MannKind Corp (MNKD) 2014 Q4 法說會逐字稿

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

( Operator Instructions.)

As a reminder, this call is being recorded today, February 24, 2015.

Joining us today from MannKind our President and CEO, Hakan Edstrom, and Chief Financial Officer Matthew Pfeffer. Also joining for the question-and-answer period is Executive Chairman Alfred Mann.

I would now like to turn the call over to Matthew Pfeffer, Chief Financial Officer of MannKind Corporation. Please go ahead sir.

Yes, good afternoon and thank you for participating in today's call. We're going to break with tradition in a few places in the call with Hakan leading off the discussion, after which I will provide a discussion of our financial results for the fourth quarter and full year of 2014 as reported this morning. But as is usual, before we proceed further, please note that 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 expectation. For factors which could cause the actual results to differ from expectations, please refer to 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 progress, February 24, 2015. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that, I will now turn the call over to Hakan.

Thank you Matt, and good afternoon.

Let me start my comments today by reviewing our accomplishments with Afrezza and our plans for leveraging our existing strength to develop new therapies. First, let me recap all that we accomplished in 2014, which was a pivotal year in this Company's history. First and foremost, we achieved the approval of Afrezza, another rapid-acting inhaled insulin treatment and currently the cornerstone therapy of MannKind. Soon after we entered into the global licensing agreement with Sanofi, who we believe is the best possible strategic partner for Afrezza. This partnership puts Afrezza in the best position for commercialization.

This brings me to the fourth quarter, which was a very important and busy quarter for us. We finalized all the partnership arrangements with Sanofi, established joint management committees, prepared the transfer of the IND, and planned for the post marketing studies agreed with the FDA as part of our approval. The Afrezza NDA and R&D have been transferred to Sanofi, and Sanofi, with MannKind's assistance, will be responsible for contacting the post marketing studies, and managing the ongoing quarterly and annual report.

Commercial manufacturing got underway in the fourth quarter in preparation for launch in early February. We provided the commercial launch supply in January following an integrated production plan issued in October of 2014. As we did throughout the year, I am happy to report that all of those activities were executed with excellent results and all key milestones were reached.

In fact, our manufacturing startup has been outstanding. Our yields have been better than projected and we have consistently stayed ahead of our very ambitious delivery schedule. Installation of additional capacity remains on schedule and will come on line during the second quarter, more than tripling our manufacturing capacity. Consequentially we are prepared to supply additional commercial product to meet the market demand if sales so requires.

Furthermore, Sanofi filed a 12-unit corporate dossier as a supplemental NDA on December 17, 2014, and approval is expected in the second quarter of 2015, adding to our product offering. Importantly, we also earned two $25 million milestones associated with the launch of Afrezza late in the fourth quarter. We have now realized $200 million of the $925 million in upfront and milestone payments from Sanofi, demonstrating the near-term value creation of our partnership.

Which leads us to today, and I'm happy to report that Afrezza has been on the market for about two weeks. I know it that you are very interested in the Afrezza launch and its progression. But remember it's very early in the launch cycle, having been on the market for only two weeks. We cannot really offer any insight into the results at this time.

However, we did see a very motivated Sanofi sales force leading the sales meeting that we attended, and based on initial feedback the excitement is continuing. In fact, we were just the other day asked if we could up the sample pack volume, since demand for the sample has been higher than anticipated. And as we have said for some time now, this sort of product is not the one that is expected to grow explosively, but rather to start slowly and build from there.

Even those anxious to try Afrezza need to make an appointment with a doctor and get the initial pulmonary function test done before they can be prescribed Afrezza. We are certainly encouraged with what we have heard thus far and remain confident that we have a paradox shifting in the making with Afrezza.

And the YouTube, Facebook, and Twitter commentaries by excited patients are certainly increasing by the day, supporting such a settlement. And further details about the Afrezza progress will certainly be forthcoming from Sanofi at appropriate times.

Now, I would like to spend some time talking about the MannKind's future development plans. Having successfully partnered Afrezza and validated the dataset technology and our innovation platform, we also intensified our product development activities in the fourth quarter.

We engaged a major consulting group to assist us in identifying, validating, and commercially assessing a number of targeted disease areas where we believe our Technosphere and innovation technology can deliver a well-differentiated benefit. And as I announced in our last call, our intention was to complete this evaluation for presentation to our Board of Directors this month. And I am happy to report that this has occurred and our strategy was met with great enthusiasm.

Accordingly I would like to take this opportunity to share a bit more about our vision for our future product development activities. Our goal is to develop a credible pipeline of exciting new product opportunities. At this point we have identified a small portfolio of potentially exciting products on which to focus our efforts.

These potential new products have in common the following characteristics. First, they all address serious unmet medical needs. Secondly, they have comparatively relatively short development times or low cost of development. Third, they all take advantage of the unique benefits of our proprietary drug delivery technology. Finally they all address large markets.

Our current focus is on product in three areas: pulmonary disease, pain, and oncology support. As a relatively small Company we cannot immediately begin working on several ambitious programs simultaneously. As a practical matter, you can expect us to begin full-scale development activities on one target at a time, with each successive new target to be rolled out some months later.

But importantly, we've already identified the area of development of the specific API and disease indication for each. And some key hires are also part of the plan. In the coming months we will finalize our development plans for each, and at that time we'll be able to offer more insight into this process, including timelines, rationale, market opportunity, and potential development costs.

Business will occur one at a time as each target completes its initial steps. In some cases though, competitive pressures may dictate that we not tip our hand too early, but we will commit to sharing as much information as we can as soon as we can.

At the same time, but independently, as we have previously said, we are in discussions with certain other companies to bring their API onto the Technosphere platform. This work is ongoing. We view these opportunities as a nice add-on to our core business, enabling us to extend our reach beyond what we otherwise could. But again, we consider ourselves first and foremost as a product development Company.

Additionally, our agreements with these [partners] currently prevent our making any statements about them. But if our work results in a material agreement, we will of course announce it.

So before turning the call over to Matt to walk through some of the financials for the quarter, I want to add that I am really excited about the future of this Company. With Afrezza approved and in the market, not only has our technology platform been validated, and is becoming to see economic results, we have gained a road map to realize significant opportunities ahead of us. It has taken us some time to get here but we have consistently overcome obstacles in our path, marking the beginning of a new exciting chapter for this Company, thanks to a very capable workforce and committed workers.

Matt, thank you.

Thank you Hakan.

Turning now to the financials, the net loss applicable to common stockholders for all of 2014 was $198.4 million or $0.51 per share compared to the net loss applicable to common stockholders of $191.5 million or $0.64 per share for 2013.

Operating expenses increased year-over-year from $169.4 million to $179.6 million, or $10.2 million, primarily due to a $19.7 million increase in G&A expenses only partially offset by a $9.5 million decrease in R&D expenses.

Increase in general and administrative expenses was primarily due to increased professional fees of $15.4 million associated with the closing of the collaboration and license agreement with Sanofi, which we announced earlier, the amendment of the financing facility with Deerfield and a significant expansion in our program to identify, screen, and fully evaluate new product opportunities that will best take advantage of the unique advantages of our Technosphere drug delivery technology. The outcome of some of his work was discussed just shortly earlier by Hakan.

Other G&A expenses increased by $4.3 million primarily due to stock-based compensation, earned compensation for the achievement of significant corporate milestones in 2014, as well as severance expense related to a reduction in force in the fourth quarter of 2014. R&D expenses decreased in 2014 with the completion of the affinity studies in 2013, resulting in decreased clinical trial-related costs of $14.7 million, partly offset by increased spending on commercial readiness of $4.4 million and an overall increase in stock-based compensation expense.

Cash and cash equivalents at the end of the year totaled $120.8 million compared to $70.8 million on December 31, 2013. As of December 31, 2014, as previously announced, we had earned $50 million from 2 milestone payments in connection with the satisfaction of manufacturing milestones specified in the Sanofi agreement. This amount is included as an Account Receivable as of December 31 but has since been received and will be included in cash reported at the end of this quarter. In addition, we still have $30.1 million of borrowings available under the amended loan arrangement with Mann Group and $50 million potentially available under the ATM facility.

Turning now to some forward-looking statements, I would like to provide a little bit of guidance generally of where I see our P&L and cash going during 2015. I previously noted that our G&A spend will remain relatively consistent with 2014, if you take out non-cash stock compensation expense and selected one-time costs. This equates to roughly $10 million to $12 million quarterly. I see some opportunities for reductions on the horizon, but it is too soon to make any promises in that regard.

In R&D I previously guided to lower numbers in 2015 as clinical trial costs run down and much of the cost of our manufacturing facility in Danbury becomes absorbed into product costs, rather than R&D. While we now anticipate including costs of the new product development in 2015, such costs should not be very great in the early periods. As a result I expect quarterly R&D costs, absent non-cash stock comp expenses to decline from roughly $20 million per quarter in 2014 to roughly $12 million or less per quarter in 2015.

In regards to alliance, profits, and losses, I will not be providing guidance as doing so this early in the launch is not realistic. These profits and losses are shown neither in our statement of operations nor in our cash flow statements in any case.

In regards to cash, most of this can be derived from the guidance above, but I would like to remind everyone that now that we are in a commercial operations, we will be exposed to some more traditional uses of cash than we have been previously, such as accounts receivable and inventory bill. The latter in particular could be material. With commentary on our year-end financials complete, we are ready to transition to the Q&A phase.

With that I would like to turn it back over to the Operator. Operator?

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

(Operator Instructions)

Adnan Butt, RBC Capital Markets.

Good afternoon. This is Jeff on for Adnan. Thank you for taking our question. A question on the pipeline, I know you mentioned the three areas of focus. But are there any updates or plans in the near future for the inhaled GLP-1?

And also is there an upper limit capacity for Technosphere technology to deliver proteins to the lungs?

In regards to your question on GLP, that certainly is a topic that is under discussion with our current partners in Sanofi. So I can certainly acknowledge the fact that the debt is also a potential development benefit project that we have in production with them.

On the second question, you are looking at the size of the API in terms of the ability to deliver with the Technosphere?

Yes, since insulin and GLP-1 are both pretty small. I was just wondering if there was an upper limit capacity for a larger protein.

Yes, there is. However, I have to say that I am not skillful enough in the technicalities of the product that I could give you a specific molecular weight and so on, so forth. We are looking usually at, say, small molecules and relatively potent drugs in terms of the APIs available to deliver it through the lines.

However, one also needs to realize that by avoiding the first pass metabolism, sometimes you can significantly reduce the amount of API and still get a good metabolic affect because of the fact that you delivered through the lungs.

This is Matt. I was hoping that Hakan might remember. I know I have heard that figure stated before but I can't recall what it is. The size limits. But that was certainly part of the screening criteria that was being used by us and our outside advisors to help us select products both as far as the molecular size and weight of the API but also the quantity needed.

If you get into huge quantities you start running into practical problems for how big the cartridges get or whether you can fit them in there without a significant redesign. That was all taken into consideration as we selected the API and the choices of these indications that we did.

Great. Thank you.

Cory Kasimov, JPMorgan.

Hey, good afternoon guys, and thank you for taking my questions. First one is I am wondering if you can comment on how reimbursement negotiations have been going for Sanofi on the Afrezza front. And how easy it is for patients to get Afrezza relative to the analog at this stage? And then I have a follow-up.

It's a little premature to say. Typically most of those discussions don't happen until it has been out in the market for some number of months. I know those discussions are ongoing. It is a very active area.

We had a joint advisory committee meeting, joint Afrezza advisory committee meeting just yesterday, in fact. And got an update on that. They are working diligently at it. So it is coming along.

In the meantime, you can still get it. Some places, it depends on the particular insurer. Some of them will just stick it in Tier 3 automatically as a new product. Some will want prior authorization which isn't usually very complicated to get. It just requires the doctor to request it.

Most times it is just a form they check off and say, I think this patient should get it. An extra step, and makes it a little more complicated initially and slows down the process in the first few months. But so far we haven't heard there's been a particular barrier.

Okay, and then Matt, in your comments you alluded to inventory having a potential affect this year. Can you comment at all on what the early inventory build in the pipeline has been for Afrezza?

Not with much specificity. I see it in our budget and projections for the year. So I wanted to get it out on the table. We are hoping not to be holding too much if we transfer to Sanofi and let them hold it instead as we produce it. Right now we have not had a material amount of inventory build.

We don't have a lot of -- the way it generally works, we take it -- if you remember the packaging -- we will take it to the foil over wrap stage in our inventory. And then hold it in that form and then once it gets combined in the different kinds of packaging, as determined, like it will be maybe a mixture of 4- and 8-unit cartridges for example, and later, 4, 8, and 12 or whatever it happens to be. It goes in to a secondary packager. And that is where it is really technically finished goods. In our hands it is more like semi-finished goods. We don't too terribly much of that. But we do have some obligations to hold some measured in numbers of months under the Sanofi contract.

Okay. I appreciate you taking the questions. I will hop back in the queue.

Jay Olson, Goldman Sachs.

Hi, thanks for taking the questions. Congrats to Hakan on his new role as CEO. I had a couple of Afrezza questions and then maybe a pipeline question, if I could.

Could you tell us what the sample configuration is? Is it 90 cartridges? And also how many sample packages have already been distributed?

The sample packaging, is, if you're talking about the real sample of the active drug. I believe it is a 10-day supply, so that would entail 30 cartridges. There is also a demo kit that's floating around out there that would be dummy inhalers and cartridges just for demonstration purposes to show the patients or prospective patients what they look like. The second part, I've forgotten the second part of the question --

How many of the 10-day supplies samples have been distributed?

Not enough. ( Laughter )

As I mentioned in my -- we have been asked by Sanofi to look into increasing the number of sample packages. I couldn't give you a number. I only know at this point in time that demand has been higher than they had initially anticipated.

Okay. And then on the new product development front, I guess you mentioned pulmonary disease, pain, oncology support. I am guessing it sounds like an anti-emetic. It seems like maybe these are more moving in the direction of PRN dosing as opposed to chronic dosing. Is that correct and if so, can you give us some color around how you chose to move the new product development in that direction?

You are correct in regards to the fact that most of these are not, say, chronic type of diseases. The benefit there of course is that we have a significant safety package around Afrezza because it is addressing such a common disease and long-term disease where patients are on it. That certainly makes sense.

Then there are other areas where our technology is certainly very beneficial in terms of, again, avoiding the first pass metabolism. In working with a number of consulting groups, physicians, and hospitals and hospital groups out there, in identifying areas where, the cancer patients are suffering from a lot of side effects from the therapy, where most of the, say, reprieves that they get are in-hospital type of treatments which is very costly and very inconvenient. Those are the type of areas which is being focused on specifically and have opened up, actually, quite new avenues for us that we really did not even consider, only about six months back.

Yes, some of that stems from the criteria that Hakan was talking about earlier, where we are looking for a much quicker regulatory path and getting a jumpstart in the market much more quickly than we have experienced before. The outlier would be Afrezza as the extreme example of that.

There's a lot of ways that we can dramatically shorten that pathway. Make it go much more quickly and frankly costless. Those were amongst the criteria that were used in some of the screenings and some of the same criteria will lead to some of the affects you are talking about.

Great, thank you.

Keith Markey, Griffin Securities.

Hi. Thank you for taking my questions. I just had a few related to accounting. I was wondering if you could break out the current liabilities and also discuss a little bit about the prepaid expenses going up-- most of them are significantly higher than last year.

Yes, some of these are accounting nuances. In the prepaid expenses we had a pretty large advance payment for inventory which is what caused that to go up. It was $15 million for inventory shipments that we received or are receiving this year. And that is the key thing there. Other than cash of course. Excuse me, that is pretty much the big thing.

Of course the receivable from Sanofi is $50 million. That cash and -- well you asked about specifically prepaid. That is really mostly insulin.

As far as current liabilities, a lot of that has to do with where things are being classified now. For example, things have moved up. The notes that are due in August of 2015 are now current. They are showing in current liabilities as opposed to long-term.

Okay.

The biggest change there, I'm sorry, you'll see all this when the K gets filed. Remember going back to the strange accounting for this whole collaboration causes us to take the whole $200 million essentially we're earning from Sanofi and hang it up as liability. So it is sitting in current liabilities, which is an odd place to find it, but it is deferred payments from Sanofi essentially. It's not flowing through the P&L yet.

Okay, that leads to my next question. That is, how are you going to actually present the results of your partnership with Sanofi in your upcoming quarterly income statements?

Well, if you remember the last call, it's very awkward but you won't find it in our quarterly income statement. Nor in our cash flow statement. You'll have to tease it out of the balance sheet and the other disclosures we will make. Which is kind of awkward but that is the way the accounting world seems to be these days.

Really anything that would be a source of revenue is going to be hung up on the balance sheet for a while. We'll make disclosures about -- to make sure there is no misunderstanding, we will make disclosures about what the profits or losses from the collaboration are. You can see it as a movement on the balance sheet but that is not a very good disclosure. So we will make sure it is specified in the MD&A at the very least, and probably in the press release as well.

We will also talk about things that I think investors will find important like levels of sales. Sanofi will probably previously disclose that anyway because they typically have their calls before ours, but we will make sure it gets in there even though it doesn't reflect it on the face of the financial statements.

Okay. Great, thanks. And I was just wondering if the 12-unit dosage form that was filed in December is the same formulation as the 4- and 8-unit dosages.

Yes, it is. Exactly the same. They just put a little more powder in the cartridge.

Okay, and finally, you talked a little bit about the new drugs coming out fairly quickly. Do you think that something could be launched later this year or is it -- is that way too early?

It is way too early. Yes. You need to go through a proof of concept and go on those efforts. We certainly hope to have started all or at least most of the development projects during the course of this year. But yes -- no, you will not see a launch in 2015.

That's not possible with the regulatory pathway even though we are looking at an expedited regulatory pathway for most of these product opportunities, because they are known APIs. From that point of view, they tend to have a good safety profile around them already. And they are well-known substances.

Great, thank you very much.

Arlinda Lee, MLV & Co.

Hi, it's Ben Shim for Arlinda Lee. Thank you for taking my questions. For Afrezza I was just wondering if you were going to contemplate any other packaging sizes for example, pediatric, is there anything like that that you have in store for the future?

We are aware of the fact that as part of the pediatric care range of drugs, we may have to go to a lower dosage size than we have currently. Those are part of the development discussions that our people are having with Sanofi at this point in time. I don't have a decision at this point in time but I certainly do recognize that for younger children, that may be a necessity.

Okay, thank you, Hakan. Just a housekeeping question for Matt. Matt, can you tell us a little bit about what happened to the convertible notes? Not the corporate converts but I think the Deerfield notes? It looks like they went down.

You mentioned an amendment to the loan agreement. Can you tell us what happened there?

They haven't gone down recently. I mean the last -- there were some conversions early in 2014 which caused them to go down, but there has been nothing since then. It was one of the reasons for the fluctuation in the P&L which is a non-cash charge because we had some unamortized discount that we had to flow through when those portions of the notes went away. So I don't think of it as loss but from a P&L standpoint it is.

Since that time there is nothing that is changing. The discount continues to be accretive a little bit. There's no conversion rights left with the Deerfield notes. It is just straight debt now.

Great. And then on the year-end share count, the 406.1 basic shares, that's before the $9 million stock loan arrangement. Right? Or is that inclusive?

That does not include the $9 million because those will come back to us. They are not considered to be circulating for that purpose.

Thank you so much.

That was the last question for today. I'd like to turn the call back to Hakan Edstrom for closing remarks.

All right. Well thank you for joining us today. Next we are certainly looking forward to sharing with you the first quarter 2015 information, which will happen in early May. Again, thank you.

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