MannKind Corp (MNKD) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation fourth-quarter and year-end 2011 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, February 22, 2012. Joining us today from MannKind are Chairman and CEO, Alfred Mann; President and COO, Hakan Edstrom; and Chief Financial Officer, Matthew Pfeffer. I would now like to turn the call over to Matthew Pfeffer, Chief Financial Officer of MannKind Corporation. Please go ahead.

Good afternoon. Thank you for participating in today's call. I will summarize our financial results for 2011 as reported earlier today, and also our recent financing activities. Hakan will then discuss our current operations, and Al will conclude with an overview before we open the call to your questions.

Before we proceed further, please note that comments made during this call will include forward-looking statements within the meaning of Federal Securities Laws. It is 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 and Exchange Act of 1934.

This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, February 22, 2012. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

For the fourth quarter of 2011, total operating expenses were $30.6 million compared to $32.1 million for the fourth quarter of 2010 and $32.8 million for the third quarter of 2011. R&D expenses were $20.2 million for the fourth quarter of 2011 compared to $24.2 million for the fourth quarter of 2010 and $23.1 million for the third quarter of 2011.

The decrease in R&D expenses for the fourth quarter of 2011 compared to the same quarter in 2010 was primarily due to the termination of our insulin supply agreement as we did not purchase insulin in the current quarter, partially offset by an increase in clinical trial-related activities as trials 175 and 171 were initiated in the fourth quarter of 2011.

The decrease in R&D expenses this quarter from last quarter was primarily due to our final purchase of insulin under our insulin supply agreement in the third quarter of 2011. General and administrative expenses were $10.3 million for the fourth quarter of 2011 compared to $7.9 million for the fourth quarter of 2010 and $9.6 million for the previous quarter of this year. General and administrative expenses remain stable quarter-over-quarter except for the fourth quarter of 2010 reflected lower G&A costs due to nonpayment of bonuses for 2010.

The net loss applicable to common stockholders for the fourth quarter of 2011 was $36.4 million or $0.30 per share based on a weighted average of 122.4 million shares outstanding. Compared with the net loss applicable to common stockholders of $38.3 million or $0.33 per share on 114.9 million weighted average shares outstanding for the fourth quarter of 2010.

For the full year ended December 31, 2011, total operating expenses were $140.6 million compared to $152.6 million for 2010. R&D expenses were $100 million in 2011, down $12.3 million from 2010, primarily due to lower purchases of raw materials as a result of the termination of our insulin supply agreement. We purchased only $8.4 million of insulin in 2011 compared to $16.3 million in 2010. We also incurred reduced salary and other compensation expenses as a result of a reduction in force in February 2011.

G&A expenses were relatively flat increasing by $0.3 million to $40.6 million for 2011 as compared to 2010, with lower salaries and benefits costs from the 2011 reduction in force offset by increased financing transaction costs and legal fees.

The net loss applicable to common stockholders for 2011 was $160.8 million or $1.32 per share based on 121.8 million weighted average shares outstanding compared with a net loss applicable to common stockholders of $170.6 million or $1.50 per share based on 113.7 million weighted average shares outstanding for 2010.

Our cash, cash equivalents, and marketable securities at the end of the year total $3.2 million which compared to $23.3 million at September 30, 2011 and $70.4 million at December 31, 2010. Financial resources including the remaining credit facility from Al amounted to $48.2 million as of December 31, 2011. Our cash burn decreased during 2011 from $32.7 million spent in the first quarter 2011, $40.2 million in Q2, $37 million in Q3, and $20.1 million spent in Q4. We expect to accelerate our spending in 2012 as we complete the trials and approach commercialization.

On February 8 we sold 86.3 million worth of units in an underwritten public offering with each unit consisting of one share of common stock and a warrant to purchase 0.6 of a share of common stock. The offering was up-sized in light of the strong demand and the total also reflects the full exercise of an over allotment option granted to the underwriters. Net proceeds from this offering were approximately $80.6 million excluding any potential future warrant exercises.

Concurrent with this public offering The Mann Group LLC committed to purchase $77.2 million worth of restricted shares of common stock which will be paid for by a cancellation of principal indebtedness under the amended loan agreement. With our cash on hand the remaining available under the credit facility from Al and the net proceeds from the recent sale of common stock we believe that we would be able to fund our operations into the fourth quarter of 2012.

This financing will provide a bridge as we continue to pursue additional funding opportunities to extend our cash runway but I cannot comment further until we have something definitive to announce. With that I would like to now turn the call over to Hakan. Hakan?

Thank you, Matt, and good afternoon. Let me provide a high level overview of the ongoing AFREZZA activities. In general, we remain on target for resubmission to the FDA in the first half of 2013. The FDA continues to provide guidance with regard to clinical and CMC development. All key clinical trials have been initiated, and we are actively enrolling subjects.

Enrollment in our pivotal type 1 study, the MKC171, is well underway. There are 42 US sites that are operational, and having had successful experience with the clinical centers in Russia and the Ukraine during earlier trials, we are utilizing some of those centers in the current studies. The Russian investigator meeting was held in December and the Minister of Health has approved the protocol. Russian site activation and recruitment have begun. Additional sites and recruitment in Ukraine will begin next.

The type 1 trial has three arms, each scheduled to finish with 133 patients. Two arms will deliver AFREZZA, one with a DreamBoat device, the other with a MedTone inhaler as a bridge to our earlier trials. The third arm will use a rapid-acting analog in conventional injection therapy. All three cohorts will use LANTUS as their basal insulin.

Our pivotal type 2 study, the MKC175, was initiated on schedule following the start of the type 1 pivotal study. Site activation is well underway with 35 US sites already established and with additional sites currently being activated. The MKC175 investigator meeting in Russia was held last week and Russian site activation and recruitment are now beginning.

This is to be a superiority study in early stage type 2 patients failing on Metformin or Metformin plus another oral drug. AFREZZA is provided in one arm. The other arm is Technosphere placebo without insulin. And each arm is scheduled to finish with 123 patients. Both pivotal clinical studies are expected to complete recruitment in the second quarter so that study completion should occur around the end of 2012 with an FDA submission in the first half of 2013.

The primary focus on the CRL was the device change. In addition to the two noted clinical trials the agency called for information on CMC quality device, human factors and product labeling. We submit in the information package in response to the FDA in November, seeking advice from the agency on any remaining comments noted in the CRL. A response to those remaining peripheral matters is expected from the agency shortly. With that let me now turn the call over to Al for an overview of our situation. Al?

Thank you, Hakan, and good afternoon. Many of our long-term stockholders have expressed concern about the loss of value of their investments. That is certainly understandable, given that MannKind's stock has dropped by about three-quarters since the CRL. I have shared in that loss of value. In fact, my loss has been the greatest of all.

I have personally invested $575 million to purchase what is about 40% of MannKind, and the current value of that equity is but a fraction of my actual cash investment. Yet I expect that loss to be reversed by developments over the next couple of years. I am certainly continuing to hold my stock, and I'm even converting some of my loans to the Company into stock so as to maintain my ownership position.

As you know, out of concern for potential dilution to our many stockholders I had earlier personally provided to MannKind an additional $350 million in a low-interest credit line. We had expected that amount to have been sufficient to fund the Company past the launch of AFREZZA. However, with the delay in approval at year end there was only $45 million left in the credit line. And there were mounting obligations.

It therefore became critically urgent for the Company to raise additional capital. We are continuing to work on several minimally dilutive financings, but in today's world it seems to take much longer to complete such transactions. We therefore certainly needed to act decisively and quickly to raise capital. Not to do so would have been very foolish.

We therefore undertook the recent equity offering which netted the Company about $81 million. Unfortunately that financing was quite dilutive, yet it will provide resources for the Company while we continue our pursuit of non-dilutive and minimally dilutive financing to satisfy our needs through approval and beyond.

Let us not dwell on the past and instead focus on the future. Our situation and the outlook for MannKind soon could very well change substantially for the better. Some of you may recall a somewhat parallel story regarding my experience in MiniMed which had pioneered an insulin pump and continuous glucose sensors.

After some negative publicity about a serious problem with another company's pumps, the three major companies competing for that market all dropped out. Our stock was then priced at $1.75 per share. Later Medtronic acquired MiniMed for a split at $192 a share. The story for MannKind had been similar with a low stock value. I'm not suggesting an ultimate future gain by a factor of over 100 for MannKind, though I do remain very optimistic about the value of AFREZZA as well as several other product opportunities at MannKind.

While the financial consequences of this past year have been costly, the Company now has resources to bridge our current needs and enable us to prepare for the future. So let us now look forward to the unique opportunity that is AFREZZA.

The 2011 CRL focused on the device change with a few associated CMC and other related questions. As Hakan described, we are conducting two significant trials, one in type 1, and the second in type 2. We have worked closely with the FDA in preparing these study protocols to be sure that they are fully endorsed. We believe we have carefully managed the risks so that these trials provide a clear path to approval.

In our response to the CRL we had initially proposed two basal bolus studies, one in type 1, and the second in late type 2. What was so significant during this process is that the agency actually guided us instead to conduct a type 2 study in early stage patients failing on Metformin with or without another oral drug.

Although I have long expected AFREZZA to be extremely valuable in early stage type 2, with studies MKC175 such use should even be incorporated into the initial label. This would enable to us market AFREZZA throughout almost the entire spectrum of diabetes, greatly expanding the potential market. Of course, I predict that the capacity of our factory fully equipped will be able to serve only about 2 million people, so I expect our real challenge in a few years post launch will be in expanding capacity.

The benefits of AFREZZA in basal bolus therapy for type 1 and late stage type 2 are obvious but AFREZZA is truly so much more and I predict it will transform therapy in early stage type 2. In this early stage population, AFREZZA alone or with oral agents should provide simple, safe, and effective therapy without injections.

After all, insulin is nature's antiglycemic agent and is needed 24/7. But today's exogenous insulin products are not adequately physiologic, and the deficiencies raise significant challenges. Prandial insulins start much too slowly so the patients are instructed to inject their dose before even starting to eat. More importantly, the activity of these insulins lasts far too long, and the excessive persistence is a significant cause of hypoglycemia and weight gain in prandial therapy.

In early type 2 a variety of alternative antiglycemic drugs are used today, and these products are viable largely because of the deficiencies of current insulin products. But it is insulin that the body needs for glucose metabolism. Even with the limitations of current insulin products there is increasing pressure to move patients much sooner to exogenous insulin.

The alternative antiglycemic products are intended simply to supplement endogenous pancreatic insulin more effectively. Some of them are directed to increasing pancreatic output, likely contributing to earlier beta cell burnout. Other products attempt to lower resistance to insulin to enable hepatic glucose release or to slow digestion.

But all of these drugs have limited efficacy and side effects that can be significant in some patients. And the long-term safety for many of them may still be in doubt. Moreover, none of these antiglycemics are believed to slow progression of the disease so that after 8 to 12 years patients using those drugs typically move on to insulins.

Another issue is that many of the newer, more advanced antiglycemic agents are very expensive. If only there were a physiologic ultra fast acting insulin that would reduce postprandial hyperglycemia to within normal guidelines without the risks of hypoglycemia or weight gain. And without the complexity of titration or the need for multiple daily measurements of glucose.

Such a prandial insulin would far better deal with postprandial excursions throughout the entire spectrum of diabetes. Moreover, key opinion leaders assert that by reducing pancreatic and hepatic stress such an insulin would slow and perhaps even stop progression of type 2 diabetes and prediabetes. Surely that would seem to offer a far better solution than those alternative drugs.

Moreover, a therapy that does not require the inconvenience and discomfort of multiple daily injections would certainly be more patient friendly. AFREZZA has been shown in over 50 clinical trials to mimic endogenous insulin kinetics, and this should enable this insulin to more effectively and more safely address the objectives of providing improved glycemic control.

A product such as AFREZZA would be especially appealing to children, and should ease the issues about treatment in the classroom. Because of the FDA's aversion about risk in this young population the initial label for AFREZZA will be restricted to patients 18 years and older. The agency asked us to submit a post-approval phase 4 protocol for a trial in children. We responded with a proposed study in children ages 12 to 18. Interestingly FDA directed to us include children down to age 4.

Indeed, there are many reasons supporting the unique value of AFREZZA for treating almost the entire spectrum of diabetes. I actually sensed this potential from the moment I first saw the kinetics and dynamics of AFREZZA. It became immediately clear to me that such a product would address the kinetic deficiencies of current prandial insulins and would represent a major advance in diabetes therapy.

I believe that in prediabetes and in early stage type 2, ultra fast acting insulins such as AFREZZA will evolve as a monotherapy or as a second-line therapy along with Metformin. And without the vagaries and risks of other alternative antiglycemic agents.

As noted, these product may even arrest the progression of type 2 diabetes, reducing the awful complications of this disease and the enormous associated costs. For type 1 and late stage type 2, such an insulin along with a small patch pump would offer a superior overall glycemic control with greater convenience and low risk.

I remain even more optimistic today about the potential of AFREZZA. As Hakan noted we expect to complete the current trials around the end of the year and to resubmit the NDA in the first half of next year. That will surely be a time for celebration. With that, I want to thank you all for joining us today, and we'll now open the call to your questions. Operator?

(Operator Instructions)

Ian Somaiya, Piper Jaffray.

Thank you very much. Thank you for the update on the phase 3 clinical trials. I was hoping to get a similar update on the ongoing negotiations in terms of licensing of AFREZZA. I don't know if you can tell us if the tone of the discussions have changed, given your recent financing, or just as additional market research is conducted what the thoughts are on the overall opportunity for the drug as portrayed by potential partners.

Actually, following the meetings with the FDA and expansion of the clinical trials into earlier type 2 patients, those patients that are on orals, we have seen actually a significantly increased interest with new potential parties coming, basically coming to the party and wanting to perform due diligence. So we are continuing discussions with potential partners that have been with us for some time and that we have guided through the CRL process and that have the comfort level with what we're doing right now in regards to the clinical trials, as well as accommodating newcomers that have been attracted by the -- I would say the significantly greater potential that AFREZZA offers now also in earlier type 2 patients.

If I could just ask a follow-up, can you speak to the -- their expertise within the endocrinology or the diabetes field, these new parties that are coming to the forefront? And then beyond that, has your -- have your thoughts changed in any way regarding licensing the drug in terms of whether it be a global deal, or are you looking more to partner individual territories?

Well, yes, on your first question, I would say that the company represents both companies that are certainly involved in diabetes and other companies are more involved in metabolic type of diseases, but at least have a familiarity with the market. In regards to the process going forward, I would have to say, actually this is following a discussion with our Board, that since we see a significantly bigger potential for AFREZZA here in the marketplace, we are certainly entertaining the discussions, but we are not necessarily pushing to close those discussions until we do believe that we have a deal that represents fair value for the Company. Of course, if someone wants to pre-empt the process and come to us, we certainly would listen carefully. But again, we want to make sure that we have due process before we enter into any type of partnership arrangement. And, yes, we do still look at a global partnership. There are certain parts of the world that we might look at a different type of arrangement, but as a basic principle we are looking for a global partnership.

Okay. Thank you very much.

Tom Russo, Baird.

Good afternoon. Thanks for taking my question. I guess it's two parts of the same question. Maybe first, Hakan, can you give an update on the percent already enrolled for the two replacement phase 3 trials, or is it more that the sites are opening, and they will go from very low enrollment to completely enrolled by the second quarter?

Well, as I mentioned, I mean, we have, I think, 42 sites already enrolled and enrolling patients in the type 1, and if I remember correctly, 35 in the type 2. So certainly those are expanding by the day. So right now, basically what I can confidently say, that we will -- we do expect, certainly, to complete the enrollment within the second quarter. That will allow us to complete the trials by around the end of the year, allowing for a submission in the first half of 2013. So there are no indications at this point that we need to change those anticipated schedules.

And maybe for Matt, I was just trying to put some numbers together; the $3.2 million in cash at the end of the year and the $6.3 million that was drawn down before the financing. It looks like only about $9.5 million of cash burned in the first maybe six weeks prior to the raise. I guess I was just wondering, is that right? And then I know you also guided to sufficient cash into the fourth quarter, but at the rate of around $7 million a month would imply that you have more like a year and a half. So I was just trying to maybe understand what the pace of cash burn will look like over the course of 2012.

Tom, that's an excellent question, and I'm glad to see you're paying such close attention. Yes, I'm trying to be somewhat conservative in the guidance I've been giving for cash usage. You're right, I have been saying $10 million to $12 million a month is what you should expect during 2012. It's going to be a very lumpy process, but you're right, if you look at the fourth quarter, it was less than $7 million a month during the fourth quarter and you're right, it was less than $7 million a month in the first month this year. So, yes, the current burn rate is quite a bit less than that, but I'm projecting it to ramp up pretty substantially as we get the trials fully enrolled, and they're enrolling very rapidly right now. So trying to err on the conservative side here, but it is going to reach a crescendo sometime after full enrollment is reached in the second quarter, then it will start tapering off from there as people roll off from the other side and come back down to a more typical burn rate. So that's what you should expect. But beyond that I'm trying to keep it -- I would rather err on the positive side here.

Okay. Thanks, Matt.

Steve Byrne, Bank of America.

Hi. I have a couple of questions about the 175 study. In your design of that study, what level of power did you design it to demonstrate superiority?

It's at the 90% level.

90%, okay. And then the key assumptions that would go into that estimate would be -- well, one of them would be what level of incremental A1C reduction are you assuming you can achieve with AFREZZA, after the patients are at a stable level on the oral therapy?

0.5%.

That's we need to.

Yes, 0.5% is the goal, and we certainly --

Expect to do better.

Yes.

Okay. Then just a record keeping question for you, Matt. Post the equity raised on a pro forma basis, what is the effective share count, the diluted share count right now?

Boy.

Close to 200?

A little less.

A bit less than that. 165 million, roughly, right now.

Now, does that include --

That does not include shares to Al yet, though.

Okay.

That doesn't include the shares to Al, it's just from the --.

They haven't transferred yet because of the SEC requirements.

Yes, so you will notice that I carefully said that The Mann Group committed to purchase the shares. There were a couple of housekeeping things we had to do before those could actually be transferred, so they will be doing -- actually, I'm not even sure they're done today, but they will be shortly. So that number is strictly with the publicly offered shares.

Okay. Thank you.

Steven Wilson.

Hi, guys. Dr. Mann, I've been an aficionado of yours for a lot of years, and I do remember when you first were very successful. This is strictly on the offering side. And I was very, very aware of the dilution, and I do own the stock higher, and I've been dollar cost averaging down, but wonder why you didn't do a rights offering so that, in fact, existing shareholders were unable to participate in this offering. And what was the thought behind that at this time because the dilution is so great, and I believe any time you're offering more than 10% of the outstanding stock, I mean, I think you're almost required to do a rights offering. I could be wrong. And I tried to get a-hold of you directly at your office, but seem to have not been successful for at least the past year.

I'm not sure why you couldn't reach me, because certainly I am reachable, so I don't know, we need to somehow touch base and discover that. But I think I would rather turn your question over to Matt, because I'm not sure what --.

Yes, without going into all the details, we did consider that, I'll be honest. We found that that process is an extraordinarily complex one and very time-consuming and uncertain. And given the circumstances we were in, we thought that the course we pursued was the best one for the Company and by definition its stockholders as well.

Okay. Which leads also to one last question. Is the fact that we have so many shares shorter, and it comes up on a percentage basis for a Company the size that yours is, being short 37% of the outstanding float, what sort of ideas did you guys come up with to stop the shorts from acquiring your shares to cover? Because I know that Warren Buffet always said the guys that go ahead and short his stocks are also buyers of his stock. But, if, in fact, you're creating new shares, these guys are going to go in here and just be able to get the shares back again, cover, and they've done nothing to help the Company except hurt it, and hurt existing shareholders.

You're certainly right, the shorters are not helping the Company.

We'll see. I think it will be very informative what we see the short count in the next tally, which will be the first one that will follow the offering, and see where we came out. We were very careful about where we placed those shares, but you can never be 100% certain.

We thought we were careful, but obviously a lot of the shares were sold.

Agreed. But again, Dr. Mann, I'd love to chat with you sometime specifically relating to this, and I think you may find it to be a little illuminating.

Okay. I would appreciate hearing from you, and I can give you my office number.

Call the main number, and to the extent Al is in the office you can always get him.

Is that you, Matt?

Yes. Matt, okay. Thanks again. I'll be happy to do that.

(Operator Instructions)

Keith Markey, Griffin Securities.

Hi. Thank you for taking my question. A little while ago, when you were talking about commercializing AFREZZA, there was talk about having three different still unfinished lines. I was wondering if the thought of being able to get approval in the United States and Europe at the same time has changed your feeling about what production capacity will you need for the near future and how you have planned to meet that capacity.

From a capacity point of view, we expect to have capacity for at least -- to serve 400,000 patients upon initiation and then certainly build out in a rapid pace from that, going up to -- the 2 million capacity that we would see in Denver. And at the same time, as Al has indicated earlier, there are a number of actually regions and nations of the world that expressed interest in being part of, say, a fill and finish operation as we expand on a global basis. So really nothing has changed in regards to our plans from that point of view.

Okay, great. And one other question. I was wondering if you could, Matt, give us the breakdown of the quarterly burn rate and how it changed. I'm sorry, I couldn't get the numbers down. Thank you.

You want me to repeat the numbers for the, as each quarter the burn rate went quarter-to-quarter?

Yes, just the 2011 numbers. Thank you.

Okay, so in first quarter of '11 we burned through $32.7 million of cash. The second quarter was $40.2 million. The third quarter was $37 million. And the fourth quarter was $20.1 million, obviously a significant reduction from prior quarters. But it's interesting, the fourth quarter in many ways was the first quarter during 2011 that wasn't beset by something unusual in the way of a transaction. Remember, Keith, that in the first quarter of the year we did a pretty significant restructuring, and took out about 40% of our headcount in an effort to reduce costs, but, of course, making reductions like that is expensive initially, and so it takes awhile for those costs, or those benefits to filter through.

In the second and third quarters, we had the two payments to terminate our insulin supply agreement which were split between those two quarters. So those two quarters had kind of some unusual final costs as well. And the fourth quarter was the first one that didn't see anything unusual happening, which is why, as was already disclosed earlier, the first quarter of 2011 was also relatively low. But again, I want to caution everybody that these expenses will trend upwards again in 2012 as we ramp up these trials.

Very good. Thank you very much.

At this time there are no questions in the queue. I would like to hand it back to Alfred Mann.

Thank you. Thank you all for joining us today. And we look forward to our call for the next quarterly conference in May, and we hope at that time to be able to report significant progress on the status of our clinical trials and some other developments. Thank you all.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.