MannKind Corp (MNKD) 2014 Q2 法說會逐字稿

Welcome to the MannKind Corporation second-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this call is being recorded today, August 11, 2014. Joining us today from MannKind are Chairman and CEO, Alfred Mann; President and COO, Hakan Edstrom; and Chief Financial Officer, Matthew Pfeffer. I would like to turn the call over to Mr. Matthew Pfeffer, Chief Financial Officer of MannKind Corporation. Please go ahead.

Yes, good afternoon and thank you for participating in this afternoon's call. Obviously, as most of you know we had a call later this morning, so we're going to depart from our normal format for a call like this and I will give prepared remarks about the financial sections and then answer a few questions we've heard and open the call to further questions, but we won't go into prepared scripts or comments from Hakan or from Al. With that, I will certainly be discussing our financial results of the second quarter of 2014, as reported this morning, after we reported the collaboration agreement with Sanofi. I will then open the call for 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 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 August 11, 2014. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

Turning now to the financials, the net loss applicable to common stockholders for the second quarter of 2014 was $73.4 million, or $0.19 per share, compared with a net loss applicable to common stockholders of $46.1 million, or $0.16, per share in the second quarter of 2013 and $52.1 million, or $0.14 per share, for the first quarter of 2014. Research and development expenses were $37.3 million for the second quarter of 2014, compared $26.2 million for the first quarter of 2014 and $27.1 million for the second quarter of 2013. R&D expenses increased by $10.2 million for the second quarter of 2014 compared to the same quarter in 2013 and by $11.1 million from the first quarter of 2014 due to increased non-cash stock compensation expenses.

In the second quarter of 2014, the settlement terms for certain performance-based awards were modified, requiring reclassification of these performance grants from equity awards to liability awards, resulting in incremental stock-based compensation expense. General and administrative expenses were $32.5 million for the second quarter of 2014 compared to $15.2 million for the first quarter of 2014 and $14.5 million for the second quarter of the previous year. G&A expenses increased by $18 million for the second quarter of 2014 compared to the same quarter in 2013 and $17.3 million from the first quarter of 2014, due to increased non-cash stock compensation expense as previously described.

Cash and cash equivalents were $41.2 million at June 30, 2014 compared to $35.8 million in the first quarter of 2014. In the second quarter of 2014, $16.3 million in proceeds from warrant and stock option exercises were received in addition to $20 million in Tranche B notes purchased by Deerfield.

Subsequently, after the end of the quarter on July 18, 2014, $40 million in Tranche Four notes were purchased by Deerfield upon FDA approval of Afrezza. Currently up to $70 million of additional sales of Tranche B notes to Deerfield remain available. There was also $30.1 million of available borrowings under the amended loan agreement with the Mann Group.

At this point I'd like to answer couple of questions that we've gotten frequently about the transaction this morning and in particular a question that we received a few times since our call was to explain the considerations that led to the deal terms with Sanofi, and in particular the 65/35 profit split. So there are several components of this answer.

First, it's important to consider the overall economics of the deal. The upfront and milestone payments to MannKind are intended recognize our significant investment in the product to date. When these payments are combined with the payment stream from the profit-sharing arrangement, the net present value split is fairly balanced between the two parties, although obviously that depends on the assumptions used to model the product P&L over a number of years.

In fact, when we modeled the deal with our internal sales projections, which of course we have not disclosed but we do, do that kind of modeling routinely in these kind of analyses, we did obviously compare it to a traditional royalty-based deal and found that to get essentially equivalent economics the royalty terms would be somewhere in the mid-20% range, which was pretty favorable royalty comparison.

Secondly, the profit-sharing arrangement is an important conceptual element of the deal structure, as both parties have incentives to maximize overall product profits and minimize costs. We expect this will become increasingly important as we collaborate with Sanofi in manufacturing area.

The split was designed to reflect the relative contribution of resource to the product going forward from a commercial and development perspective. There is also a retrospective aspect as well. It recognizes Sanofi for the substantial investment and involvement has made building a market-leading commercial infrastructure and also recognizes MannKind's investment in the product today.

Another topic that has frequently been raised since the call this morning was the rationale for contracting with Amphastar for a five-year supply agreement. As we said this morning, Amphastar's facility in France has supplied our insulin for more than 10 years and produces the insulin that is referenced in Afrezza's NDA. Our supply agreement with them will ensure a robust supply of insulin while we work with Sanofi to qualify their insulin as an additional source of insulin for Afrezza.

Qualification of a new source of the insulin involves a certain amount of CMC work, including stability studies and some clinical study to assess bioequivalence. Thus, it takes some time to qualify a new resource of insulin. Amphastar insulin is essential to ensure that we have a sufficient amount of raw API, or active pharmaceutical ingredient, for the first few years of launch until and beyond the point in time when Sanofi insulin is expected to be qualified.

At the same time, we have not yet qualified Pfizer insulin as a source of insulin for Afrezza. The necessary CMC and clinical studies have been performed and supplemental NDA is nearly completed. But with the transfer of the regulatory responsibilities to Sanofi, it will ultimately be their decision as to whether or not that insulin will be used as source of insulin for Afrezza.

The Pfizer insulin represents a potential upside from a supply perspective and in any event, between Amphastar and Sanofi, we should have plenty of insulin to support Sanofi's marketing efforts for Afrezza. With that, I'll know that there are a number of questions from a number gotten the phone, but I'd like to turn over to those who are waiting on line rather than take the time with things I guess are question and get to your actual questions. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Steve Byrne, BofA.

Hey, Matt. Can you provide any commentary on the post-approval studies? Do you have any projections on what the total cost might be and how long they might take? And are we correct that those will be included in the cost-sharing agreement?

Well the cost absolutely will be included in the cost-sharing agreement. It's difficult to project the precise costs until we finalize the protocols with the FDA.

Those efforts are underway even as we speak and should be completed relatively soon but certainly by early next year. I think those are the requirements for doing that and at that time we could probably better estimate costs. But at this point, it's a little too speculative, other than to say they certainly are included in the collaboration agreement so will essentially be funded in that partnership

And what you think your longer-term G&A and R&D cost run rate might be once this agreement is established and those, most of those cost flow through the agreement?

While some of them do and some of them don't. Most of the costs that flow through the agreement really are in the forms of cost of goods from us. But in addition there is some product development work that could flow through. So if you want to think about what our future P&L will look like, I tried to touch about this, this is complex in a lot of ways and some of it's a little bit being formed even as we speak.

If you look at our recent G&A, and here I want to caution you to get only cash G&A because as was pointed out on the text of the earlier part of the call, we had some extraordinary non-cash things flowing through, but those were extraordinary. They're not going to be continuing in the form of stock compensation expense. If you want to analyze what our G&A expenses are, you can look to the actual cash portion as being somewhat representative but some of those costs will, in fact, go away as well. So it's not certainly going to go up much from there.

If you look at R&D, the continuing R&D is primarily non-Afrezza R&D, of which at this point there isn't a tremendous amount. So while it won't happen instantly, I don't think you're going to see our R&D numbers on the P&L drop to nothing by tomorrow, over time as we essentially shift those costs either to Sanofi or shift the cost into a cog component, so essentially capitalize them into inventory, they will essentially disappear off of our P&L. So our cost structure declines quite dramatically as a result of this agreement.

Being more precise than that at this point is a little bit tough but if you can wait until next quarter, I can give you a much more precise answer

Okay. And then on the share count, if you were profitable, or I should say when you're profitable, what would be that diluted share count if you were to include the options that are in the money and the warrants that are in the money?

Oh boy, I should have that number but I don't have in front of me. Because you're right, once you reach profitability you will suddenly rope in all those otherwise diluted securities. Why don't I get back to you with the right number rather try to guess based on my rather tired memory at this point.

Okay. Thank you.

Adnan Butt, RBC Capital Markets

Good. Thanks for taking the question. Congrats, again, everybody.

You know, I just want to make sure that the Company [will use the] processes in place but that will ensure that Sanofi will make an effort to sell Afrezza. So based on your discussions, what do you think the optimal way to market Afrezza is? Is it anything different than kind of the Company's product to previously?

Well, I think we have really good answers to those questions. Unfortunatly, they are not things we can much talk about.

I can tell you that these were things that were we spent a dramatic amount of time going over with Sanofi and getting comfortable with their approach and the amount of resources they were going to devote and how to ensure that in fact happens and what commitments they were making. As you heard on the call this morning from their Global Head of Diabetes, they consider much of that, if not all of that, proprietary and are not anxious to disclose it or tip their hands to competitors and such about how they are going to go about that, so obviously we can't either.

I can tell you that we were very, very pleased and thrilled and quite excited about some of the approaches they are taking. We left there believers and convinced there's nobody literally in the world who could do a better job than we think they can marketing this and making this the huge success we think it has the potential to be. But as for how they are going to go about that, I think you're just going to have to wait and see.

If I can get a follow-up, Matt, so what are the plans for cash that you received? How should we view R&D going forward? The Company will -- are there plans to do some R&D or pretty much it's going to be an Afrezza-focused Company?

No, there's definitely plans to do R&D. I mean, we have a lot of exciting possibilities in front of us for using this technology and other applications.

It was mentioned briefly on the call this morning, although it was primarily about the deal, we did not want people to forget that we view this as a platform technology with a lot of exciting applications and you should expect to hear more from us in the future about that. I mean, it's the obviously next question post-Sanofi.

Okay, thanks.

In that regard, I have been asked this a couple times on the phone, so probably clarify it. Because people say -- well, what rights in those other areas does Sanofi have? They do have a right of first negotiation if we were to take a formulation of inhalable GLP-1 forward, but they have no rights to those -- any other products beyond that. So I can't say we would mind talking to them about them what they get to the point where that's appropriate, but under the current agreement the only future potential right they have is (inaudible).

They also have rights to our new process.

We've not disclosed that yet, Al.

Sorry. (Laughter)

Are there --

As you'd expect, if there other developments enhancements to Afrezza, you can anticipate that would be included under an agreement like this.

One more follow-up. Are there -- is there any engagement with anything from their pipeline to vie with your technology platform?

Not really at this point. Nothing formal in the agreement except the customary things that make it clear that we are not planing to compete against each other in the space. (Multiple speakers) the agreement is eventually filed to see the customary things say we can't compete against each other except that we say that might ultimately end up in the collaboration except in very limited circumstances, but that's kind of it.

Thank you, everybody.

Thank you.

(Operator Instructions)

Michael Tong, Wells Fargo. Mr. Tong, your line is open. If you line is muted, can you please unmute it.

Cory Kasimov, JPMorgan.

It's actually Matt Lowe in for Cory. Firstly, congratulations on the deal. A few questions. The first one I have is, is Sanofi contractually obliged or obligated to provide a certain number of PCP details and annually, or is it just commercial best efforts?

Well, I mean, it's difficult to prescribe certain limits like that into an agreement like this beyond commercial best efforts. That said, these efforts are dictated by a joint advisory committee of which we have equal amount of representation so a lot to say about it.

And they have certain presented their initial plans to us and satisfied us what they are going to do. It would be difficult to back away from that at this point in the near term. But you will find it in the agreement

Okay, got you. And then just a quick follow-up. How, just on the income statement, how will that look in terms of revenues once they start to appear for Afrezza on the income statement -- on your income statement?

I think you've hit the most common question I've gotten today from people trying to model this deal, and also the one that I have the greatest trouble answering. Unfortunately, the situation is this. I mean, we've -- we were making minor tweaks to this arrangement as recently as last week, some of which the auditors have used an excuse to go back and reevaluate and question how we might do some of this.

So whereas even to the extent we thought knew how some of this is going to be accounted for, it may end up appearing in different places on the income statement. So I need to reserve that. I could speculate, but I could prove me wrong, too. We know mechanically how it's going to work, but how it will appear on a income statement is harder to answer.

Okay. And then just the last question I have is, how should we think about modeling COGS as well? If I could get some guidance on that, thank you.

We haven't given a lot of disclosure there except to say that under the supply agreement, which will eventually become public as well, we are obliged to sell the product to Sanofi at our cost and that's our intention. The ultimate profit from such sales will flow through when they actually make some sales and it drops down to the bottom line in the collaboration. So other than to say were going to sell at cost, we have not said what our cost structure is at this point.

Okay. All right. Thank you

I think it's important to note, and I've tried to highlight this a few times, but one of the unique aspects of this arrangement with Sanofi is what we see as their ability to help us at various points in the supply chain and, in fact, drive down our costs. So even to the extent I were willing to answer that question today, I'm hoping that number will change and go down over time.

So I guess if I had to pick the two highlights of this agreement in my mind it's number one, their ability to make the sales number larger than anybody else I can think of. But also to make the margin percentages larger than anybody else I can think of. And that also influenced and why we ended up in a joint venture kind of arrangement. More answer than the question you asked but I couldn't help squeezing it in there.

Thank you. Josh Schimmer, Piper Jaffray

Thanks for taking the questions. First, is there a mechanism or some kind of a cap on annual expenditures by MannKind as part of the collaboration with Sanofi that's been built into the agreement to prevent Sanofi from forcing you to spend beyond your capabilities?

Well, there isn't per se, but then our obligations under the arrangement are somewhat limited other than manufacturing and some enhancements in the product itself, on of which Al alluded to earlier. So we don't see that as a major problem. I mean, there are some protections from both sides built in for overspending and requiring spending according to budget and putting in things like, we can't charge an infinite amount for the product. We have caps.

And they can't charge an infinite amount for sales and marketing. They have budgets the have to adhere to. I think those are all pretty customary but other than that, not really as you describe.

They are joint [effects] committee and part of the -- that is that by each Fall we are looking at an annual budget for the upcoming year and where we are certainly then finding an agreement based on the plans in place and so on, but the spending then will be forthcoming. And if that would change dramatically, then of course it would be a situation for the companies to get together and determine whether that is a intelligent investment going forward.

That is sort of a protective mechanism like you're talking about, because we do have some say on what that budget says and if we felt that we couldn't spend according to that, we wouldn't agree to it in the budget

Sounds like a fairly robust mechanism, then. I know you also have a somewhat complicated, or at least in the past have had a somewhat complicated capital structure. Can you just kind of review for us the composition of senior support net notes, maturities, interest rates et cetera, kind of those as they stand currently?

Well, I'll admit that the Deerfield ratio was a little bit complicated, but other than that it's become more simple. We just one convertible debt out there at this point. It will mature in August of 2015. We hope that will, in fact, convert because it's mostly been in the money in recent months.

Beyond that, we have debt to Deerfield I think you know about. It's coming different trenches, future tranches. It's all essentially six-year debt. Earlier tranches were at a fairly robust interest rate of 9.75%. The more recent ones and any future ones will be at 8.75%.

We have some debt to Al. That debt has grown rather small. It's under $50 million at this point, certainly compared to what once was it is not a huge number. Again that -- the debt to Al doesn't have certain maturity because it's pretty much dictated that we cannot pay anything against that debt until after we've paid off Deerfield.

But only the convertible debt maturing in August is convertible? The rest are just straight?

Yes, everything is straight debt. There's no rights to conversion of any kind in anything else.

Okay. And then I know it just -- back to the question of the fully diluted share count, I guess it's kind of bounced around. Looks like it was around $34 million in 2011 up to $128 million in 2012 down to $78 million at the end of last year. Just directionally, do you have a sense of where it's gone from the end of last year to now?

Well, as you might guess, especially because of disclosures I just made about non-cash expenditures, a lot of those things will have flown through now. So the number of options and so forth and warrants outstanding has come way down and that's part of the reason why a I'm not sure what the number is.

Much to my surprise, I would have guessed that those warrants would stay outstanding their entire term. We already talked about a lot of them were, in fact early exercised in last quarter so. So the numbers are down substantially. I don't have in front of me what they are down to. You can see in the quarter-end numbers but they'll have changed pretty significantly since then in the intermediate month or so.

Got it. All right. Thank you for answering those.

Thank you.

(Operator Instructions)

Christopher James, Brinson Patrick Securities

Thanks for taking my questions. Just a quick question on labeling. Have you had any additional, or Sanofi, any additional discussions with both payers and endocrinologists on the current labels, specifically with the need for PFDs?

They did extensive market research, both qualitative and quantitative, prior to getting into the depth of the negotiations with us. The only thing I can say, since I don't necessarily have information to -- part of that which was propriety for them as part of their negotiations. They were very comfortable in regards to the opportunity and the feedback that they do get back from both endocrinologists and laboratories in general. But that's really the only information I have at this point in time, that there is a certain comfort level within Sanofi.

Great, thanks. And then really quickly, is there an update on the 12-unit cartridge? How much additional preparation is needed with that application?

The 12 unit basically in regards to the preparation for an SNDA, that's done. That's completed. So I would say that we are probably talking days, maybe, maybe weeks, but that will be submitted. So that is well underway and certainly part our plans going forward.

Great. Perfect. Thanks. And congrats again.

Thank you

And we have no further questions at this time. I will now turn the call over to Mr. Mann for closing remarks.

Alright, well thank you very much for joining us now, probably most of you on two calls today, which is above and beyond the call in many respects. We appreciate it. We are very happy about all of the developments of the day I look forward to giving you future developments again soon. Thanks very much.

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