MannKind Corp (MNKD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation third-quarter 2014 conference call.

(Operator Instructions)

As a reminder call this call is being recorded today, November 3, 2014.

Joining us today for 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.

Well good afternoon and thank you for participating in this afternoon's call. I'll be discussing our financial results for the third quarter of 2014 as reported this morning, we'll then turn the call over to Hakan.

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. 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 November 3, 2014. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

Now turning to the financials. The net loss applicable to common stockholders for the third quarter of 2014 was $36.5 million, or $0.09 per share, compared with a net loss applicable to common stockholders of $50.8 million, or $0.17 per share for the third quarter of 2013, and $73.4 million, or $0.19 per share for the second quarter of 2014.

R&D expenses were $19.2 million for the third quarter 2014, compared to $37.3 million for the second quarter of 2014 and $27.3 million for the third quarter of 2013. R&D expenses decreased by $8.1 million for the third quarter of 2014, compared to the same quarter in 2013, and by $18.1 million from the second quarter of 2014 due to decreased non-cash stock compensation expense resulting from the settlement value of modified performance awards and overall decrease in stock-based compensation expense related to performance milestones, which was actually recorded in 2013 but which were achieved and settled in 2014.

General and administrative expenses were $19.1 million for the third quarter of 2014, compared to $32.5 million for the second quarter of 2014 and $17.5 million for the third quarter of the previous year. G&A expenses increased by $1.6 million for the third quarter of 2014, compared to the same quarter in 2013, primarily due to an increase in professional fees associate with closing of the collaboration and license agreement with Sanofi, offset by decreased non-cash stock compensation expense resulting from the settlement value of modified performance awards and an overall decrease in stock-based compensation as previously described.

G&A expenses decreased by $13.4 million for the second quarter of 2014, primarily due to decreased non-cash stock competition expense as previously described partially offset by increased professional fees associated with the closing of the collaboration and license agreement with Sanofi.

Cash and cash equivalents were $172.5 million at September 30, 2014, compared to $41.2 million in the second quarter of 2014. In the third quarter of 2014, the $150 million upfront payment was received from Sanofi in connection with the closing of the collaboration and licensing agreement,.

$40 million in Tranche 4 notes were purchased by Deerfield upon FDA approval of Afrezza. And $17.3 million in proceeds were from warrant and stock option exercises were received. Currently up to $70 million of additional sales of Tranche B notes to Deerfield remain available and there is also a $30.1 million of available borrowings under the amended loan agreement with The Mann Group.

Overall, as projected last quarter, without considering unusual expenses such as the non-cash stock compensation expense amounts or the amounts paid to outside parties in connection with the Sanofi transaction, our general and administrative costs remain relatively flat with R&D costs trending downwards. As a result, our monthly cash burn has also been trending down with each month this quarter less than the last.

Turning now to our accounting treatment of the Sanofi transaction to this point and going forward, I have to admit that under current accounting rules this has become more complex and even less intuitive than I would have anticipated. First, in relation to the upfront payment of $150 million already received, the full amount has been deferred to future periods. This is because current accounting guidance requires that the ultimate amount of any payment that will be captured into revenue must first be fixed and determinable prior to recognition of any of such revenue.

Because the loss sharing provision under the collaboration agreement requires that we recognize our share of losses which are expected in early periods, this impacts our ability to currently recognize revenue related to amounts received under the collaboration agreement.

In addition, our agreement has multiple elements, including, but not limited to, licenses, manufacturing and supply agreement and development activities. All of these elements cannot necessarily be accounted for separately, which will also have an impact on the timing of revenue or condition. But at a minimum, before we can begin to recognize amounts received as revenue, we must have established a track record of sales and e able to project earnings, which is obviously not possible at this time.

Looking forward, one area that continues to confuse some investors is the cash effects of our collaborative arrangement with Sanofi. Much of what is now included in R&D expense is related to manufacturing. To the extent these costs relate directly to commercially manufactured product, they will in the future not be expensed but will be capitalized into inventory. That inventory will then be sold to Sanofi and we will be paid for it on a current basis, so we'll be able to recover these costs.

Additionally, to the extent we experienced losses under the collaboration agreement, Sanofi has agreed to cover our share of losses under a revolving loan arrangement of up to $175 million. So our 35% share of near-term losses will likewise not impact our cash position.

So while not all of our cash flow coming in the door may soon be recognized in our P&L, I feel quite comfortable with our cash position.

With that, I'd like to now turn the call over to Hakan.

Thank you, Matt.

Since signing the partnership agreement with Sanofi, both organizations been really busy coordinating efforts in preparation for a launch in the first quarter of 2015. And I'm really happy with the activity level and enthusiasm that are seen from the Sanofi staff. Representatives from the US, France, Germany are participating in the launch preparations, the clinical development programs, the regulatory preparation and the commercial manufacturing start up activities.

We have established a joint advisory committee, or the JAC, between the two Companies represented by Senior Managers for critical functions. Supporting the JAC, several working groups have been established with working group leaders assuming the operation of accountability for their areas of responsibility. They are all hard at work meeting at least weekly to enable a first quarter launch of Afrezza.

Both companies also have an alliance management function in place whose job it is to coordinate all the various activities and be the conduit to the JAC committee on important strategic issues. Most of the critical supply chain and manufacturing PV activities have at this time been successfully concluded. So I'm pleased to announce that we have began commercial production and we are confident then we will be able to supply Sanofi the launch inventory necessary for successful launch.

As a result, we're also close to triggering payment of the first of two milestone payments associated with manufacturing and supply considerations. Not only are we in commercial production as we speak, but we are also well underway in expanding [cost rate-driven] capacity in Danbury. During the first half of 2015, we will have added two additional filling lines to make sure our capacity can meet current and anticipated demand growth.

Sanofi launch planning is well underway and our marketing team is working closely with them to convey the marketing intelligence of product benefits and risks that we have learned from having worked with Afrezza for such a long time. Beyond the more immediate [activities] in preparation for launch, we are also collaborating closely in preparing for the clinical trials agreed with the FDA. Those trials being the pediatric trial, the dosing trial and the long-term safety trial. Those protocols are under development and will be agreed by the FDA before initiation.

We are certainly excited and eager for the center for launch to get underway. We do know that a great number of adult patients that may be ready for a transition from OAD to an insulin therapy, both from a doctor and a patient point of view, if one can operate inhalation insulin therapy as an option that can help patients improve glycemic control, that will be seen as a benefit. And Sanofi is certainly well experienced and equipped to manage this insulin product with their reach into the diabetes community supporting both doctors and patients.

Adult patients on base of therapies are also an obvious target with an opportunity to offer an ultimate delivery option. Again, this is an opportunity to help support disease management, which will translates into better blood sugar control. And Sanofi's international reach certainly represents a major longer term opportunity for Afrezza. We know already from having been approached by companies and governments from the Middle East, China and Japan that Afrezza could fit very well into their treatment and cultural pattern.

Sanofi's already established business of regulatory experience in these regions will be a major asset going forward. Preparation for a filing in Europe will also certainly become an important agenda item very soon. And the priority right now is certainly a successful launch in the US.

Based on the spirit of corporation and the joint activities to date, we are looking forward to a long term and very successful partnership with Sanofi.

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

Thank you, Hakan, and good afternoon, ladies and gentlemen.

The third quarter was certainly very eventful. We received FDA approval of Afrezza, a prandial human insulin on June 27, just the Friday before the quarter start. Then on August 11, MannKind and Sanofi jointly announced formation of a global partnership for commercializing Afrezza.

Sanofi is especially significant as the partner for Afrezza because it's such a major force in diabetes throughout the world with insulin sales in more than 120 countries. Moreover, Sanofi will have this basal insulin as a greatest revenue of all current insulin products.

I have long considered Sanofi the best of all potential partners for Afrezza. And my belief has been confirmed by Sanofi's very strong activities in preparing for the US launch. Indeed, it is exciting to see Sanofi's impressive commitment to resources through the partnership, and I am thrilled to see our diabetes teams working very enthusiastically together towards the launch in the first quarter.

Many of you in the financial community recognize that Sanofi is likely to generate a significant market position for Afrezza. But some of you think MannKind's 35% share of the profits to be disproportionately low reward for MannKind for its achievement and huge investment. However, it is important to recognize that this split provides a very attractive return to both Companies and that Sanofi will bear the brunt of the remaining development and commercialization costs.

The arrangement is designed to reflect the overall relative contribution of resources to the product from a commercial and development perspective, including Sanofi's investment in building a market-leading commercial infrastructure, as well as MannKind's investment in the product to date.

Additionally, MannKind is entitled to earn $925 million of cash payments upon achievement of various milestones. With the September 23 legal closing of the agreement after FDA [start] clearance, we already received the first $150 million of those fees. I am confident that the many remaining milestone payments will be earned in due course.

Clearly, Sanofi will be able to serve a larger diabetic population in the wider market then MannKind could ever do on its own. And it's not just Sanofi's strength and marketing and sales which are important in this partnership. We have enormous global manufacturing operations and substantial financial resources that can enable additional factories to facilitate major expansion of the Afrezza opportunity.

Our MannKind factory in Denver, even fully equipped, will be able to serve only a small portion of the people worldwide with diabetes. Far greater production would be necessary if we are to provide Afrezza even to a moderate portion of the global patients who could benefit from this unique prandial insulin.

As our partnership relation with Sanofi grows, we should also be working together on multiple aspects of the supply chain, such as insulin and other materials. The profit sharing structure of the collaboration is especially appropriate because it ensures that both Companies are completely aligned on the best ways to produce Afrezza and produce a product to appropriate patients with diabetes around the world.

The overall objective of diabetes therapy today is focused on helping to improve glycemic control, to help reduce the risk of long-term diabetes related risks. As a consequence, evaluations that control diabetes are generally based on HbA1c, a measure of glycosylation of hemoglobins, which reflects the amount of attachment of some glucose to the exterior of those cells.

HbA1c's action is good monitor for disease progression, but is not an independent measure of prandial control alone. Is a measure of all factors that control glycemia over the two or three month life of hemoglobin.

It is also important to judge the prandial insulin separately. The kinetics of Afrezza more closely mimic pancreatic insulin in response to a brief load of glucose. The current FDA approval of Afrezza is glycemic control in adult patients with type 1 or type 2 diabetes.

About 65% of the latter group are insulin (inaudible) early-stage type 2 adult diabetics who today are using alternative anti-glycemics. Those products are not without limitations of performance and some problems for some patients. Afrezza offers an alternative with a prandial insulin, which the FDA has approved also for serving this patient populations.

Now that the path to commercializing Afrezza is on track, we can provide greater focus on the many additional opportunities for our Technosphere technology. In addition to a few opportunities already under development, our Technosphere development group and an advisory team are actively evaluating a number of additional possibilities.

Such Technosphere delivery of other drugs beyond Afrezza is still at an early stage. FDA approval in the partnership with Sanofi for Afrezza have provided validation for that technology as a platform for the delivery of a variety of active pharmaceutical ingredients directly in the arterial bloodstream. Our Technosphere platform truly has great potential for more safe and more effective delivery of many additional drugs beyond insulin.

One of the key advantages of this technology is it enables noninvasive delivery of an API into the arterial blood, which currently must be injected because it cannot be taken orally. Peptide hormones, including insulin, certainly fall into this category. But there are other types of API that also have such stability challenges.

Eliminating injection is certainly a very important benefit of the Technosphere system that patients truly appreciate. But there are other important advantages which could be extremely valuable and in many cases, likely very compelling. Inhaled in the Technosphere delivery has especially -- is valuable potential for drugs whose benefit -- whose beneficial effect would better be achieved in a few minutes then close to the hour typical of current delivery methods.

The beneficial effects can be achieved with Technosphere technology, the speed that may be matched at best only by intravenous injections. Rapid onset of action is clearly important for drugs such as pain medications, which would thereby provide relief in a few minutes rather than in about an hour. Imagine pain relief in just a few minutes. And there are also other advantages for hormones which normally take their affect on the body in a (inaudible) manner.

Moreover there are many drugs which today are limited in use due to substantive gastric or hepatic side effects. Our delivery technology allows active ingredients to bypass the first pass metabolism to the stomach and the liver, thereby potentially avoiding or reducing any dosing or toxicity problems.

Among our development activities in the past period has been a new process for manufacturing Afrezza, which I alluded to on our Q2 earnings call. This new process has many advantages, including the lowering cost and enabling cartridges with higher dose strengths. We'll have more to say about the new manufacturing process as this project continues.

With our many potential opportunities, I am confident of the substantial success of MannKind Corporation. We are [poised] with Sanofi to make a major interest in the population of people with diabetes. And our development group is already pursuing exciting additional opportunities in which the unique advantages of this Technosphere delivery system will significantly improve therapy.

For the next two years -- thus the next two years, thus we'll be offering exciting opportunities for MannKind Corporation. We thank those of you have supported us during the challenging early period and we now invite your questions. Operator?

(Operator Instructions)

Jay Olson on the line with a question.

Thank you for taking the question. I have a couple of them.

First, in light of the management changes at Sanofi, could you please describe how that may or may not impact the Afrezza partnership? And then, second, with regards to the first manufacturing-related milestone payment, should we expect MannKind to receive that payment during the fourth quarter? And also will that payment be capitalized? And then, finally, have you had any conversations with payers and are you expecting Afrezza to be included on any formularies at launch? And has that impacted your perspective on pricing at all? Thank you.

Well, let me start with your question about the [three buckets]. While certainly [christy bucket] was a supporter of the Afrezza partnership, I have to say that the entire Sanofi organization has embraced this opportunity with much enthusiasm as we've seen in the US and in France and in Germany. So we are still looking forward to a long and successful partnership; and yes, we have not seen any other impact on that.

Matt, do you want to -- ?

What was your next question, Jay, to make sure I get them in the right sequence?

I think Hakan had mentioned that there was this first manufacturing milestone payment should be expected near term, and I was wondering if that would be in fourth quarter and if it will be capitalized? Thank you.

Yes, I can half answer your question. We don't project timing of things like that. We think it's imminent, but whether -- we're in November now, so it could easily fall into the fourth or the first; we'll get it when we get it.

But much like under the same rationale that we've deferred the revenue recognition of the upfront payment, you would expect the milestone payments to be deferred under the same basis. So happily, we'll have the cash; that's what's most important for us at this point. But recognizing them through the P&L will have to wait for the same criteria, which means some track record of sales and ability to project earnings as the front payment would.

Okay, thank you.

Right. And as regard to your question on payer, certainly the research has been done and payer conversations are certainly underway. However, this year specifically our responsibility for our Sanofi partners. So this is really as much as I'm prepared to state at this point because of competitive reasons. But I can assure you, again, it's a very active area for us right now.

Thank you.

The next question comes from Cory Kasimov.

This is actually Brittany on for Cory. Thanks for taking the questions, I have two.

How many reps is Sanofi going to launch with? And also, second, what are your thoughts on the recent commentary made by Sanofi about insulin pricing and how this may affect Afrezza? Thanks.

Well, again, unfortunately, I have to tell you that certainly we know that Sanofi has a big and a large diabetes organization in the US including sales reps and MSLs. And that is being worked out together with Sanofi right now. And in a short period of time, the JAC committees in between the two companies are getting together, say, to finalize the planning. But again, for competitive reasons I cannot give you the exact number of reps and MSLs that are being part of the plan. But it's a well-resourced focused plan.

And there will be one group with that -- those sales salespeople whose first priority will be Afrezza.

Absolutely, yes. What was the second question?

And then the second one is about Sanofi's commentary about insulin pricing and how that may affect Afrezza.

Well, remember most of their pricing was really in relation to Lantus, so they're speaking about a different market. We think this is clearly a different shade of product, but we're not really prepared to discuss pricing at this point.

Right.

Thank you.

The next question comes from Adnan Butt.

Good to hear launch is on track for first quarter. If I can ask, would you able to tell us the specific steps that have been taken so far? Is a sales force assigned? And did I hear correctly that it's a sales force that's going to have Afrezza as the first detail? And are these new reps, or are these being assigned from the current Sanofi structure? That's the first question, please.

Well, there are certainly experienced representatives within the Sanofi organization. And, yes, they will certainly have Afrezza as their number one position in their sales target during launch and into the first and second quarter.

So, Hakan, what more needs to be done to nail down when in the first quarter the launch can take place?

Well, I would say that the launch team, the joint launch team in between our companies are going to present their final plans to the JAC within a few weeks. At that point in time, I would say then you will have a decision in between the companies when they're ready to launch. But as I mentioned, from a supply point of view, we are in commercial production at this point in time, so we are confident that we will have product available for a launch.

Okay and one more question then I'll get back in line.

Do you expect to provide details of the post-approval studies when you're prepared to? And do they have to be finalized pre-launch? Or can they be finalized after the launch? Just because the size and timing of those studies would be of some interest for us.

They can be finalized after launch; those are in discussions with the FDA. And if I remember correctly, during the first half of 2015, all of those will be agreed upon with the FDA and then initiated following those studies. That will probably be discussed at later on this call when we have more details.

And lastly, Sanofi is holding an analyst event. Do you know what you expect them to discuss regarding Afrezza there?

I can -- since I've been talking to them, I can talk about that. It is an Analyst Day. I believe they're calling it New Medicines Day. I can tell you I'm very relieved and gratified that Afrezza will be very prominently featured in that event, along with a couple of other products they have coming down the pipe. But I think it will demonstrate their commitment to the product and their excitement about it, so I'm looking forward to it as well.

Okay, I'll get back in line for now, thanks.

Steve Byrne is on line with a question.

You covered a lot of categories where the two companies are working together: these joint steering committees, the European filing activity, the protocol development for the post approval studies, the Eastern countries that are interested in this. Are all of these activities included in this 35%-65% joint sharing agreement? And did that begin effectively the date of the agreement? Or does this all start to accrue post launch?

Well, it starts as of the effective date of the agreement, but not all of those things are included in the 65%-35% profit split. So there are specified things that are related specifically to the sales and promotional efforts of Afrezza that are included and some things specifically are not. For example, Hakan talked at length about the joint advisory committee. Our costs and their costs, for example, in that committee are specifically excluded from this arrangement. So we don't pick up their costs; they don't pick up ours. We bear our own costs for these things.

And is it also the case on your -- the activities regarding the expansion at Danbury and bringing the three fill lines on stream -- is that essentially your cost until your post-launch when you would capitalize it?

Yes, it would be our cost. It would be capitalized as we incur those types of expenses and then the depreciation of those costs would be absorbed into the product and we'd be reimbursed as we sell the product to Sanofi.

Okay, that's helpful.

And the $19 million R&D expense in the quarter -- can you break that down into how much of that was actually pre-launch activities at Danbury? And where do you think that expense line item trends down to, post launch?

Boy, so this is moving quickly. It's trending down, but I can't get you to an exact number quite yet. Remember I won't set expectations -- you're not going to see a dramatic impact in the fourth quarter, because that only starts getting absorbed into product as we go into commercial manufacture, which has only just begun. So you're not going to see a full quarter's impact of that. And even then, it's only the things that are in the materials produced.

So that'll start late this quarter and you'll see the first big impact of it for a full-quarter basis in the first quarter of next year.

Okay, thank you for the help.

The next question comes from Keith Markey.

A couple of questions.

I was wondering if we might see a launch in China or the Middle East prior to Europe? And also wondering, how are you going to recognize the $150 million upfront payment and the milestones that you're capitalizing? Is that going to be on a straight-line basis, or is there some other mechanism?

Let me start with launches outside the US and Europe and say China, other places. Again, those discussions are just in the beginning. We do know that in China, the regulatory process is rather lengthy; and Europe it's more similar to what you see in the US. So the only thing I can say right now, there are certainly an agenda items for us but we have not really delved into the detail at this point in time that I can give you a more specific answer, because, again, the focus certainly on the launch in the US.

Okay, thank you.

And Keith, as far as straight line, I believe that it will it likely be straight line. What I can't tell you for sure is when that will begin and with certainty how long it will last. So some of those things are still to come.

You certainly should not expect to see any revenues flowing into the P&L in the next year as, again, we need to go to a point where we have some track record of sales and we see the projections and the trajectory before we could recognize anything at all. And then it will likely be spread over a modest period after that.

Okay, thanks. And if I could ask one other question -- I thought you might have a few additional people on the call for the -- probably for the first time. So I was wondering if you might be able to compare Afrezza to Exubera, and explain a little bit why you believe that Afrezza is going to be a success where Exubera was not?

Keith, it's hard to really try to compare Afrezza to Exubera because they're totally different products. They are truly powders of both companies, both Pfizer and MannKind, decided to deliver them by inhalation. But the difference is that the Exubera was a very huge, clumsy, inconvenient, very expensive device that delivered a powder that was clinically less efficient and effective than injected rapid-acting analogues. And even rapid-acting analogues are not even close to pancreatic insulin. A rapid-acting analogue doesn't peak for close to one hour and lasts for five to seven hours. And Exubera was even worse than that.

But pancreatic insulin peaks in 10 to 14 minutes and is gone in a couple of hours. And if you look at the kinetics of Afrezza, they're very close to those that say it's hard to see much material difference. And so you can't compare Afrezza to Exubera. The fact they're both inhaled is not really any important feature.

All right, thank you.

And the next question comes from Josh Schimmer.

First one for Hakan -- if you could clarify the supply and manufacturing milestones that you expect, the timing and then the amount?

And then for Matt -- just because it's so important for modeling, the Company want to push a little deeper on the percent of R&D in the quarter that was for manufacturing and what kind of decline we should expect? I'm sure that is information that you have fairly handy. And earliest in the ballpark, are we talking 50% of the expenses for the quarter, more or less? Thanks very much.

In regards to the supply milestones, having started commercial production, we feel at this point in time -- but that certainly will have to be reviewed by the JAC -- that we have met the say the performance targets and the parameters that was important for the first of the two milestones. So my expectation is that as soon as the JAC is coming together for the second joint meeting, that will be an item for review, and that's happening in a few weeks.

And the dollar amount for those milestones?

The first milestone is $25 million.

Great.

All told, you may remember we announced that there were the three milestones that were potentially CMC related, and they're $25 million each. And with that -- so I guess my answer, as before, we're not sure it'll be helpful -- can certainly break down between manufacturing and clinical. I was really reluctant to do it because I think that might even be misleading, because the clinical (inaudible) expenses in R&D are coming down rapidly but they've not bottomed out yet by any means.

Certainly manufacturing is about two-thirds of that total. I think that percentage will increase but it's not going to completely go away. We do expect to have some cost associated with the future applications of the product that will still be ours, and other things that will be done to foster development of the product even under the Sanofi agreement that will still remain our costs. They'll be chargeable through the collaboration, but they're not currently reimbursable. So it's going to drop a lot -- remember, it's just the things that are going into the product that will come out of the P&L, but that will be the bulk of it.

One of the new projects, of course, is a new process for manufacturing Afrezza, which has significant advantages. And we pay for it until we get the IND and then -- and that's almost ready now. And Sanofi pays for all of the other development expenses until it goes into manufacturing. And that's their expense.

Okay, thank you.

The next question comes from Arlinda Lee.

Can you walk us through some of the mechanics of the Sanofi, the drawdown that you can take on them? And how we should look at the convertible note due in 2015?

Okay. So let's think about how this works and how money moves around under this agreement. Each quarter, we will submit our expenses to Sanofi and we will create a combined P&L for the collaboration. We will technically be responsible for 35% of any losses or be the recipient of 35% of any profits that, that quarterly statement produces. Obviously, in the first several quarters we expect there will be losses and then ultimately those will turn to profits.

But to the extent that there are losses in the early periods, after such time as that number is figured out, we have the option of either writing a check to Sanofi for our share, or we can apply that to that line of credit that they have provided to us so that we don't have to be cash out of pocket. And that's a 10-year instrument except to the extent that when we become profitable, the first thing we should use those profits for is to repay that obligation.

Does that answer that part of the question?

Yes.

The other things that are happening is, in the meantime there is cash flow coming into the Company because they're funding the production of products, so we do get paid for that on a current basis. So that's not cash out of pocket to us. And there's an element of cash positivity there, too, because to the extent we've already paid for things like a manufacturing facility whose depreciation is contained in that product, those costs are passed along. But they're not cash costs.

Likewise, to the extent that there are raw materials we've previously paid for, those costs are passed along to Sanofi, but they're not cash costs to us either. So there'll be some net cash inflow from a manufacturing arrangement during the term of the agreement -- for most of it anyway, certainly in the early years.

Okay, great. And would you be able to use the line of credit against -- what are your plans for the convertible note? And could you use the line of credit against that?

No. The convertible note -- I think it's premature to say what we will do with that. I think it's unlikely we will expect to be paying that off or providing shares. It's more likely that it would be restructured in some fashion. But anything can happen between now and then and we will see what happens when we get a little closer to it.

I do talk to the holders of that instrument fairly often and they have pretty firm views on what they would like us to do with it, but we'll see. So I need to hold that in reserve and I can't commit one way or the other. But we cannot use the Sanofi loan to pay that off, nor would we expect to or want to.

Okay. Great, thanks.

The next question comes from Christopher James.

Let me add my congrats on your progress.

Most of my questions have been asked at this point, but it's great to hear that you've begun commercial scale-up. But could you give us an update on the work, your work for getting additional lines of insulin approved? And what additional work needs to be done there? And then I have a quick follow up.

Chris, are you speaking of the different cartridge strengths when you say different lines of insulin? I'm not positive what you're asking about.

Yes, the different cartridges. The 12 unit, I believe you were going to submit the NDA for the 12-unti cartridge and --

That is correct. We have -- on our side we have finalized what we believe the application to the FDA to submit that momentarily. It was sent over to Sanofi about a week to 10 days ago and so I don't know the specifics, whether it's been submitted at this point in time. But I know it is just about to be submitted, since they also took the responsibility for the NDA and going forward. We did transmit it to the FDA through them. So it's certainly in process; it may have been submitted already.

Great, thanks.

And given that you describe the other technology as a platform, have you identified any specific opportunities for Technosphere or the inhaler in pain or any of these other areas where it seems like it might be useful?

Yes, of course we have, but we can't talk about them yet.

Yes, because I once was quoted and (inaudible) we have an embarrassment of riches here. But I think it's to some extent true, we have a lot of opportunities we've identified and we're combing through them. We can't afford to do everything, so we want to make sure we pick the optimal ones and make sure we have a good plan in place before we start talking about them publicly, so that we can start being judged as progress against what we're planning. And I hope we'll be in a position to do that in subsequent quarters, but definitely not today.

Great, thank you.

Hakan mentioned that it's very active area; we have lot of people internally and some people externally helping us with that project.

Great, thanks, guys.

Jay Olson is on the line with a question.

Thanks for taking the additional questions. I have a couple of them.

With regards to an European filing, since the Afrezza pivotal studies included European study sites, should we expect to see a European regulatory submission in the near term? And if not, can you comment on what additional work might be needed?

And then, secondly, you had in your prepared remarks and in the press release described some additional borrowing capacity that was available to you. Do you expect to use that over the next year or so? Thank you.

Yes. In regards to the European studies, remember what we did as a part of doing the regulatory status for the US, we kept European requirements in mind, so that hopefully there was a way to leverage we have done in the US. Whether we need any further studies, or whether we are looking at enhancing the label of Afrezza before we submit in the European arena, still needs to be discussed with Sanofi. We have not had the chance to do that yet because all of our people and really our capacity is right now fully exploited towards the opportunity in the US. So I don't have any further insights than that at this point in time. But the fact that we certainly kept Europe in mind as we conducted the regulatory trials for the US approval.

Matt?

Again, you all know me well enough to know that I don't like to forecast things, especially about borrowings or offerings and those kinds of things. I like having the ability to get money just in case. But I don't have any current plans to draw upon those facilities, but it's nice to have them there.

Okay, thank you.

The next question comes from Shaunak Deepak.

Wanted to see if you could provide a little bit more detail on how Sanofi would be targeting Afrezza to these patients in this thing that I think they termed the lost decade on their call last week? See if there's any clarity you can provide on the sales and marketing efforts?

Let me take a crack at that one.

It's interesting, I couldn't help but notice that term being used, too, because I had not heard it used previously. But it's an interesting way to characterize a problem that certainly exists in the diabetes community, where it's well recognized that it's really hard to get patients to move on, particularly the insulin. There's just so much resistance to starting on insulin that some doctors characterize up to a decade of time where you're struggling with alternatives and different kinds of orals and other things, or diet or whatever it happens to be, trying to get them to insulin.

And unfortunately during that time, a lot of damage is caused to the patient and one of the reasons we see the prevalence of such -- still with all of the advances we've made in this field, the prevalence of long-term complications in diabetes -- the common ones you hear about, the scary ones like blindness and amputations and things. They still happen with some regularity, and I think that's partly what's to blame, speaking as a non-doctor. But I think that's what they're alluding to.

And I think they see, in addition to some of the more obvious places where Afrezza might be used, if you want to pick where you might have the biggest impact on patients and on humanity generally, it might be to the extent we can get Afrezza into the patient sooner. And I think that's what they were alluding to.

Clearly, we've always thought this ought to be used earlier. We were very pleased to do our last Phase 3 pivotal in an early-stage setting with essentially Metformin failures. If we can get the use by people earlier, we hope we can impact the ultimate outcomes for the patients. So we've always felt that, it's pleased to hear Sanofi agreeing.

So I know you know from our presentations we've often talked about the three areas we target, which would be the people on prandial insulin now, we call the switchers, that's an obvious group. I don't doubt we'll get quite a number of those people. But the other two maybe that were less obvious but in many ways is a more fertile ground, are the people that are just on a basal insulin today, such as Lantus. Particularly with Sanofi as our partner, obviously that's their customers, they know those people really well. And I think I can safely say that there isn't a single one of them that would not benefit by adding a prandial insulin. And giving them a more palatable alternative to other prandial insulins in the form of Afrezza seems like a natural fit, particularly from Sanofi's perspective.

But then if you go into the early stage setting even before that, that's where you can start having a big impact on the ultimate patient outcomes. And I think that's what they're referring to although it's always dangerous to speculate what's in other peoples heads. But makes sense to me, and I feel the same way.

More tangibly then, hopefully -- hoping you could provide a little bit of granularity on the options expenses in the quarter, or what seems to be perhaps a reversal in some of these lines, research and development, G&A?

Yes, well it's going to be tricky and you'll see a lot of breakdown in the Qs. But generally speaking, as you know, we had an unusually large amount of expenses flowing through in the non-cash stock compensation area for a lot of pent-up things in past quarters that really did not occur again in the third quarter.

In fact, since we had accrued some things in the prior quarters and when you actually book it, it is dependant upon the stock price and obviously the stock price didn't zoom upwards but in fact went down a little bit. The ultimately settlement of those was a smaller number, so we actually came out with a slightly negative number in the third quarter of 2014. So without going into nitty gritty details, it was a fairly trivial amount and it was a trivial negative amount as opposed to prior quarters where it was quite large.

And just for modeling purposes, I was getting around $20.2 million and $9.2 million respectively for the two expense lines Is that about right?

$20.2 million and $9.2 million -- I'm not sure which expense lines you're talking about so I'm hesitant too give you a specific answer. It depends on what you take out. So the G&A expenses has been trending in the $9 millions range, sure, without these unusual costs. But this quarter it was higher, remember, because we made a large payment in recognition of the Sanofi transaction. So both as a commission on the people we used to help us, but also professional fees and so forth. So yes, it's been trending in the mid-$9 millions from a G&A expense standpoint.

And yes, it's been running $19 million to $20 million or so R&D, if you exclude the stock-based compensation. But it's been increasing in manufacturing and decreasing in clinical and other areas just as a general trend.

(inaudible) Yes, thank you.

Remember a lot of those costs are going to be absorbed by Sanofi in the future.

We have no further questions at this time. I will now turn the call over to Mr. Mann.

Thank you, and thanks to all of you for joining with us today. We look forward to our next quarter's conference call in which we expect to update you regarding the commercial launch of Afrezza. Thank you again.

Thank you, ladies and gentlemen; this includes today's conference. Thank you for participating, you may now disconnect.