MannKind Corp (MNKD) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MannKind Corporation second quarter 2012 conference call. My name is John and I will be your operator for today's call. (Operator Instructions)

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 it over to Matthew Pfeffer, Chief Financial Officer of MannKind Corporation. Please go ahead.

Good morning, and thank you for participating in today's call. I will summarize our financial results for the second quarter of 2012 as reported earlier today. Hakan will then discuss our operations and Al will conclude with an overview before we open up the call to your questions.

Before we proceed further, please note that comments made during this call will include forward-looking statements within the meanings of federal securities laws. It is possible the actual results could differ from these stated expectations. For factors which could cause 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 concerns time sensitive information, accurate only as of the date of this live broadcast, August 7th, 2012. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

For the second quarter of 2012, total operating expenses were $44.1 million compared to $33.9 million in the first quarter of 2012 and $39.2 million in the second quarter of 2011.

R&D expenses were $26.6 million for the second quarter of 2012 compared to $24.2 million for the first quarter of 2012 and $30.3 million for the second quarter of 2011.

The decrease in R&D expenses for the second quarter of 2012 compared to the same quarter in 2011 was primarily due to the settlement of the terminated insulin supply agreement in the second quarter of 2011 partially offset by increased clinical trial related activities in 2012 which also resulted in increased R&D expenses this quarter compared to last quarter.

General and administrative expenses were $17.4 million for the second quarter of 2012 compared to $9.8 million for the first quarter of 2012 and $8.9 million for the second quarter of the previous year.

General and administrative expenses increased this quarter primarily due to a $7.7 millionlitigation settlement accrual related to securities and derivative actions which I will describe shortly. The net loss applicable to common stock holders for the second quarter of 2012 was $36.6 million or $0.23 cents per share based on a weighted average of 159.9 million shares outstanding, compared to a net loss applicable to common stock holders of $44.5 million or $0.37 cents per share on 121.7 million in weighted average shares outstanding for the second quarter 2011.

Our cash, cash equivalents and market (inaudible) securities into the second quarter of 2012 totaled $32 million. Financial resources including the remaining credit facility from Al, amounted to $58.9 million as of June 30th, 2012.

Our cash burn decreased from $33.3 million spent in Q1 2012 to $24.7 million in the second quarter of 2012. We expect though, that our spending will accelerate through the end of 2012 as we complete the trials and approach commercialization. With our cash on hand and the amount available under the credit facility from Al we believe we will be able to fund our operations comfortably into the fourth quarter of 2012.

We continue to pursue additional funding opportunities to extend our cash runway, but I cannot comment further until we have something definitive to announce.

It is also worth noting that the Company recently settled the securities class action and derivative litigation pending against it in federal and state court. Specifically on July 26th, 2012 we announced that the Company and other named defendants had entered into a stipulation of settlement to resolve the federal securities class action in the central district of California. Pursuant to that stipulation and in exchange for a release of all claims and dismissal of the action with prejudice, the Company 's insurers agreed to pay $16 million and MannKind agreed to issue 2.8 million shares to the class members.

On August 6th, 2012 we announced that the Company had entered into a stipulation of settlement to also resolve the derivative lawsuits pending in federal court in the central district of California and in state court, Los Angeles. Pursuant to this stipulation, in exchange for a release of all claims and a dismissal of the derivative actions with prejudice, the Company agreed to adopt certain corporate governance measures. Its insurers agreed to pay $800,000 to plaintiff's attorney and MannKind agreed to issue 225,000 shares to plaintiff attorneys.

Both settlements are subject to court approval and notice to MannKind stockholders. By entering into these stipulations of settlement, defendants in the Company did not and do not in anyway admit fault or liability and continue to deny any and all allegations of wrong doing rising out of the litigation. A copy of the stipulation of settlement in each matter is attached to the Company's previously files forms 8-K announcing the settlement.

Another item to note this quarter is $10.3 million included in other income related to the change in fair value of a forward purchase contract which met the definition of a derivative instrument. As we disclosed last quarter we did not have sufficient available shares to complete the Mann Group common stock purchase agreement pending approval by our stockholders. Once our stockholders approved the increase, the authorized number of shares on May 17th, we were required to account for the change in the fair value of derivative instrument and we are no longer required to reflect changes to the fair value of this derivative instrument in our operating statement.

With that I would like to now turn the call over to Hakan. Hakan?

Thank you, Matt, good morning. We continue to progress. The conduct of the clinical trials required for resubmission. We have now screened more than 87% of the patients required for study 171, and we have screened 83% for study 175.

As we explained at the last earnings call, we have seen a higher than expected screen failure rate in these trials so we have had to screen significantly more patients in both trials. Nonetheless, we expect screening in both studies to be completed next month. In addition to pursue the two affinity trials, we recently locked the database for study 176 , a study that examined the dose [originality] of AFREZZA up to a maximum dose of 80 units. We also completed dosing in study 177 in which we compared the pharmacokinetics of AFREZZA and the rapid-acting insulin analog.

Furthermore we are in the final planning phase of our human factors validation study for the Dreamboat inhaler. This study will demonstrate the ability of patients to utilize AFREZZA appropriately. And we expect this study to complete well in advance of the resubmission. We recognize the time line for the resubmission has been under pressure and are focusing resources on completion of all preparatory work such as statistical programming, expanding the prepared shelf for our submission documents as much as possible and establishing a dedicated team for each key document. During the development of AFREZZA and our second generation inhaler, Dreamboat, we have gained considerable experience with powder formation and delivery systems.

Representations at scientific meetings and at other industry events, we are now on the radar of a number of companies have begun to explore the feasibility of delivering a number of APIs using our technology. While these activities are in early stages we are pleased with the interest we have seen in the pharmaceutical biotech industry and see it as a recognition of the value of our technology.

In concluding my section, we are proud to announce the issuance of a new patent with claims covering optimal Technosphere microparticles as well as methods of making such compositions and methods of treating endocrine -related diseases including diabetes using these microparticles. This patent extends our matter-based patent protection for AFREZZA until 2031, a significant added value to the AFREZZA IP estate. And with that let me hand it over to Al. Al, please go ahead.

Thank you, Hakan, and good morning, ladies and gentlemen. As you heard from Hakan we are making excellent progress enrolling patients in the clinical MKC-171 trial and also in the 175 trial. As we disclosed a couple of months ago, for these trials we needed to screen far more patients than we had earlier planned. Our original estimate for 171 had been to screen 942 patients to end up with 471 randomized patients and 399 finishing. But even though the trials require only non-inferiority for approval, the FDA wants us to include patients with high starting HbA1cs so that the average will be close to 8.5%. That should enable us to show substantial lowering of A1cs even for those poorly controlled patients.

To achieve such an average it is necessary to have a fair number of patients at the upper end of the range, that is between 9% and 10%. The problem was that at Premiere Clinics where we are conducting the trials, there are very few patients that are so poorly controlled. Thus for the 171 trial instead of screening about 942 patients as had been planned, we are screening almost 1300 type 1 diabetics. As we had early reported, this increase led to a delay , and we are pleased to say that we are now on track as we had last reported. We expect this process to be completed next month. The last patient first visit for the 175 trial is also on track with the revised schedule. Thus both trials are expected to be completed in the second quarter of next year with resubmission of the NDA in Q3.

As Matt noted, the remainder of my $350 million credit line to the Company will not carry us through the end of this year. We are therefore considering several financing arrangements to provide the needed additional funding going forward. Partnership and financing discussions are moving along with some very interesting developments, but while you no doubt want clarification, nothing is firm yet so there is nothing that can be discussed at this time. With resubmission of the AFREZZA NDA in sight we are moving forward with plans for commercializing this product.

Surely you are aware that I believe AFREZZA will become a major weapon in the battle against a diabetes pandemic. AFREZZA is so very significant because it addresses a glycemic problem in the most natural way providing the very same needed regular human insulin with the PKPD profile that mimics natural physiology. Moreover by mimicking natural physiological gluconeogenesis, the relative insulin effectiveness is not much less than from injected rapid acting analog. That is new information that is very important. Our delivery is so very simple , so very convenient and so very cost effective.

I find it strange there are still some people describing AFREZZA as just another inhaled insulin. All the other programs for inhalation of insulin were simply directed to eliminating prandial injections. Their clinical benefits were not even as good as those of current prandial insulin products. But AFREZZA is not just a means of eliminating prandial injections. It offers so much more . Those people describing AFREZZA as just another inhaled insulin are missing the point.

AFREZZA will be the first ultra fast acting prandial insulin. It is a kinetic dynamic profile of AFREZZA that is so unique and so important, It is a powder, and thus we have elected to deliver it by inhalation. And we do it with our Dreamboat inhaler which is so very small , so very convenient, so very discreet and so very easy for the patient. But the delivery mode is truly not the most significant feature. All patients do love the inhalation delivery that eliminates prandial injection. What would be most significant about AFREZZA as a commercial product is that is not just a prandial insulin for basal bolus therapy in type 1 and late type 2 patients.

I am convinced that it will become an effective tool throughout the entire diabetes spectrum. The separate diabetes segments are not precisely quantified, but in the U.S. type 1 patients comprise only about 5% to 6% of the total number of diabetics. Gestational patients, another couple percent. And the type 2 market about 92% or so of the total. In the dominant type 2 market only about 30% today use any insulin at all. And those usually start with the basal insulin.

Soon after most of those late type 2's progress and need to use prandial insulin as well. Thus there is indeed a huge number of diabetes patients using prandial insulins today. However, the major opportunity would be even much greater if we were treating the 70% of type 2 that today do not use any insulin at all. Most of that large pre-insulin type 2 population today uses oral pills or injected GLP-1 analogs.

All of those alternative type 2 drugs are directed to accelerating or increasing the remaining pancreatic insulin released, reducing insulin resistance, modifying glycemic metabolism or other means of enhancing the patient's remaining pancreatic insulin function. But almost all of the alternative anti-glycemic drugs have side effects, generally have limited effectiveness and are even safety concerns for some. Frankly the commercial viability of those drugs is largely because today there is no truly safe and convenient prandial insulin. Moreover, with these alternative anti-glycemics, most patients are still unable to achieve adequate control.

Indeed the American Diabetes Association recently changed its recommendation for type 2 diabetes, proposing insulin be started in early stage disease as second line therapy just after MetforminThe FDA appears to be in agreement with the ADA in guiding MannKind, regarding the MKC-175 trials. That study is evaluating AFREZZA in pre-insulin using type 2 disease. This trial is designed to demonstrate superiority with the addition of AFREZZA. I expect that in these patients we will see significant reductions in HbA1c and I am thus confident of success in this trial.

Yet as with MKC-171, the agency guidance has directed us to include patients who are starting A1c's up to 10%. The objective is again for the average to be close to 8.5%. That ought to enable us to demonstrate substantial drops in HbA1c with AFREZZA and that would be very valuable. However, for a patient to have an A1c of 10%, the fasting blood glucose level would likely be substantially over 200mg per deciliter. Those patients would not be what I would call early stage type 2s. They should have long ago started basal bolus insulin therapy.

For patients in this study with fasting levels under about 140mg or 150mg per deciliter, which would be more appropriately described as relatively early stage type 2s I am confident of very impressive benefits with AFREZZA. I expect for these earlier stage type 2 patients this trial will show that most compliant patients will reach HbA1cs below the ADA target of 7%, many below the endocrinologist target of 6.5%. and quite a few even under 6% and with very little risk of severe hypos.

To show this we will separately review the results of this trial for those earlier stage patients. Remember that in MKC-119 we showed that type 2 patients could achieve control within the ADA guidelines and no matter what level of carbohydrate is ingested up to over 100 grams and even for no food at all. A simple inhalation for each meal in early type 2s should enable most patients to reach those impressive A1c goals. To be sure we must await the results of the current trials to make any claims. But I am confident the results will be significant.

Of course registration trials are complex and there are always risks. But in the real world of diabetes therapy have I no doubt that AFREZZA will prove to be far more effective than just a better prandial insulin in basal bolus therapy.

That said, I predict it will become a major therapy not only for today's insulin using diabetics, but also for the enormous population of earlier stage diabetics that do not use insulin at all. Such a change in direction is consistent with what the ADA and key opinion leaders are recommending. They are saying that insulin should be the second line therapy after MetforminThat is also consistent with what the FDA's guidances show in MKC-175.

Key opinion leaders are even suggesting that by reducing pancreatic stress AFREZZA may slow and even stop progression of this disease. Wouldn't that be great? Indeed I believe so, and that is why I have already personally provided about $900 million of the funding for MannKind and AFREZZA. Thank you. Now we will take your questions.

Thank you. (Operator Instructions)Our first question is from from, please go ahead.

Good morning, guys. Thank you for taking the questions. Just to clarify on a thing that Hakan said, in Q2 are we expecting to see the data, or did you say that was the time when you expect to complete enrollment?

We expect to complete enrollment next month.

So in 2Q you expect to have the top line data?

Oh in 2013?

Yes.

Yes.

And then Hakan, you also spoke about -- you walked us through the numbers . You had the screen randomized and what you think will finish the trial. Can you update us -- actually do you think you have a pretty decent handle on the ratio of patients screen versus the ones who will be treated, and can you tell us -- can you disclose how many people have been treated so far in each trial?

Well, 15 patients have already completed the trial.

You said 15% or 15 patients.

No, 15 patients have completed the trial, but we are on course, as Hakan said, we have 86% of the 171 trial already completed and ready . They are not all fully enrolled yet, but they will be shortly, and the balance will be done in the next few weeks.

And Al the 15 number you said is for 171, correct?

Yes,

That's correct.

175 started later and is a faster trial. It won't take as long.

And then the -- just to clarify again the average starting HbA1c it was 8.5 for 175, was it the same for -- sorry for 171. Was it the same for 175?

Yes, That's -- it is supposed to be close to 175 which as I pointed out in my remarks , hardly defines early stage type 2, but we will separately evaluate those in the lower part of the A1c range so that we can show what I believe will be an enormous opportunity to be able to control people in the early stage without all of the issues with alternative therapies and frankly in a way which will produce excellent control with virtually no risk of hypos, but of course we have to wait until we do that before we can make any claims.

Final question and then we will jump back in the queue. You are currently thinking about European submission. Are you going to wait for potentially a partner to do this, or are you in discussions with EMA right now?

We are not in discussions with the EMA as we speak. However, as we are preparing the documents for the U.S. submission, we certainly are keeping EMA submission in mind. If we sign on a partner early enough , certainly we would utilize their resources for application for the European submission as well.

Great, thank you for taking the questions.

And our next question is from Cory Kasimov, please go ahead.

Hi, this is actually Matt Lowe in for Cory today. Just a quick question as most of my questions were answered, but in terms of when you think you might be able to refile the NDA was that 3Q 2013? Did I catch that correctly?

Yes, that's correct.

That's great. Thank you.

Our next question is from Keith Markey. Please go ahead.

Hi, thank you for taking my question. I was wondering if you could give us an update on what your cash burn rate will be for this year since it is taking a little longer than you had expected to enroll? And also can you give us an estimate for next year?

Sure, Keith. I will try to do that. You probably remember in my last call I think I said we would likely be in the 10 to 12-month range. That's the guidance I have been giving pretty much for the whole of this year. Obviously we came in a fair amount below that this quarter. Partly it's due to delays, and partly because the (inaudible) invoicing are a little hard to predict, but I think that is still a reasonable guidance. It's just shifting out a little further.

The burn is likely to peak right around this next third quarter as the likely event as the trial is fully enrolled, but not as many people enrolled off the back end, and then it will trickle back down. I would think the time the trial is done early next year or coming to a close early next year you will see the burn rates back down in the -- more like the range we are in for this quarter or if you go back to the fourth quarter before the trials got seriously underway we were doing about seven a month. This month we did about eight a month. It will be somewhere in that neighborhood once the trials wind down. The confounding things will be the speed at which we gear up to commercialization that may offset those decreases, but I think that is still a comfortable range.

And kind of a housekeeping question, do you know -- can you tell us what the accounts payable were at the end of the quarter?

Well, shoot, I don't have a break down in front of me. They were quite high because we had -- remember this was sort of an accounting anomaly . In the litigation settlement we showed both the accrued payment and a receivable from the insurers because that's how you have to record it even though we don't expect to pay out any cash related to that litigation settlement. That is covered by DNO insurance which is why we have that kind of insurance sitting in our payables at the end of the quarter. I think that is a little misleading though because there is an offsetting receivable.

Great. And if I could ask one other question, I was just wondering , has the -- since you have some patients that have begun to be treated in the type 1 trial, has the data monitoring committee shown any concerns about hypoglycemia?

Not that I know of. Bob?

We have Bob Baughman here that's responsible for our clinical trials. SoBob, have we heard any concern about hypoglycemia in the type 1 trial?

No, Hakan, we haven't. There have been no signals at all.

Great, thank you.

Our next question is from Tazeen Ahmad. Please go ahead.

Hi, guys. Thanks for taking my question. Just a couple of top level view questions. How long of a review period do you expect AFREZZA to have when you respond to the CRL in 3Q of next year?

Second question, in terms of the type of partner you think would be ideal for AFREZZA, are you still thinking that you would like to have a partner who already has a foot print in the diabetes market, or are you looking more toward any type of company that has a primary care sales force? Thanks.

Number one is we still expect a review period of six months with the FDA. And that is pretty much set in stone.

In regards to a partner, they do not necessarily have to be in diabetes. They probably should have some type of endocrine metabolic disease and knowledge and presence in terms of their sales forces and we believe that access to the general care physician is an important component. Other than that we are pretty open minded in looking at what type of partners we will consider.

Is it your primary focus to secure a partner for the U.S. territories before any other regions, or are you looking at all worldwide territories at the same time?

Well, what we have said is we are looking for a global partner. So that certainly has been part of say the search criteria. However, there are a number of strong regional partners that have come to our knowledge and approached us. So we haven't excluded that as an option , but obviously based on the regulatory approval, the U.S. will be the most significant market early on.

Thanks.

(Operator Instructions). And we do have a question from Tom Russo. Please go ahead.

Hi, good morning, and thanks for taking the question. I just had a multi-part question on the type 2 trial. Can you remind us, have you mentioned before the FDA's request for an average 8.5 starting A1c, and if not , why are you highlighting that now?

And then in the past you have been very bullish on this design versus placebo because it could help marketing for earlier stage patients, but now kind of highlighting cuts of the data rather than the -- I guess the full data from the trials. I was just hoping you could put this into context and just remind us again who suggested this trial, and maybe what you expect the indication and labeling to have for the type 2 population.

Well first let me say that it was -- this was guidance from the FDA itself. They suggested this would be a very valuable trial for us. As far as where we started with the A1c average I am not sure -- I think we disclosed that earlier. But we never really highlighted it. As we start to review the details it seems that the high A1c's are not really early stage diabetics, and what happened recently, the American Diabetes Association is now recommending insulin use as in the early stage type 2 .

So with that in mind as we look at the 175 protocol , it is clear that the people in the upper end of the range of that trial are really not early stage type 2s. They may be non-insulin using, but when you have a fasting glucose level of 200 to 250 you are no longer an early stage type 2. So the intention we have now is to look at the early stage type 2's separately out of that trial and because there I think we will show amazing benefits for those patients. So that's why we want to look at that group separately.

And just to clarify the design of this trial , this was FDA's preferred design as opposed to an alternative?

Absolutely. They suggested the trial.

That is correct.

Thank you.

They actually even said that they would approve AFREZZA without a type 2 trial , but they recommended this as being a very significant need and asked us to do this trial.

Thank you.

And that was our last question. I will turn it back over to you Mr. Mann if you have any closing remarks.

Well, it has an interesting quarter, a lot going on, although not a lot we can talk about except for the trials. We are making good progress, and we are looking forward to seeing you all again and speaking with you at the next quarterly conference call in probably some interim information that will be released in the interim. Thank you again for joining us today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.