MannKind Corp (MNKD) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation Third Quarter 2012 Conference Call. At this time all participants are in a listen-only mode. Later instructions will be given for the question and answer session. If anyone has difficulty hearing the conference please press star, zero for operator assistance. As a reminder, this call is being recorded today, November 1, 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 and thank you for participating in today's call. I will summarize our financial results for the third quarter of 2012 as reported earlier today. Hakan will then discuss our current operations and I will conclude with an overview before we open up the call to your questions.

Before we proceed further, please note the comments made during this call will include forward-looking statements within the meaning of Federal Securities Laws. It is possible that 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 and 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, November 1st, 2012. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

So for the third quarter of 2012, total operating expenses were $35.5 million compared with $44.1 million for the second quarter of 2012 and $32.8 million for the third quarter of 2011. Research and development expenses were $25.5 million for the third quarter of 2012 compared to $26.6 million for the second quarter of 2012 and $23.1 million for the third quarter of 2011.

The increase in research and development expenses for the third quarter of 2012 compared with the same quarter in 2011 was primarily due to increased clinical trial related activities in third quarter of 2012, partly offset by the settlement of the terminated insulin supply agreement in third quarter of 2011. There was a slight decrease in R&D expenses this quarter from last quarter due to timing of clinical trial related expenses.

General and administrative expenses were $10.1 million for the third quarter of 2012 compared to $17.4 million for the second quarter of 2012 and $9.6 million for the third quarter of the previous year. General and administrative expenses were higher last quarter, primarily due to a litigation settlement accrual related to the securities and derivative actions.

The net loss of applicable common stockholders for the third quarter 2012 was $42.8 million or $0.22 per share compared with the net loss applicable to common stockholders of $38.4 million or $0.31 per share for the third quarter of 2011.

Our cash and short-term investments at the end of the third quarter of 2012 totaled $2.1 million. Financial resources including the remaining credit facility from Al amounted to $21.9 million as of September 30th, 2012.

We recently closed an underwritten public offering of 46 million shares of our common stock together with warrants to purchase up to an aggregate of 34.5 million shares. The gross proceeds were $92 million, not including any future proceeds from the exercise of the warrants at a price of $2.60 per share. These are short-dated warrants expiring in October of next year and could potentially generate additional gross proceeds of $89.7 million.

Concurrent with the public offering, we entered into a purchase agreement with Al for the sale of our common stock along with warrants. Al committed to purchase 40 million restricted shares of our common stock and restricted warrants to purchase up to an aggregate of 30 million restricted shares. Similar to the public offering, these short-dated warrants will be exercisable at a price of $2.60 per share. The aggregate purchase price of $107.4 million will be paid by the cancellation of principal indebtedness under our existing revolving loan arrangement.

Additionally, Al is allowing us to re-borrow the amount of principal cancellation related to this purchase providing us with over $120 million that we may be able to borrow in the future if we need it.

Our cash burn increased from $24.7 million spent in the second quarter of 2012 to $29.9 million in the third quarter of 2012. We expect our spending to accelerate through the end of 2012 as we complete the trials and approach commercialization.

The current cash on hand, along with the amount that will be remaining available under the credit facility from Al but excluding the potential effects of convertible debt maturities, we believe we will fund our operations into 2014.

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

Thank you, Matt, and good evening. During this third quarter the organization has been heavily involved with finishing the recruiting of the Type 1 and the Type 2 studies. Our staff in the CROs was certainly challenged by the task of screening almost 3,000 patients across US, Europe and South America. But I'm happy to announce that it's now behind us and our focus has now shifted to execution.

As a reminder, we are running two Phase III studies. The first of these studies, study 171 is an open label studying patients with type 1 diabetes. And after a running period during which all patients are optimized on the base of the insulin regiment, at least 471 subjects are to be randomized to one of the three arms for mealtime insulin, a controlled arm in which patients utilize injected rapid acting insulin, one of two of AFREZZA arms, one with the MedTone inhaler and the other for the next generation inhaler.

After the meal time insulin is titrated there is a 12-week observation period on stable doses of the meal-time insulin to assess the HbA1c levels, which is the primary outcome parameters. Another objective of this study is to compare the safety profile of the two AFREZZA treatment groups.

The other study, study 175, is assessing AFREZZA by using the next generation inhaler in patients with Type 2 diabetes whose disease is inadequately controlled on metformin with or without a second or a third oral medication. Again, after running period during which the subjects remain on their oral medication, at least 328 patients would be randomized to additional treatment with AFREZZA or to the Technosphere inhalation powder, the placebo group.

The study will also have a titration period followed by a 12-week evaluation period to assess the HbA1c levels.

Patients' recruitment for both phase 3 trials was completed in early October. The additional sites and the existing geography areas, the initiation of high enrolling sites in Brazil and the continuation of the patient referral program for the US sites were critical to achieving this milestone.

We are now concentrating on execution of these trials and in maintaining the high level of monitoring necessary to ensure well defined data sets. The last patient's last visit for the 175 study will take place in May of 2013 and the last patient's last visit for the 171 study will follow shortly thereafter.

We are currently developing a detailed operational plan for a rapid database look and the production of final papers, figures and listings. We expect to share the key trial results with you prior to submission. Submission is planned for the third quarter and we expect that the resubmission will undergo a six-month review.

All other activities to support the resubmission are well underway and none of them represent a rate-limiting challenge.

Of course, the other key event in the third quarter was the equity raise that was completed early in the quarter. We have now financed our activities well into 2013 and have added and have the added benefit of likely receiving more funding in the third quarter of 2013.

With that, let me hand the call over to Al. Al?

Thank you, Hakan, and good afternoon, ladies and gentlemen. As Hakan noted, MannKind recently achieved two major milestones. We completed recruitment for both the MKC-171 and 171 trials. We thus now have a clear time line to the end of both studies. Those two key registration trials are intended to lead not only to FDA approval of AFREZZA but also to start a potentially significant and valuable label. Together these studies should enable us to validate AFREZZA as a safe and effective therapy that would be valuable throughout a broad range of the entire diabetes spectrum.

The major features of the protocols for the two trials were generated in close collaboration with the FDA. The Agency wanted us to enroll patients with baseline A1Cs targeting an average of 8% to 8.5% so that we would be able to show truly meaningful improvement in A1C with AFREZZA over the course of the studies.

Throughout our extensive clinical and preclinical program for AFREZZA we've seen no signals to raise any safety concerns about our formulation or our delivery. Both the insulin and the carrier quickly cross into arterial blood. There is no accumulation in the lungs. Some patients do react with a tiny cough when first inheriting a powder but we've seen no unusual adverse effects throughout the long series of more than 60 clinical trials. There are patients who have been using AFREZZA and enjoying this therapy for almost five years.

The main objectives of MKC-171 are to bridge our next generation Dreamboat delivery device to the data from the earlier trials conducted with the MedTone inhaler and to compare the glycemic effects with AFREZZA to those with a rapid acting analog. The primary endpoint for approval is simply not inferiority for the latter comparison though a secondary endpoint is defined as superiority. The protocol calls for titrating the basal insulin to lower fasting glucose to under 120 milligrams per deciliter, although in the event of a hypoglycemic event titration is to be terminated.

Patients on AFREZZA who are compliant in meeting the fasting glucose targets should reach near normal A1C, whereas the almost all patients on rapid-acting analogs for those fasting glucose likely could not be safely lowered that significantly. Our problem in earlier trials is that out of fear for hypos it has been difficult to get fasting glucose levels much reduced. The most significant cause of hypos within insulin therapies today is the late post-prandial and hyper [insulin] anemia seen with current prandial products. That excessive insulin causes a post-prandial plunge of glucose below baseline that offsets a higher prandial rise producing a minimal average change from baseline.

A1C, which effectively reflects the average glucose level over two of the three months is thus largely determined for these deficient insulin by that high fasting level. AFREZZA lowers prandial highs but does not exhibit delayed hyper insulin anemia that causes hypoglycemic risk. Yet even so, because of the fear of hypos is so great because it's so great, the basal insulins have not been increased in our earlier studies, even for AFREZZA patients.

For example, in our earlier MKC-117 trial fasting glucose was supposed to be adjusted to under 120 milligrams per deciliter. However, even though required in the protocols, average basal insulins in that study were not increased and, as a result, the fasting glucose remained too high masking the advantages of AFREZZA. The average a1z reductions in the 117 trial for AFREZZA cohort was actually slightly better than for the insulin aspart that is NovoLog but not enough to show superiority.

What is truly different in 171 is the FDA understands this and has authorized us to retain an independent monitor who sees the eDiary data and who is in charged to contact the clinician with any noncompliance. With this tool there's a much greater likelihood that fasting glucose for those on AFREZZA will be lowered below the target of 120 milligrams per deciliter. Although only non-inferiority in this trial is required for FDA approval, with such compliance AFREZZA patients should perform exceptionally well in this study, reaching significantly lower A1C. Such improvement would be unlikely for patients on rapid-acting analogs.

Let me provide an example to illustrate the significance of what this compliance and the 171 study should make possible. With basal insulin titrated for an AFREZZA patient to yield an average fasting level of say 110 milligrams per deciliter and with prandial glucose likely rising an average of say about 40 milligrams a deciliter over two hours for each meal, the results in A1C at three months would be about 5.8%, essentially normal for a non-diabetic. That would really be outstanding. For those using current prandial insulins lowering fasting glucose significantly would not be safe and the A1Cs would thus not be substantially reduced.

The FDA said it would consider approving AFREZZA for basal-bolus therapy with just that MKC-171 study. Yet interestingly, the Agency also guides us to do MKC-175, a clinical trial, the early stage type 2. With the second trial the FDA is giving us the opportunity to validate a significant potential of AFREZZA in this huge population. This would substantially enhance the initial label.

In study 175 AFREZZA will be added to early type 2 patients that are independently controlled on metformin or in some cases, metformin plus one or two other orals as Hakan described. To achieve superiority the aggregate A1C average in this 175 study would only be reduced with AFREZZA by 0.5% more than the comparator, which is a Technosphere placebo. That should certainly not pose a challenge. We do not see any substantive risk in this trial. The 175 study should lead to a label supporting promotion into the roughly 75% of type 2s not using prandial insulins today and will thus greatly increase the market opportunity for AFREZZA.

The guidance for this study seems to be a very positive signal from the FDA. To meet the FDA's objective of an elevated average baseline A1C of A3 Naprosyn in these trials, we ended up screening 100 and -- I'm sorry, 1,402 patients for the MKC-171 trial in type 1 and 1,381 for the MKC-175 trial in early type 2. We actually need only 399 at the end of 171 and 246 for 175.

With recruitment complete, the last patients' last visit for both trials should come in the second quarter of next year. Top line data should be available this summer with three submissions of the NDA scheduled for Q3. That is an aggressive timeline for such a substantial effort. The amount of data and supporting information including tables, graphs and listings is to be very extensive. In addition to those two key trials, a few other studies not yet reported will also be included in the resubmission. Our team has generated a detailed plan and is fully committed to meet the schedule.

With three submissions in sight, we are evaluating plans for commercializing this important product. MannKind's focus to date has been to launch AFREZZA first in the US. Filing for the US will follow. No difficulty expected -- is expected there. There are quite a few countries very interested in AFREZZA. The deferral for other markets has been delivered based on business considerations.

As I have so often clearly stated, I believe AFREZZA will become a major weapon in the battle against the global diabetes pandemic. AFREZZA is so very significant because it addresses the prandial glycemic problem in the most natural and most effective way. AFREZZA delivers a very same regular human insulin that is supplied from a healthy pancreas. Importantly, AFREZZA's PK/PD profiles in the blood quite closely mimics the natural insulin physiology of a non-diabetic in response to a meal. AFREZZA should enable a much improved glycemic control without the serious problems, risks and limitations of current antiglycemic problems -- products, and that means just not just today's insulins but also alternative drugs.

The American Diabetes Association and many key opinion leaders are urging ever earlier use of insulin. The FDA seems to be in concert with this. After all, it was the Agency that guided us to conduct MKC-175 to evaluate AFREZZA in early type 2. Key opinion leaders are becoming increasingly positive and enthusiastic about the potential of AFREZZA. Some are suggesting that by reducing pancreatic stress, AFREZZA should slow and perhaps even stop progression of type 2 disease. Wouldn't that be great?

Moreover, delivery of AFREZZA by inhalation with our tiny whistle size inhaler is so simple, so convenient and so very cost effective and patients love it. I am absolutely convinced that AFREZZA will become widely recognized by patients and clinicians alike as a preferred therapy throughout almost the entire diabetes spectrum. For quite a few years into the future I assert that in type 1 and late type 2 diabetes an optimum basal-bolus therapy ought to be AFREZZA plus the basal pad pump. For early type 2, since the first launch is prandial control and not fasting control, an ideal therapy for most patients should be AFREZZA alone or with metformin.

Why am I so confident of the significant opportunity for AFREZZA even in early type 2? If only there were truly physiologic exogenous influences, those ought to be clear choices to treat hypoglycemia for almost all diabetics. However, with the significant deficiencies of current insulins, basal as well as prandial products, the pharma industry has focused more on alternative antiglycemics for these people.

These alternative type 2 drugs are mostly directed to increasing any remaining pancreatic insulin release, reducing insulin resistance, modifying glycemic metabolism or other means of enhancing the patient's remaining pancreatic insulin function. Almost all of those alternative drugs have side effects and generally limited effectiveness, and for some there are even safety concerns.

Moreover, they do not stop the progression of the disease and in some cases even accelerate progression. When the limited effectiveness has failed, patients should almost always move on to insulin, typically in eight to 12 years. The commercial viability of those alternate drugs in early type 2 is largely because today there is no truly safe, adequately effective and convenient exogenous insulin product.

The American Diabetes Association has changed its recommendation for treatment of type 2 diabetes proposing that insulin be started much earlier in the disease. However, because of the more significant deficiencies of current prandial products, the first insulin use is almost always the basal formulation. In true early stage that is medically incorrect. The first loss of glycemic control is for mealtime. Of course, those patients who are not diagnosed until the disease is already advanced will need more than a prandial insulin. They should probably already be on the basal-bolus insulin therapy.

Although the clinical and commercial opportunities for MannKind seem so enormous and so clear, the approximately three-year delay in approval of AFREZZA consume most of the Company's available capital. We have been working on several non-dilutive debt transactions and also some minimally dilutive deals that were to fund us through commercial launch and even beyond. Those potential transactions are still moving forward but none of them has yet closed.

We cannot afford to put the Company in jeopardy so we proceeded with a recent secondary offering. This offering has just closed, along with issuance providing us $86 million now and almost certainly will supply almost another $90 million next October. While dilutive, I'd say that the offering was certainly necessary and was the right decision. I remain absolutely committed to MannKind and AFREZZA.

As Matt described in parallel with the offering, I am purchasing an equal number of units without issue. Because of NASDAQ rules, I'm even paying a premium of 34.7% more than the other purchasers. That amounts to my paying a premium of $27.75 million. My participation is especially important because it helps to preserve our valuable $2 billion -- that's $2 billion NOL. A portion of my credit line is also being restored and could be available as needed going forward.

The key takeaway from all this is that the tranches of this financing should provide the Company with about $175 million of new money to fund our operation, assuming the warrants are purchased in next October. Recognition of our need for financing has apparently been widely viewed during recent months as the major risk depressing the Company's stock. With this offering and with what is a rather clear path to FDA approval of AFREZZA to serve an enormous market, our valuation should hopefully now begin to recover. We shall see.

I've described before and I'll say again that we had a somewhat similar experience when I was at MiniMed. In the early days there we too encountered financial challenges. I recall that at a slow point the stock of MiniMed was priced at $1.75 per share, not far from where we are here. In 2001 Medtronics acquired MiniMed, now Medtronic diabetes for a split adjusted, $192 per share.

I'm not predicting the MannKind stocks will reach such a level but I am confident that AFREZZA will become a hugely successful product and that this product will alone should create significant Company value. Moreover, with our platform technology there are more products to follow. With the first tranche of money from the offering in the bank, we are now so much more comfortable. Yet I certainly realize that this has been a difficult time for many of our loyal long-time stockholders and I thank all of you for your patience and your understanding.

Thank you all and now let's open the call to questions.

We will now begin the question and answer session. (Operator Instructions). The first question is from Simos Simeonidis from Cowen & Company.

First one for Matt, just to make sure I have the cash arithmetic correctly, you finished the quarter with $2 million. You added $86 million from the offering and you had, I believe, $21 million from Al. And then finally, if I heard you correctly, you said that you're going to have another $120 million that Al is restoring back to his line of credit. Are all these assumptions correct?

Well, yes except that the $120 million that I talked about is the total amount available after adding that back, so that would add back.

Okay so it will be $100 million that's available under Al's line of credit.

Well, we're adding back a little over $100 million because of those -- where if you look into the text, you'll see he spent about $104 million buying the stock and warrants and we're doing that by a reduction of the loan. But we're making that amount of the facility available again for re-borrow. So you take that and add it to what was available previously and it comes to around $120 million.

Okay, okay great. And then you said for 171 -- for 175's last patient visit May 2013 and for 171 last patient in shortly thereafter. So we should assume that you're going to announce the data sometime in June or July next year?

Early August is probably a more accurate, Simos, but yes it will be around there as quickly as we have it all gathered.

Okay, okay and it might be too early to ask this but I mean, what's the partnership interest looking like? Are people talking to you now and they'll wait to see the data or can you say anything about that?

What I would say you have a mixture. We -- as we expanded the market opportunity with type 2 patients, we certainly had newcomers that are actually in different levels of due diligence right now. We, ourselves, are also very enthusiastic about the opportunity here with an expanded type 2 patient market, so we, I would say we expect that we would in earnest stop the negotiations say in the early part, early to mid-part of 2013.

All right and final question and I will jump back in the queue; what's the -- do you have the general breakdown for -- geographic breakdown the US versus outside US for the two trials?

I would say guide about 60/40.

60% US, 40% ex US?

That's correct.

Okay great. Thank you very much.

Ian Somaiya, Piper Jaffray.

It's Matthew on for Ian. Two questions; first and sort of following up on the partnership question, how has the commercial partnership strategy been impacted or changed, given the recent financing in terms of either timing or the type of deal that you might be seeking?

Actually the fact that we have been ability to finance and we now see -- I mean incremental finance, that would certainly take us clearly into 2013 and with the warrants also being -- and now the opportunity for incremental funding in 2013, I would say at this point in time, the money situation has not impacted our ability or our strategy in regards to partnership discussions.

Okay and then on the trials, I know the goal was to get an average HbA1c level of 8.5% -- or 8% to 8.5%, and I just wanted to confirm or know, did you achieve that goal? And if so, what do you -- how do you view the implications of that in terms of outcomes, trial outcomes either in terms of the non-inferiority and/or superiority end points? Thank you.

I'm going to refer that to our Senior Vice President of Clinical Research, Bob Baughman.

Hi, Matthew. Again, that was, as we've mentioned before, we had to screen more patients than we planned and the purpose was or the need there was to ensure that we were keeping only those subjects with A1Cs that were in the range of 7.5 to 10. So we have done that; all of our subjects being randomized into the trial were elevated above 7.5, which gives us the room to be able to measure the effect of the drug. So we're confident that we've been able to bring in the subjects that are necessary to be able to show its effect.

The second part of your question related to what do we expect out of it. I gave an example that if you get the AFREZZA patients titrated to the target of under 120, most of these patients are going to be at near-normal A1Cs. And so you're talking about, you know, 6% or under starting with 8% lower, you're going to see 2% drops for a lot of the AFREZZA patients. And that's probably not possible with many of the rapid-acting analog patients. So we should expect far more than just non-inferiority but we can't make any claims until we see the data.

Thank you, fair enough.

(Operator Instructions). Steve Byrne, Bank of America.

I wanted to better understand 171. In the titration phase, are there adjustments being made to both the AFREZZA dose and the basal insulin dose targeting blood glucose levels at different time periods during the day?

Yes this is Bob again. During the basal optimization we're focusing there under basal insulin. But then, once randomized, we're putting them into titration period, a 12-week period, where we're focusing on the prandial insulin but we continue to monitor fasting blood glucose. So if it's necessary to keep that at the appropriate level, we will elevate or decrease the basal insulin as well. So again, that first period of four weeks is focusing on the basal. The next 12 weeks is on prandial, but with adjustments as necessary, so that the final 12 weeks they are on stable insulin dosing.

And how do you view the potential impact of this type of titration versus the conventional prandial insulin on weight gain?

All of our data to date says that AFREZZA has minimal impact on weight gain. Because of the pharmacokinetics of the drug, we are not having to "feed the insulin later on after the meal." So in this case because by 2.5 to three hours, the insulin from AFREZZA is now gone, we do not have to continue to add calories to control their potential hypoglycemia. So we're very comfortable with where we think we'll end up with weight gain or the effect on weight in the patients on AFREZZA.

And while it's shown no real increase in weight, certainly not from AFREZZA, people gain weight from other things, but we believe that AFREZZA is really weight neutral.

And, Bob, can you review quickly the secondary endpoints for both studies?

Not quickly. What I can address for you is that what we're looking at, as you know, is the primary is in the 171 study is to evaluate A1C and that will be compared as a non-inferiority trial. The secondary objectives are looking at the proportion of subjects that have A1Cs that fall below 7, that fall below 6.5, those incidences of 6.5 or 7 with no significant or severe hypoglycemic events. And we'll be also looking at their 7-point glucose from different points throughout the study and the change in body weight is also a secondary objective.

Okay and on 175?

In the 175 study, again, we are looking at A1C as our primary endpoint in that trial. And the secondaries, again, are those subjects that reach 7, those subjects that reach 6. We also are looking at fasting plasma glucose, change in body weight. And importantly, in the type 2 studies, we're looking at the proportion of subjects that require rescue therapy.

Okay and now that the 175 has enrolled, can you roughly describe the proportions that are on metformin monotherapy versus those that are on one or two additional orals?

I'm sorry; I do not have that data in front of me. I couldn't comment on those that are on metformin alone or two or more other agents or those on metformin plus one or two other agents. I do not have that data available.

Okay thank you.

We have no further questions at this time. Mr. Mann, would you like to make any closing remarks?

Thank you all for joining us today. I know it's been difficult, given the change in timing because of the hurricane, but thank you all. We look forward to our next call in 2013 announcing the status of our clinical trials and other corporate developments. Thank you all.

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