MedTone clinical device.

We want a clear path to approval. Once we have confirmed that we are in alignment with the FDA, our clinical operations group will go into high gear to recruit the necessary patients and move them through the titration and treatment phases.

Questions have been asked about the impact of the new CRL on partnerships and finance. All the potential partners in the queue are experienced in evaluating such responses from the FDA. They can understand and deal with such actions. Once we have received guidance from the agency, we believe we should be able to have a meaningful dialogue with our potential partners without any remaining trial and regulatory risk.

Of course, there are likely still to be uncertainties about the label and the timing of a launch. Nevertheless, we tend to explore any deal opportunities that are available. There are a number of interested pharma companies. After all, there is great need by pharma for a late stage product and there are not many late stage opportunities. Certainly not any with the market potential of AFREZZA.

Notwithstanding the CRL, our premier asset AFREZZA targets the greatest health care challenge facing the world today with a game changing therapy. We are committed to getting this therapy into the hands of diabetes patients and we will consider any reasonable plan that allows us to accomplish this goal.

In the meantime, as described by my colleagues, we have already taken some painful actions to stretch out our cash burden. In our AFREZZA operations, we are retaining what is needed to support the path to approval. In certain other areas especially in our oncology program, we are only retaining critical resources.

This was not a happy day for MannKind Corporation. We are letting go a lot of very good people who have made important contributions to the Company. However, we have no choice given the singular focus we must have on securing approval for AFREZZA. We simply cannot afford to do much else.

I have tried to describe the current situation, the impact on our plans and how we were seeking to deal with the complete response from the FDA. So, now let's open up the call to your questions.

Operator?

Operator? Sorry, folks.

(Operator Instructions) One moment for our first question, thank you. Our first question comes from Simose Simeonidis.

Thanks for taking the questions. Can you tell us have you contacted the FDA and/or has a meeting with them been set up yet?

Not yet. They won't get a schedule for us for probably a week or two.

But you have requested the meeting?

Well, we prepared the request, but it's being reviewed now, so it probably is going in tomorrow morning.

In terms of the cuts that you made, the 100-or some people that you laid off. Can you give us an idea where they -- in which departments these were in?

I would say they were across the entire Company. We certainly made sure that we retained the critical people that will bring us to the approval that we are pursuing for AFREZZA. But, otherwise across that, we -- all of the functions were impacted to a great extent.

And the final question, toughest question for Matt. Matt, can you give us an idea going forward what the spend per quarter is going to be or can you tell us how much will it take in terms of cash for you to get to an FDA decision?

You are right, Simos. That is a tough question. I'm not sure I'm completely prepared to answer it.

I gave what guidance I could at this point. Remember, this is all happening very realtime and we're still making a lot of assessments and we made some difficult decisions today. We have a lot of things, other things being evaluated.

I feel comfortable saying we have cash that should take us to about the end of the year. We are looking at things that might take us beyond that or improve upon that situation.

So, I would really rather not lock us into a particular number at this point. However, especially because our spending tends to be a little lumpy, it's not always very even. We take the financial resources that we disclosed today and divide it through the end of the year you will get a rough idea of what our firm rate going forward from this point is.

I had to give it a shot at least. Thank you.

Our next question comes from Cory Kasimov. Go ahead, Cory, your line is open.

Thanks for taking the questions. Regarding your meeting with the FDA, are you going to wait for the minutes from that meeting before restarting the Affinity trials?

Peter, would you like to?

I think that really does depend in terms of what we would anticipate and we've had opportunities to speak with the agency in terms of what we are going forward with here.

They've actually agreed with us that they will do a two parallel review process as we approach the end of review meeting, but also accept the review of the two protocols filed to the IND for the review, which will give us additional feedback.

If by the time we get to the meeting, we will have bridge analysis to the questions which will be normal before the meeting and we are in agreement, then I would love starting the studies as soon as we were sure that we had the alignment and we got the protocols finalized to that level. Rather than waiting for minutes.

If however there is -- remain disagreement, I think the important thing is that we agree the details of the -- any changes that need to be done to the protocols at that point.

Okay.

And then Peter, I just want to be sure from the time lines you had outlined in your prepared remarks that I'm clear here, so if the two Affinity studies, assuming they are successful, you wpi;d be looking at 15 months from the time you restart the trials until you are in a position to resubmit. So you are looking kind of mid-2012-ish or something? Is that the right way to look at it?

Certainly I indicated that it would be at least six months in terms of our previous history and knowing recruitment times in this area for recruitment and each patient would be six months. We also said two to three months for preparation of the NDA.

But I think at this point we've really got to look at how we optimize, we have some decisions in terms of how we execute in terms of sites that we net on. So, we will certainly be able to give you a much better idea of the detail finding when we know the details of the protocol, clearly giving real guidance on this at the moment depends on numbers and the calculations that we have done being accepted.

Okay. And then my final question is regarding Al and Hakan's comments on meeting with prospective partners. I'm just trying to understand this, you wouldn't partner AFREZZA before the prior two PDUFA dates but are you considering taking less money now to keep the product moving forward or is this something a contingency plan if you don't have other financing opportunities?

I wouldn't say it is contingency. We have been in contact with our partners on an ongoing basis, as Al mentioned, a CRL is not kind of an unusual event that potential partners have not seen in the past. We will sit down particularly after we've met with the FDA and we understand what is required of us in the go forward in clinical trials.

We think that will provide clarity in terms of what type of deal arrangement that we could be looking for. But certainly increased flexibility is part of the say Modus Operandi going forward.

Thanks for taking the questions.

Our next question comes from Mimi [Pham]. Go ahead.

In terms of resources, you talked about having enough funds to operate through year end. Assuming you need another $150 million to $200 million or somewhere around the same levels to fund through FDA approval sometime the end of 2012, when do you plan to start raising this additional funds?

Matt?

Mimi, as a general practice, we have never preannounced financing plans and I don't intend to start doing that now. We were blessed in having a lot of different potential opportunities.

I wouldn't expect that we would be considering doing anything prior to meeting with the FDA when we have a bit more clarity and can make a more informed choice about which of the financing options and other things we might be looking to do.

Okay. Then I guess -- sorry.

So, all I say is stay tuned.

I guess maybe directly just asking Al in terms of if the financing options fall through, is there an option still to provide some resources through the Mann group?

Well, I can't make any commitments at this point. Obviously, I believe in this product and I have invested a lot in it because I believe in it and I got to find a solution for this.

Okay.

And then just in terms of the R&D and G&A spend, can you at least directionally help us. The $24 million you spent in the fourth quarter for R&D, will we expect post the work force reductions and with the clinicals that directionally it will be the same levels or above or below and similar question for the $8 million in G&A post the work force reductions.

Is it the same level? Below or above?

Well, obviously with reductions, I assume this is for me, Hakan. The spending is going to go down in most of those areas. The only place it will likely go up a little bit is once these new trials are in full swing you will see some additional clinical spending there.

Obviously, we have chosen not to be terribly specific when that might happen, because frankly, we don't know with certainty. The kind of background spending should certainly decrease. Just payroll is going to take us down a third right there. Then once the trials get underway, you will see it pick up again at the end.

I hope that helps.

So, I guess take a third of the $24 million R&D and take that out to reflect the workforce reductions and similar take a third of the $8 million in G&A to reflect the workforce reductions and then we can figure out how we estimate increments from clinical.

To be perfectly honest, Mimi, we are still modeling this ourselves. We can certainly see the workforce reduction effects because we can quantify that. When you start rippling it through and taking the associated spend out it's hard to -- it takes longer to do that.

We are doing it even as we speak. Obviously we couldn't let this information become too widely known in advance of announcing it. So it limited our ability to do full analyses. But we will be reforecasting and rebudgeting in the days ahead.

Thank you very much.

Mimi, I think it's also appropriate to say that the Affinity One and Affinity Two studies that were planned as marketing studies, was part of our budget for 2011. So, from that point of view, the studies that we are now transitioning to responding to the FDA request is not fully incremental to our planned spending for 2011.

Thank you very much.

Your next question comes from Tom Russo. Go ahead, Tom Russo, your line is open.

Good afternoon, and thanks for taking the questions.

There is still a lot of continued talk about potential partners which is frankly rather unusual to hear to such an extent and so frequently from a public company. Can you comment, have any talks actually advanced or occurred since the setback last month?

Depends how you define. Yes, we have been in contact and we are in contact with those many companies that we've been talking to kind of over some of them a significant amount of time.

Have we entered into negotiations? No, we have not. We think that would not be appropriate until both parties have a fully understanding of the outcome of our discussions with the FDA.

I guess I'm also just trying to understand how you could negotiate with potentially interested parties while kind of in this financial predicament? Would one come before the other in terms of shoring up the balance sheet before really being able to even consider negotiating? Or is there another way around it?

Well, we have several plans going forward that -- but really until we get full clarity on the path to approval, that we hope to get at this meeting, we can't really define the final program.

So I think it's premature for us to give any further details of the various opportunities. We have several very significant opportunities.

And also remember, as Matt mentioned in his remarks, is the fact that the Company we are financed at this point in time through roughly the end of the year, so it's not like we are sitting at a cliff here.

All right. And then last question, this came up a month ago or a few weeks ago. But it seems to be getting more emphasis now.

Can you give a little more clarity on this pulmonary function head to head? What exactly does FDA need to see or not see? What is the concern there?

Peter, would you please?

Of course, until we've spoken further with the FDA, I can't give you definitive answer on that, but it's a head to head comparison of the pulmonary safety of the MedTone model C with the next generation inhaler.

We are interpreting that one based on what we have done previously in the two year studies and all of the studies so far is that that would be based upon an assessment of the pulmonary function using spirometry and all other measures to assess pulmonary function change. That's one of the important things to ensure that we have got clarity with the agency. They have not asked in this area of the comparison of efficacy.

But your understanding right now is if the new device performed similarly to the old device on pulmonary function, that's acceptable?

Remember that we had only about a little over 2% to 3% reduction. A clinically insignificant reduction that was non progressive happened early in the use and didn't change until you stopped and then it recovered. There was no effect on pulmonary tissue.

We now believe it was really probably just a reaction to inhalation by people. We had -- we don't have a lot of data with the new device, but with the new device it appears to be even less. It was already clinically insignificant. The FDA just wants us to confirm that we are at least as good as MedTone.

Okay. Thanks, Al.

Our next question comes from Steve Byrne. Go ahead, Steve Byrne, your line is open.

Do you have a couple more Seaside equity purchases in January and if so, where does that put your cash balance roughly at now?

Matt?

Yes, well, obviously we did have a couple more of those. We haven't closed January yet, so I'm not sure I know myself exactly where our cash balance is.

And when you projected having sufficient funds through year end 2011 was that counting on drawing on that $98 million loan agreement? Or not?

Yes, that assumes that we can still draw upon that $98 million loan agreement. Obviously we only ended the year with $78 million or so in cash. It did assume that. It did not assume any additional financing sources from Seaside or anywhere else.

Okay. And has your -- the R&D program on the active immunotherapy program been halted and do you see potential value in selling some of that IP?

Peter, did you want to talk about oncology?

Really in today's restructuring focus very much in terms of trying to maintain the assets that we have in that area both with the oncology small molecule and the active immunotherapy program, though we retained a small key team as we move forward in terms of looking at that small ongoing clinical study, I think we are looking at ways that we can approach that with minimal cash burn.

Clearly in terms of activities in terms of looking at partnering it's too early to say what the impact of this has been.

And one last one for you, Peter. In this initial phase of the Affinity Two, have you found any of the test centers to find your treated target or forced titration protocols difficult to implement?

Certainly we are actually being very demanding in the protocols. I think that's one of the things that in intense treat to target we certainly have set some ambitious goals.

An early thing telemetry data and -- but I'm encouraged by what I have seen to date and I think it's actually very helpful to actually have the opportunity to look at the small number of patients in terms of ensuring that the titration regimen gets to the point where we can reach the -- what are difficult goals.

Okay. Thank you.

Our next question comes from Michael Tong. Go ahead, Michael, your line is open.

Thanks. This is maybe for Al or for Peter.

Can you just confirm whether the FDA has indicated to you that MedTone is considered safe and effective, so that when you have the Dreamboat inhaler being equivalent to MedTone that there is that translation equivalency that actually applies.

I think you can assume that what they are asking is to essentially bridge from the MedTone program to this one. There was some elements of the MedTone that we have not responded to. Mainly the marketing of the cartridges, but I think that -- that way the CRL reads is it would imply that if we can show that our results in both efficacy and pulmonary function or safety are as good as they were with Dreamboat that we should be on the path to approval.

That's one of the things we ought to make sure of when we meet with the FDA at the forthcoming meeting.

You would actually seek clarification from the FDA that indeed that's the case?

I think the inference from the way it's written, is they are basically saying that they want us to show that the new device is as good as the old device. You got to draw that conclusion yourself, Michael.

Just help a little in terms of the specifics and I think in terms of the wording that's been chosen. It asked to compare the safety and efficacy of the new device. Not wording in terms of the AFREZZA powder or platform in terms of that in terms of the comparison.

And secondarily, they asked us what's the pulmonary safety in comparison to MedTone. So, that is why the thoughts in terms of design of the studies and the way that we have done that in terms of comparison with the analog seemed appropriate in terms of answering that question.

Really, remember that they have not raised any safety issues even in the first CRL. They have not identified any issues of concern in any -- in either of the letter. They want updates and then in this case they want to make sure that our new device is as good as the old device.

Okay. Thank you.

Your next question comes from John LeCroy. John, your line is open.

Thanks for taking my call.

In Affinity Two to get the patients down to that 140 post prandial number, how many puffs of the AFREZZA device is that taking? Could you make a guess?

Only one puff with the cartridge, period.

How many cartridges do you expect?

Depends on the patient. The average that we have seen is about a 30 unit cartridge. We have larger cartridges, but they require a small change of the formulation.

So, that at this point, if a patient needs a lot of insulin they are going to have to use a couple of cartridges. Later, we will have larger cartridges that will have to be approved after we get initial approval of the 10 and 20 unit cartridges we have now. By the way, when I said 30 before I was referring to MedTone which is 20 with Dreamboat.

All right, thanks. What sort of type of hypoglycemia percentage rates were you looking for in the titration period?

Peter?

Gentlemen, not sure in terms of percentage rates.

Percent of patients that might get a hypo?

That depends in terms of the type one and type two.

Really in type one patients you are expecting a large proportion of patients to have a mild to moderate hypoglycemia when you titrate here. What we are looking for is a significant reduction in that rate between that acting analog by injection and AFREZZA. The rates will be lower in type two there in terms of hypoglycemia makes me know that we expect low percentage numbers.

Okay. And then it looks like from your timing that you are expecting an average titration of about 12 weeks, is that right?

Well, the titration -- we have to be at 12 weeks of reasonably stable dosing. It will take several weeks.

We don't want to say how many, but, it could take up to six weeks or more to do the titration to get the patients down in both the basal rate and the prandial rate.

That 12 week of stable dosing is before the--?

No, no. The stable dosing is after they are all titrated.

You think the titration takes about six weeks?

Could be up to or it depends. The plan is to titrate AFREZZA, I mean Lances first to get them down under 120. And then to titrate the AFREZZA to make sure that we are under 140, 90 to 120 minutes and then once we get there, then the patients are -- enter the treatment phase in that 12 weeks.

Great. Then finally for the Organon deal that you are cancelling, what's the penalty on that?

It's not resolved just yet. But we will see.

Any kind of rough ballpark?

We did disclose a potential penalty that we -- is payable at the end of the deal of $22.7 million that's to be negotiated. It's very much dependent upon whether they are able to sell the insulin elsewhere. That and to the extent they are successful, there is no penalty.

Okay. Thanks. That's it.

Our next question comes from [Issac Roy]. Your line is open.

Two questions for you.

First, given the complete response letters that in theory are supposed to contain a complete accounting for all of the FDA's objections or concerns about a filing, why do you think it is that they have brought up these concerns about the inhaler in this second CRL and not in the first CRL? You think they would have addressed that in the first CRL.

We have not applied with the new inhaler. We changed the inhaler and they decided they needed to have these studies as a bridge with the new inhaler. That's what it's about.

Of course.

And then I recall that with this study 117 that was terminated early, you'd mentioned at the time that the reason for the termination was that it was done with the original device and you stopped that study when you stopped producing the old device and decided to make a change over to the new device, which suggests that it takes awhile to ramp up and down production of the MedTone inhaler.

So I guess I'm curious how long do you think it will take you to ramp up production of MedTone to conduct these -- to add those on the study.

Actually, as I said in my script at the top, is that we do have the MedTone, the inhalers and the cartridges in ample supplies. We would be ready to go with an immediate start. And we also have ample supplies of the, what we call the Dreamboat inhaler and cartridges. So supply is not a narrow sector for us at this point in time.

Just to understand then with the 117 study, was the 117 study terminated because you ran out of cartridges? Or because strategically, you decided that because the study was being conducted with the old cartridges it wasn't worth continuing.

It was because of the latter.

Okay. Thanks a lot.

Our next question comes from Keith Markey. Go ahead, Keith, your line is open.

Thank you for taking my questions. They have already been answered.

Thank you.

Thank you, Keith.

(Operator Instructions) Our next question comes from John Lemke. Your line is open.

Actually, sorry, it's Kevin Tang with Tang Capital. How you doing, guys?

Hi.

So, I just want to clarify on the financial guidance of resources sufficient until the end of the year, of the $22.7 million of estimated maximum penalty for the Organon termination what did you build into that projection?

We didn't because that wouldn't be until the following year. It's not known. We've disclosed it, but it's not anything that is certain at this point.

So that payment would not be due until 2012?

That is correct.

It relates to the purchase of material that was scheduled for next year.

Okay. And why then in 2012 would that payment be due?

March.

March of 2012. Okay. Thank you.

And then my second question is do you intend -- I should define you. Does MannKind the Company intend to draw down the $98 million on the credit facility?

Matt?

Probably, but not certainly. It depends on what happens between now and when we might need to draw upon that line.

So, you have not decided to draw down -- if you raised money otherwise, you may not draw down?

That's absolutely possible.

Then one clinical trial question.

First of all the titration period, in currently in the affinity protocols we discussed this on the last call, it's fixed at four weeks, but it sounds like you are talking about maybe modifying that to be longer? Is that what I should infer by the six weeks?

Yes. We looked at this and I think that we really want to be conservative in terms of ensuring that we optimize the titration and then have that relatively stable period. So, we felt that it was worth, given the importance of getting this right in these studies that it would be worth extending to six weeks if necessary in the patient.

As you probably gather from my comments last time, I would agree with that conclusion. And then I just want to -- I wasn't going to ask this, but I was just reminded by I think two callers ago, the number of cartridges that the -- the amount of delivered insulin in Dreamboat per cartridge is the same as MedTone? Correct?

The amount that's actually delivered is the same.

I know the amount in the cartridge is less, but the amount delivered is supposed to be the same, right?

Yes.

So I--?

Precisely the same amount of the very same powder in both devices.

Okay. So I think if I remember right from the Lancet article in the Phase II -- in the Phase III type two study, the average number of cartridges used at the end of the study was seven. Is that not correct, Peter? I'm sorry?

Peter, I'm sorry could you repeat that. We missed it.

Per day if I'm remembering correctly there. So that's two at each meal was a typical dosing in the type 2 patients.

So it was six point something. I remember seven.

Some patients will take a dose with snacking and, of course, that's an average across that and the vast majority of patients have managed a single or two cartridges with that and we don't anticipate that being the same with Dreamboat.

I guess my question is if the average was six or seven and before the aggressive force titration that will occur in the new studies, would it not be -- will you not end up delivering more insulin in the new studies, so the average would actually be probably more likely greater than seven inhalations per day?

I think that remains to be seen because I think the combination is optimizing the fasting and then moving with the titration necessary. We will see what that occurs. I wouldn't want to speculate that would increase the amount that's needed by any means.

Okay. But typically if you are doing a forced titration trying to get anyone down more aggressively the way you do that is you give more insulin? Right?

Correct.

Okay.

And we will be doing so in both arms.

Correct. Okay.

I think those are my questions. Thank you for answering them.

Thank you.

Our next question comes from Jason Butler. Go ahead, Jason Butler, your line is open, sir.

Sticking with the Affinity trials. Can you give us an overview of the statistical plan in terms of what you are aiming to show in terms of A1C compared to Humalog or Novolog even?

Pretty much the same design we used in 117 and studies in terms of 0.4 margin. And not inferiority in HBa1C after that 12 week period.

Okay. Great.

And then you mentioned earlier that you had data on the lung function safety side for Dreamboat. Have you or do you intend to present that data at any time?

We presented some of that short term data in the Diabetes Technology Society meeting.

Great. Thanks a lot.

Thank you.

Our next question comes from Mimi Pham.

Hi. Just a couple of follow-ups. First, in terms of your strategy for AFREZZA on the regulatory front in terms of Europe and other countries, where do you stand there?

I think we are looking here at the opportunity of using these studies as the potential basis for filing of the Dreamboat inhaler in Europe. We're looking at our strategy for how we can do that.

I would anticipate once we moved through the meetings with the FDA, that we will then look in terms how we can approach the European authorities and establish what plans would be adequate there.

Okay. I guess if it requires additional studies you will reassess and if it -- if you can use what you are doing in the US then maybe you can file some time next year also for Europe?

That would be an ideal logistic plan, but it's too early to say whether that will be the case.

Then the second question in terms of the Seaside financing, can you lower the minimum to the $5 range? Or is that discussion even an option right now?

It was our choice to set it where we did. They have approached us earlier before the more recent period suggesting they would be receptive to something, but we haven't had any discussions with them since the CRL.

Thank you very much.

At this time we would like to return the call back over to Mr. Al Mann for closing comments. Thank you.

Thank you all for joining us today. We look forward to updating you in our next quarterly call.

We hope we have some positive news to give you at that time. Thank you.

This concludes today's conference call. Thank you for attending. You may disconnect at any time.