MannKind Corp (MNKD) 2018 Q4 法說會逐字稿

Welcome to the MannKind Corporation Fourth Quarter and Year-End 2018 Earnings Call.

As a reminder, this call is being recorded on February 26, 2019, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call until March 12, 2019. (Operator Instructions)

Joining us today from MannKind are Chief Executive Officer, Michael Castagna; Chief Financial Officer, Steven Binder; and Rose Alinaya, Senior VP of Investor Relations.

I would now like to turn the conference over to Rose Alinaya. Please go ahead, ma'am.

Good morning, and thank you for joining us on today's call. Please note that comments made during this call will include forward-looking statements within the meaning of federal security laws. It is possible that the 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 and Exchange Act of 1934.

This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, February 26, 2019. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

I will now turn the call over to our CEO, Michael Castagna. Mike?

Morning, everyone, and thank you, Rose. For those on the East Coast, we'll try to get this done before the market opens there; on the West Coast, we're still waiting for the sun to rise.

So we're going to talk about a quick overview from myself and some of the 2018 highlights. We'll then bridge over to Steve, and then circle back with medical, some of the newer information coming as well as where we're heading for the rest of 2019.

In Q3, we laid out four pillars on our earnings call that we believe will enhance shareholder value. These pillars, when combined, will start to show you how our revenue compounds over the next few years as Afrezza grow, our Technosphere platform evolves and we don't have any more debt that we have to worry about, any major debt in the next 2 1/2 years. We continue to solidify our institutional shareholder base and regain the confidence of Wall Street. As you now see, we have three analysts covering our company. I will hit on many of these points under these four buckets throughout our presentation this morning.

Some of the Q4 highlights that are important that you'll start to see now in our press release as well as Steve's section is the Technosphere platform is now well underway with our UT collaboration and our research agreements. These are related to Treprostinil in particular, as well as our BluHale technology and another compound moving forward on the Technosphere platform.

We'll also be talking about this morning and updated our website with additional compounds on the Technosphere platform moving forward that are in MannKind's control.

On the revenue front, Q4 revenues were $16 million or 254% versus 2017. This is the first time you'll see us recognize United Therapeutics revenue. And as we go forward, this is something you can expect as part of the story of MannKind not just for the milestones that we receive and the [funds] that we have received, but also due to the other collaborations that we have that Steve will walk through. In addition, at some point in the future, you'll see royalties come out once TreT is approved.

In Q4, Afrezza net sales were $5.7 million or 28% GAAP and 86% non-GAAP versus 2017. The reason we show the difference here is because we had a 1x catch-up in 2017 in Q4, and wanted to compare Afrezza underlying revenue in Q4 of '17 to Q4 of '18.

Overall in 2018, Afrezza net sales we $17.3 million, 88% versus '17. And I think you'll start to see how the picture evolves over the last 8 quarters in a few minutes.

Our financial position has significantly been enhanced through our receipt of $45 million with the UT collaboration agreement, our $40 million public offering. We also, as news released this morning, as amended, our insulin purchase commitment which reduced our '18 and '19 requirements by almost $11.5 million. And we ended 2018 with $72 million in cash.

While our sales in 2018 weren't where we expected, we've made tremendous progress with advancing our company forward with our Technosphere platform, debt reduction, COGS profitability for the first time as well as our insulin purchase reduction. All of these now allow us to focus and invest our revenue, to grow our revenue in 2019. We believe our capital allocation should get us to mid-2020, as previously communicated.

So here's the new product pipeline slide that should go up on our website, if it's not already. First you see Afrezza in our Type 1 and Type 2 that we're already indicated for here in the U.S. We are actively progressing pediatrics through the first part, and we're almost halfway through that. And we expect to then progress to Phase 3, hopefully by year-end.

On the Treprostinil partner with United Therapeutics, we're moving full speed ahead with TreT. We expect and hopefully anticipate entering patients early part of this year. And there's another formulation work that we should have complete by midyear for another undisclosed compound. In addition, there's two compounds related to Cannabidiol and Dronabinol, partnered with Receptor Life Sciences, as you'll continue to hear more about that in the year progresses. And there are five additional Technosphere platform products that we are moving forward as MannKind, in various degrees between meetings with the FDA, formulation work as well as [tox] studies.

So as you can see, we are progressing Technosphere rapidly now that we know that the capabilities just in the company around replicating what we saw not only with Afrezza but also with Treprostinil with the fast onset, IV-like characteristics and now (inaudible) therapeutic effective.

Now I want to bridge over to commercial. So Afrezza continued to grow over the past 8 quarters. And when you look at our TRx growth, it accelerated as the year progressed in 2018. One of the things I wanted to show you was from January all the way through Q4, you can see our growth. And I took out a program that we had called Vouchers. And the reason we did that is because we ended the Voucher program December 31, and people like to try to compare scripts year-over-year. And that's difficult to do because you don't know how many vouchers were in our base data. And additionally, you don't get the prescriber data out there in the terminals that are available.

But we can show you here on the little box on the right 2018 versus 2019. You can see paid claims, which is what we book revenue on and what we highlight in our quarterly earnings, and our Vouchers plus Bridge, which is our new program for 2019, you can see they're significantly reduced from 13% year-to-date to 6.2% year-to-date. That's important. As we continue to progress the year, we'll continue to give you updates on what percent of our prescriptions do we believe fall in this category. I'll talk about the change in the types of programs later in the presentation. But I at least wanted to give you a perspective here of how the base underlying business looks, because sometimes the vouchers made it look like refills weren't happening as much, and so we wanted to really show you the underlying business growth that we see when you take away these one-month prescriptions.

The second part that we look at is how many unique prescribers do we have in a quarter and what's the depth of prescribing? This slide starts to show you that we had over 1,700 unique writers in Q4. That continues to increase. And really, as we look forward, we're now focused on 10,000 prescribers, roughly; and, of those, we have 1,700 writing. So it's really important as we go forward to get not only just new prescribers getting used to Afrezza but also getting them to write more Afrezza. And so if you look on any given month, we have about 1,100, 1200 prescribers, and in a quarter, we have about 1,700 unique ones.

And this is as we look out. This is really the magic in what we're doing this year is narrowing our focus to really get depth in prescribing. So can we bend that curve from five to seven or eight and get to grow the number of prescribers in a consistent way each and every month?

And the last part I'll talk about before turning it over to Steve is really cartridges. This is something that our shareholders see that we thought it was important to give clarity to. Our total cartridge growth year-over-year was 57%, and our 12-unit growth was up 174% year-over-year. The reason this is important, as we've reminded you in the past, there will be a lot of new people on the phone today, is our 8- and 12-unit cartridges are now linear priced to the 4-unit. And as you can see from Q1 of '17 all the way to Q4 '18, this is also representation of our commercial efforts working as you see 12 units grow in anticipation of the type 2 strategy of getting a fixed titration schedule working, but also getting appropriate dosing. We know one of the fundamental challenges Afrezza had in the original lunch was around under dosing and people saying the product isn't working. And now we're really happy to see that the growth in 8s and 12s continue to be strong and consistent, as that's a good important signal of patient retention and efficacy results that we continue to see.

Now I will turn it over to Steve.

Thanks Mike, and good morning. I'm excited to discuss our fourth quarter and full year 2018 results which show double-digit year-over-year fourth quarter and full year growth in Afrezza net revenue, the recognition for the first time of revenue from our United Therapeutics agreements, the achievement of our first quarterly Afrezza gross profit and we ended the year with 36% less debt and 50% more cash than when we began the year. I'll be discussing select financial highlights and urge you to read the consolidated financial statements and MD&A contained in our 10-K which was filed with the SEC this morning.

Let's first review our sources of revenue for the fourth quarter and full year 2018. The top half of the slide shows the components of our total net revenues; net revenue from Afrezza, revenue from collaborations and services, and revenue other. Total net revenues for the fourth quarter 2018 totaled $16 million versus $4.5 million for the corresponding fourth quarter of 2017. The 254% increase comes from both the first time recognition of revenue related to the United Therapeutics license and research agreements of $10.3 million as well as growth of 28% in Afrezza net revenue to $5.7 million for the fourth quarter of 2018.

You may recall that in the fourth quarter 2017, we recognized the change in estimate for Afrezza net revenue, which related to prior periods, resulting in increasing the fourth quarter 2017 Afrezza net revenue by $1.4 million. If you exclude the adjustment on a non-GAAP basis, the comparable quarterly results show an increase of 86% for Afrezza net revenue and an increase of 408% for a total net revenues.

Let's keep with the fourth quarter results and move to the bottom table on the slide, which details the total value of each collaboration and services agreement as well as the revenues by partner, recognized for both 2018 and 2017. The recognition of fourth quarter 2018 collaboration and services revenue is broken down as follows. The United Therapeutics license agreement of $6.4 million, the United Therapeutics research agreement of $3.8 million and ROS of $0.1 million.

We expect to recognize revenue from the United Therapeutics license agreement through the estimated date of when our performance obligations will be substantially completed, which is December 31, 2021. For the United Therapeutics research agreement, we expect to recognize revenue based on our performance obligations, which will be substantially complete in 2019. The full year 2018 collaboration and services revenue numbers are similar to the fourth quarter due to significant impact of the United Therapeutics revenue beginning in the fourth quarter of 2018.

I'm now moving back to the top table to review our full year 2018 revenues. We recognized $27.9 million of total net revenues for the full year 2018, a 137% increase over 2017. Breaking down the components, we recognized $10.6 million of net collaboration and services revenue, with the vast majority coming from the United Therapeutics agreements and $17.3 million from Afrezza net revenue, an 88% increase over 2017.

This next slide shows the quarterly Afrezza gross and net revenues. Looking at the gross revenues in the top graph, we increased quarterly gross revenues over sixfold between the first quarter of 2017, when we launched our internal sales force, and the fourth quarter of 2018. We adjusted the fourth quarter of 2017 in both the gross and net revenue graphs for the change in estimate recorded in the fourth quarter of 2017, as this better depicts our base business.

The bottom graph shows our net revenue quarterly increases finishing with $5.7 million of net Afrezza revenue in the fourth quarter 2018. Our 2018 growth came from expanded uses of Afrezza or increased volume, and favorable cartridge mix favoring faster growth of our higher-priced 12-unit cartridge as discussed earlier by Mike.

At the bottom of the net sales graph, you'll see our quarterly gross to net adjustment percentages. Our gross to net adjustments for the fourth quarter 2018 came in at 43%, which also ended up being our overall 2018 gross to net deduction percentage. The increased gross to nets we saw during 2018 versus 2017 were attributable primarily to the increased commercial and government rebates arising from prior year price increases and product returns primarily associated with the discontinuance of two SKUs in the second quarter of 2018.

In December 2018, we amended our insulin purchase agreement with Amphastar. 2018 and 2019 purchase requirement was lowered by approximately $11.5 million. And while the total purchase commitment did not change, the contract was extended 1 year to 2024. In exchange, we paid Amphastar a 1x $2 million fee in December, which is recorded in the fourth quarter cost of goods sold.

On our third quarter earnings call, we stated that we expected to turn a gross profit from Afrezza net revenue for the first time in the fourth quarter, and we did. Afrezza net revenue was $5.7 million in the fourth quarter, while Afrezza cost of goods sold was $5 million, yielding a gross profit of $0.7 million. If you exclude the 1x payment of $2 million to Amphastar, the non-GAAP Afrezza gross profit for the fourth quarter was $2.7 million. As long as we continue to grow our Afrezza net sales and have a low volume of inventory write-offs in 2019, I would expect to report a gross profit from Afrezza in all 4 quarters of 2019.

Some final comments. We are transitioning our company from one that was dependent on Sanofi to one that now has multiple streams of revenue as shown in the upper left-hand graph. A decreasing debt load and related interest expense as shown in the two graphs on the right side of the slide and an improving loss per share as shown on the lower left graph.

We ended 2018 with the lowest amount of debt in 12 years and with $71.7 million in cash, cash equivalents and restricted cash, the highest year-end amount since 2014, which sets us up nicely to execute our 2019 plan.

Now I'll turn it back over to Mike for a medical update and concluding comments.

Thank you, Steve. We're very excited to close out the year in December and receive an update from the ADA guidelines of their standards of care. These were published in January. And when you look in there and you type in inhaled, there are two areas in particular that were highlighted for Afrezza based on our pilot study that we did with the STAT trial, showing you that there is evidence that compared with an injectable rapid-acting insulin, supplemental doses of Afrezza, when taken, could give you improved glucose management without additional hypoglycemia or weight gain.

The significance of this trial is people know Afrezza works. We've gone head-to-head in multiple trials. But what's important is, it's the first time you can show that you're not stacking your insulin and inducing more hypoglycemia. And we were very happy that, despite this small study, that ADA found this important enough to highlight in their standards of care as we go into 2019.

We anticipate additional meetings with other key stakeholders in the medical community, and continue to share and publish our data in 2019. This will continue to refine the standards of care as we go forward.

Additionally, we had three data sets published and presented -- or actually presented that will be published, last week in Berlin, Germany. The first of these data sets, as you heard David Kendall previously speak he's working on a gold mine here, is a data set that was sitting for 10 years that was completed back in '07/'08. And that's the ultra-rapid profile of human insulin mixed and natural time-action profile of physiologic absorption of glucose.

The reason this study is important is it was something we have that really articulates scientifically why Afrezza is different, and this is accepted as an oral presentation. And you can read the key data here in the box on the right as well as our press release.

There are two other trials that were presented. One is looking at longer term duration of effect on the lungs, as people always want to know what happens if you continue to go on. This shows you a 2-year analysis. And this was accepted as an ePoster and showing you no clinical significant effects of Afrezza. And I can tell you in my various meetings with [thought] leaders around the country, now that we've been on the market, their comfort of the safety profile of Afrezza continues to improve, and that overhang of the history of inhalants starts to diminish.

And then there's a third trial that we sponsored through an investigative initiated trial called One Drop. And that was an absolute improvement in A1C when compared to injectable RAAs. I will go through each of these in quick detail here.

So the first one is the first one I mentioned around postprandial excursion. And what you see here is the two purple lines are Afrezza in various doses versus Lispro. And you can see in that box, the first 2 hours just as we've demonstrated in our STAT trial, you see a significant difference in postprandial excursions. For anybody living with diabetes, this is the first thing they notice when they inject their insulin, they're waiting to see their sugars go down. And this shows you Afrezza consistently starts to react very quickly in the first few minutes and carries on for the first 2 hours. This is really important as we think about what this could mean in terms of A1C reduction just by switching your insulin and not getting additional hypoglycemia. This particular study was in type 2s.

The next slide, showing you the other data set we presented this year. Again in the first 2 hours you see a significant drop in postprandial, glucose excursion as well as the glucose itself over the 4-hour time period. And again, this is 28 days of data going on every day every meal. You see this consistent curve.

And the reason this is important is you start to see the clinical effects on [a real world] trial on the next slide here with One Drop, where people came in, if you saw of the left side, an average baseline A1C of 7, and you can see they dropped to 6.6 on Afrezza and slightly do worse on the standard of care that they were on. And as you look, all the way through baseline A1C of 10.5, you continue to see improvement in their A1C just by switching their insulin. And this is just a reinforcement of the two data sets I just showed you, that just by switching your insulin you probably will experience less hypoglycemia and potentially better A1C reduction.

So we're very excited that the data sets that we set out 12 to 18 months ago started to read out in 2018, and now they'll start to be presented and published in 2019 in various formats. So the scientific story continues to build and it's just getting started.

Now wanted to bridge over to potential milestones as we think about the first half of 2019. Some of the first ones to expect will be the achievement of our first milestone United Therapeutics. We anticipate this being completed hopefully by the end of Q1. We have multiple data publications coming out around hypoglycemia, safety and efficacy. We expect to complete pediatric cohort 2 and progress cohort 3. We expect Brazil approval sometime during late Q1 or Q2. We have received our GMP certificate, which is one of the things we were waiting on in order to receive approval, and that came through in January. We have interim results of Phil Levin study. This was a type 2 trial looking at Libre with a fixed dose titration. We are excited to present those results at an upcoming conference this year. We also are getting a regulatory pathway clarity for India. For those of you who may not follow the company closely, we have one of two ways that this can go through. One is a potential approval based on our current data and then potentially that goes on a post-marketing study with Cipla. Or they would want us to do a post-marketing study and then file for approval after that. We have a meeting with the authorities there and expect to get clarity on that very shortly.

We continue to pursue additional international agreements around the country -- I mean around the world, and we are completing the formulation work for the unnamed compound for United Therapeutics in the first half.

So hopefully you see now that the work we've been doing and the footprint we've been laying out across the U.S. between the R&D side of the organization and the Afrezza side and international expansion is starting to pay off as we continue to progress the company and the Technosphere platform as the base for the business as this continues to grow not just in pipelines but hopefully BD opportunities as well as milestones and royalties in the future.

The second part is Afrezza. We see nothing stopping us from growing as we look out over the next 5 to 7 years. So you can see as Steve showed you, all the way from Q1 of '17 to Q4 of last year, a sixfold increase. And when people say when do you get to breakeven or what are you going to reduce your cash burn, you can see quarter-over-quarter that has continued to grow, and I do expect that as we go out.

International expansion will start to become and evolve as part of the story over this year and next year and beyond, our pipeline and end licensing opportunity as we look for things to bring into the company to complement our existing sales force infrastructure [important], and recently hired a head of business development to lead our efforts in that area.

And then finally, Afrezza pediatrics we believe will help us establish Afrezza as the standard of care as we get into children and show people that you can have a life now not just attached to pumps, but you can have a life free of any attachments and really just enjoy, hopefully, taking your insulin and controlling your sugars post-meal. This is really, really important [and we'll be seeing] continue to evolve every day when we look at the positive patient feedbacks we see on the various chat rooms and forums and emails and contacts that we get.

I want to thank everybody for what really turned out to be a transformative year for the company, and we look forward to seeing you guys at our Annual Shareholder Meeting. We are tentatively scheduled for this to take place in New York City on May 14, 2019. That is subject to change, but this is our latest dates that we have that we expect to go out in a proxy very soon.

So with that said, I'll stop there and we'll take any questions.

(Operator Instructions) We take our first question from Brooks O'Neil from Lake Street Capital Markets.

Congratulations on all the progress. I have a couple questions. I was hoping, recognizing that you embarked on a relatively ambitious marketing program that was based on some prior testing, could you just comment on what you're seeing in the marketplace as it relates to what you saw in the tests and how you think that might evolve as we move forward? Thanks a lot.

Thanks, Brooks. No, it's an important topic and because this was a Q4 and 2018 overview, we didn't focus as much on Q1, but I think it's an important conversation. The efforts we kicked off about 4 or 5 weeks ago with the consumer campaign as well as an entire new marketing campaign, retraining our sales force in early January, they hit the ground running. And one of the delays you see at the beginning of the year was really the lack of a share of voice for about 3 weeks between the Christmas time period and when people came back into training at our new launch meeting that we had in January; so about a 3-week gap. And then our reps got new materials a few weeks after that. So that promotional effort started in mid- to late January. Our TV campaign kicked in, in a lot of our new markets, rolled out in February. So you'll start to see the results of that probably as early as this Friday. The DTC, just to give you some perspective, we were able to turn it on and off for 1 week just to see nationally what would happen. We still had some regional TV going on so we can measure what happens with consistent TV over time. But the end result so far that we see is significant increase in co-pay card downloads. That's probably the earliest indicator we would look at, because patients typically would see the ad, they'll download something and then they'll ask their doctor. And the problem with TV is you have to just wait until they see their doctor. They don't always run in right away. And so you got to keep TV on throughout that time period. So we see every week our co-pay card downloads are up. We saw in an entire year we probably had downloaded in the first quarter so far. So that's exciting. The other part we looked at is website traffic. So hits to our website Afrezza.com. are up fivefold. And when we turned the TV off for the 1 week, they dropped 50%. So that just gives you some indication of the impact on TV and what it has. So I can tell you the feedback from our sales force, the doctors and some of the early indicators are positive. I don't think we've seen that show up in the scripts yet, but we would not have expected to in the first 3 to 4 weeks. I think this Friday scripts, hopefully we'll see a little bit of a bump. But it should start to hopefully start to play out as we go forward from here on out.

That's great. And then just the second question I have is, obviously, at least in my opinion, there's been a sea change in the attitude of the FDA as it relates to trying to be open to innovation in diabetes products and management. I'm curious what you're seeing from the prescribing doctors. Is there a commensurate openness to innovation among the doctor community? Or are you still seeing relatively, let's call it a moving attitude from doctors?

Yes and no. So I think the challenge we see with diabetes, and I've been in many different [of these states], and I would say rheumatologists and endocrinologists are two of the most conservative groups of doctors, for good reasons and twofold. One, they've been around a long time and their diseases progress over decades not months and years. When I worked in HIV and hepatitis, again hepatitis goes over years so you can finally cure it; HIV, people were dying at 6 and 12 months. We've transformed those diseases. In diabetes, there's just this lag effect of just come back in a quarter, I'll tweak it here. I have not seen that change dramatically. We've seen some doctors pick up CGM and pumps and some of the 670G. But again, it takes a long time to move that inertia, and that's probably our biggest factor when it comes to Afrezza. It's not that we're not trying really hard every single day. It's these docs take a little bit longer to change than we'd like. But once they change, they pretty much stick to what they're doing. And that's the good news is we have lots of patent life left. You've seen our prescribers grow, our prescriptions grow. We expect that trend to continue. And the longer we're on the market, I think there'll be a snowball effect at some point. On the flipside, I can tell you there's a lot of apps and a lot of noise around technology. And for the average practitioner, I think it's a lot more noise than reality. I've been in some of new offices that are still not even using Libre; they're still asking what CGM is. I've been in other offices where they don't treat a patient unless they're on a pump or a CGM right up front. So really varies around the country and the type of practice you're in. I think the FDA is very progressive right now around this area, and we're very excited as we look at integrating Bluetooth technology in our platform. We remain excited. I think technology, combined with the new tools we have today with Afrezza and Libre and Dexcom, you'll start to see a transformative approach with how you can manage your care in diabetes. I believe your iPhone and your android will be two of the most significant medical innovations over the next decade that we couldn't even foresee 5 and 10 years ago. So I'm excited about the future. And it's our job to help create and lay that out with where we think it's going. And FDA I think is ahead of the curve for once.

Absolutely. Thanks for all that. Just one last one. You mentioned David Kendall and the impact he's having and the studies he's bringing to light. Is he having the kind of impact you hoped he would have? And do you think that will continue going forward? And thanks for taking my questions.

Yes. Thank you, Brooks. Appreciate all the good questions. No, David Kendall's been incredible. As I travel the country, whether I'm meeting with JDRF for ADA or thought leaders, Kendall's continued to be invited and well respected out there in the community. You haven't heard much from him this year because he's been giving grand rounds in at least four different cities in the last 2 weeks, meeting with big diabetes centers and educating them on the history of insulin as well as our product profile and some of the new data we have coming out. So he's been incredible. When you look at some of the authors on our new publications and the studies you just saw, we got some great thought leader support across these studies. And all these are really, with Kendall at the helm, driving the publications for it, along with the team he's built around them. So he's been a great addition and we're thankful that he's here.

And we'll take our next question from [Pasha Surat] from SVB Leerink.

This is (inaudible) sitting in for Pasha. Just a couple questions for you guys. First one on bookkeeping. How much more inventory do you think you're going to have to write off from these discontinued SKUs? And then I was hoping if you guys could provide a little bit more color on the actual terms of the agreements that you have with Cipla and with Biomm.

Dylan, it's Steve. I'll take the first one, which is we don't expect there to be any more material write-offs from the SKUs that were discontinued back in April 2018.

And then you asked for some clarity on Cipla and Biomm. So on the Cipla agreement, there is a opportunity that if we were to get accelerated review that will result in another upfront payment as well as additional royalties, you could say or milestones, because we'll make a transfer price off of that one. So we are excited hopefully to see if we can get that out. We think it's a long shot given the pathway, but we think it's doable and achievable. So we are trying to get that accelerated approval. We took that risk together with them. On the Biomm agreement, you may or may not recall, and a lot of people ask us, there were no financial terms released on that one because we wanted to make sure we understood. At that time we signed this agreement, the company wasn't in great shape. And so we really weren't sure about the pricing environment that was going on in Brazil. Now as we continue to clarity and get the product profile approved and whether that's some government pricing or private sector, that will start to drive some Biomm. And we're into active discussions on what that can look like in terms of -- you know a lot of our agreements in general revolve around who's packaging and are we shipping final goods? Are we shipping overwraps and they package them in local markets. So that drives some of the, I'll call it royalties, but it's transfer pricing, that you'll start to see coming out. So hopefully as we go forward this year, you'll hear more about Biomm and Cipla and how we expect those to translate into actual revenue.

Great. Thank you. And then one last question just about your pipeline. Can you give us a better understanding of how you go about choosing the molecules that you did? And then what does the developmental path look like for these molecules moving beyond 2019 and early 2020?

Sure. And these are all subject to change as you know. Some of them we picked because we felt they were a good market opportunity based on feedback we received over the last 12 to 18 months as well as the [acceptance] we had done 2 or 3 years ago when we first got the products back from -- further back from MannKind, we did a strategic assessment on the company. If you look at a couple -- I'll pick on the triptan category, there's been a couple new approvals there in the nasal environment that made us look at this again. We continue to evaluate that one a little bit harder. But we do believe with all the chronic migraine preventions and the refocus in that market, that there's an opportunity for better acute treatment, and we believe we have one of the best platforms to deliver that result. And we think that there will be partners available for the triptan category. So that's kind of a little bit of background on that one. When we look at tobramycin and DNase, those are two in the cystic fibrosis space. We think given the technology platform that we saw with Treprostinil, giving drugs delivered to the lung in these types of conditions could have a nice upside in terms of efficacy and tolerability. And we feel like those are two opportunities in the cystic fibrosis space. That market is growing. Thankfully to the new treatments there, these patients are living longer and hopefully healthier lives. But they still, unfortunately, get sick and still need help, and we think we have a technology platform that can help them in a dramatic way. So that's what you see in the [toby] and the DNase. And then you get into the chemotherapy-induced nausea and vomiting. And this one, we've been kind of moving along trying to pick which one we were going to go with. We landed on Palonosetron. And this is one where, if anyone has a family member who has cancer, you see just the chemo, you feel so sick and you don't feel like eating. And hopefully, we believe we can bring better symptomatic relief quickly in that area. And the reason we brought that forward, is there is so much innovation happening in oncology and there's so many companies that are going to have a niche area products, that having a second product in the bag we believe will be an opportunistic opportunity as we go forward. So we are taking that bet. And then epinephrine is one we had a lot of questions on, and we decided to come out and go back to the FDA and try to change some of the dialogue we had 2 years ago and see if there's a way to get that in a larger treatment paradigm shift with an adjunctive treatment to epinephrine as opposed to replacement. And hopefully that the FDA, from what I understand, has changed their tune a little bit, so we're excited to go back and have that discussion and continue to provide an update. So kind of the next steps for many of these are continuing to fine-tune the powders to make sure they're ready for clinical tox studies. And some of these are getting clarity around the FDA filing pathway in the case of epinephrine and some of the CF products. But we believe, for example, the Pulmozyme drug, that's a very similar pathway to Treprostinil, which would be get the tox studies done. But it's already inhaled, so that's pretty easy. It's really driving a small switch study along with a confirmatory bioequivalency study. So as we look out on all these, we think we can fund them into the development phase and at least get them to Phase 1 and then look for partners there. And if we find a partner ahead of time, we'll be looking for those and that's also equally important.

We'll take our next question from Oren Livnat from H.C. Wainwright.

Congrats on crossing that magical gross margin threshold, which I guess leads me to look at the next hurdle which is I guess overall breakeven. While obviously that's a ways off, I wonder if you could just talk about, I guess where the cost structure is today both with regards to the fixed and variable COGS, including that overhead, and what that's going to look like in the quarters going forward. And I guess OpEx, which we saw a nice disciplined approximately $20 million this quarter in total, I'm just wondering with DTC taken in, in Q1, how much higher we think that goes to maintain your ongoing ramp. Or should we think of breakeven as a current this, current cost level?

Oren, it's Steve. I'll take the first part which is on the cost of goods sold. So we have both an underutilized plant and we have under-absorbed production costs, and we don't want our production lines at full shift capacity at this point in time. So as those costs get absorbed into inventory as we increase our production volumes, I don't anticipate a significant increase in the cost of goods sold until we have to actually add more capacity in the manufacturing plant. In addition, as we add manufacturing capacity for Treprostinil Technosphere, that'll also absorb some of the costs in the factory. So we won't give any forward-looking gross margin predictions, but I think that gives you a picture of where we think it's going to go in 2019.

And then, Owen, I think you see from the company we're very conscious of the cash burn in the company and how much it takes to raise that money. And so we're very disciplined at managing that OpEx. And that's why I made some tough choices at the end of the year to narrow our focus with our sales force and kind of self-fund some of the DTC initiative (inaudible) to do as well as the other programs and take a little bit more risk on our promotional efforts in terms of costs and the types of programs we're launching. For example, switching out our co-pay program and getting rid of the vouchers, we now we have a short-term impact on scripts as you make that transition and pivot that requires your reps to be retrained. It requires a new learning from the doctors after 2 years of doing something. And all those things just take pivots, right. So we've been very conscious of our cash burn and how we manage that OpEx. And so we don't -- it's in our control to fund that growth; meaning, do we choose to burn more cash to grow faster or do we hold that cash forward to get to a breakeven? I think what you see us right now is running a disciplined approach to show that we continue to accelerate sales and we'll continue to make efforts that are in the best interest of shareholders. If we think we can grow faster, then we'll make those trade-offs. But at this point, in the first half, we're looking at just execution, execution, execution on everything that we're doing across the company. And that's our main focus is being tight on expenses. And Steve and I really manage to budget very tightly, as our employees will tell you. And I think that's important as we go forward is in making every dollar count in the best way we can to make an impact.

Okay. Thanks. And I know a lot of us are still adjusting to this IQVIA methodology shift which has reduced scripts for everybody across the board. And so we might need a little more help from you guys with regards to, I guess indicators of actual demand especially since you've launched these new co-pay programs and I guess this direct purchase program, which you can also maybe help us understand a little better. So do you have any other data that you have internally that you can show us or describe to us qualitatively that gives you an indicator of the leading demand trend?

Yes. No, Oren, when we use Symphony for all the data you see, we're not impacted by what we do with the IQVIA switch. I think we should go back and compare what we see in IMS trends historically because they were at about 5% to 8% higher on a weekly basis. But our Symphony data is what we look at. And I can tell you that's pretty consistent with our factory data in terms of we look at two things. We look at shipments from the wholesalers to the pharmacies every week and we look at shipments from our factory into the wholesalers. And that's Symphony. And so all three of those are pretty correlated pretty tightly. They may be off by 1 or 2 weeks in one direction or another. But in general, when we look at the trends, for example, we saw a reduction in overall wholesaler inventory last year, but our demand stayed strong. And the reason we saw that is because we reduced the number of SKUs we were shipping and that inventory had to burn off, and then ultimately some of those returned. So we continue to manage that tightly. And knowing some of the things there, we'll try to be as transparent as we can on some of the early indicators. And I can think about if we could show maybe [52] sales in the future, given some of those market dynamics. But today I can tell you, our Symphony sales and what we showed you and what you've see weekly in Symphony, is directionally correlated with what we see in our shipments to pharmacies; they're off by a little bit, but I would call it within a 5% variance, so nothing major. And it may vary by 1 or 2 weeks one way or another, but, in general, they're in sync. The other two things I think you mentioned which are important is the direct purchase program, the cash program we launched back in January. I didn't talk about that, mainly because it's not a high margin program. It's really meant to see, could we help those 65,000 patients paying cash for their injectable insulin? Now, unfortunately, it took a little bit longer to get that up on the ADA and JDRF websites and get that notification out. It probably just happened in the last week, and so that's why we had extended the program. We are still marketing that to some of the news media, and expect to see continued progress on that. It will evolve probably next week, into a more sustainable program that's not introductory anymore. But we expect that offer, basically, if you move to a 3-month fill, it'll still be a very low cash program for the rest of this year. Our goal is to get at least 1,000 consumers to sign up, because of the fixed cost of running the program and if we're going to maintain that type of program, we don't want to lose money, and so we need to get a certain number of people signed up. So it's on track. But those scripts do not show up in the weekly data. And so when we look at numbers, that's not there. We also have a drug program through our reimbursement hub to help some patients who may be stuck in the reimbursement. Those scripts do not show up in the reimbursement landscape either. So what you see is technically as close as you're going to get to our demand. And like I said, this year with our Voucher program going away, we have something called a Bridge program, and we won't count that as revenue either, but we'll try to bring clarity each quarter so you can start to adjust your models.

That's helpful. And lastly, if I may, just big picture, we've all seen that insulin makers are being dragged in front of Congress to explain themselves and their historical pricing practices. And I think I'm less concerned about sticker prices and maybe more about middleman and your ability to sort of penetrate the market given your larger competitors have 75% rebates in some cases. And I'm wondering if your consultants are indicating to you that anything is going to change with regards to the overall dynamics of insulin formulary access and market access such that in your planning horizon you think you're going to have a fair shot at access to patients.

Yes. I mean, the good news is, I think 3, 4 years ago the payers and the competition were, unfortunately, very negative at impacting Afrezza's initial launch. There were very restrictive covenants in some of those rebate agreements that really damaged patients' ability to get access to the drug or a doctor's ability to prescribe it. So I guess hats off to them, they were successful in protecting the monopoly which is why you're seeing them ultimately get called into Congress. But as we look forward to today, we know that some of that noise has actually resulted in those unfavorable terms getting removed from those contracts because all that stuff will be subpoenable and discoverable, and people will start to be able to see the true activity of PBMs and the competition of protecting some of those market shares. Remember two players make up 95% of the market and two PBMs make up 70% of the market. So they're very high concentration. And you've seen like State of Minnesota sue the companies for protecting that and trying to get some more discovery. And I think the judges are letting that discovery continue. So we see it as opportunity. I can tell you in one or two payer cases where they basically said your competition is no longer restricting you, then it's really about our net cost. And then I think you can see we're able to secure a position within Kaiser, and it's just evidence where there [aren't] those types of incentives, we are able to gain formulary access and be very disciplined about our contracting strategy. We are now trying to be the lowest net cost providers like injectable insulin. We are really focused on outcomes in places like Kaiser and health systems that care about outcomes, which I hate to say the majority of the systems are volume-based and not outcomes-based, and we think that evolves. So when you ask me what's going to change, nothing's going to change dramatically this year. You might see people make one or two moves like Amgen did with lower a SKU on Repatha. I think you'll continue to see certain moves of net cost focus. But you're also seeing the transparency come out that PBMs need rebates. United Healthcare came recently and said, just because you lower your WAC doesn't mean you can't -- we still need to get rebates for 7 quarters. I mean, these types of activities are showing you it's not just rebates are being passed through, their business models depend on them. And so [if we ripped] out -- I think I saw Sanofi gave $12 billion in rebates last year. When you pull that much money out of the healthcare system, someone's got to pay for it one way or another, and I think that system cannot be fixed overnight. But we continue to see opportunities of growth, where I can tell you we're growing faster than some of the non-contracted business where we're restricted versus the open access business. So the PBMs don't seem to be impacting growth of Afrezza dramatically. It's really changing doctors' behavior and habits more than anything. So we continue to see nothing but a positive environment in the near term around this stuff.

Will take our next question from Brian Marckx from Zacks Investment Research.

Congrats on the quarter. Mike, regarding the updated ADA guidelines, how influential do you think that that may be in terms of prescribers' decision-making in terms of prescribing?

Yes. I think that by itself is not much because the doctors' probably aren't reading this. But where it does help us, I think back when I did my doctorate degree in pharmacy, they train us on the guidelines. And so starting to continue to get the guidelines evolved to train future doctors and highlight inhaled insulin in general as well as hopefully as we continue to evolve the data set, you'll see even more differentiation within the guidelines around inhaled versus injected. But in near term, I don't expect much. But I think when you take the ADA standards of care update plus our recent publications plus other things happening throughout this year, I think that the time the drug's on the market along with the long-term safety along with the new data, starts to give doctors a lot more confidence. And if I had to explain or articulate one feedback I'm getting from doctors is confidence, meaning, when I ask them what evidence-based medicine made them adopt CGM, they all say the same thing, it's my experience. And I go, that's exactly the point. You have to get your experience with Afrezza. And once they get that experience, they're very happy with it. But they're so apprehensive to change that they been doing for 97 years, that that's our main focus here is how do we get them to change and get that clinical experience because they are naive and they say things like, oh, it's fixed dosing, it's not precise enough. That's because they just don't understand the drug. So whenever we hear those comments, we immediately get out there and take care that. But as doctors get that experience, as they see their patients' success, the rest is history. And so I think it's not just the ADA by itself, but it's a combination of all the stuff that our medical team is doing that starts to bring that confidence in the doctors. And that's a big shift from where I was 3 years ago, people said, no need for inhalants, don't even come to my office, to when I go out to speak now, we'll have people sit for 4 hours over dinner and have an intimate discussion around how do I now learn how to prescribe. That's a very big difference from 2 years ago, when people would barely show up to dinner. Now they actually are there wanting to learn. And so we're excited about where that is and the scientific data around it.

In terms of seasonality, is there much seasonality in Afrezza demand, particularly from Q4 to Q1?

Yes. We've seen 3 years in a row now that January kind of takes a dip and then February picks back up and then March is hit or miss in terms of growth versus flatness. But this year you saw a little bit more dip because of the voucher removal. That's why I try to bring some clarity to what people are seeing, because we only book revenue on paid scripts. So the vouchers don't make any difference to the company. But Q1 generally is flat to slightly up or slightly down, it really varies on whether you're looking at scripts or revenue. But I'll say roughly flat is a good way to think about Q1. And then Q2 through the end of the year continue to grow. And that's kind of what you see now when you look over 8 quarters. And even if you go back to '14 and '16's when Sanofi handed it back, you saw a 2-quarter decline. And we've been building back up since we got back in July of '16. But we expect Q1 could be flat or slightly down, but it really depends on the next 4 or 5 weeks and how that DTC and some of the other sales force efforts kicks in. So we'll continue to watch. Right now we're optimistic of what we're seeing, but we still need the rest of the quarter to finish up.

We'll take our final question from Bert Hazlett from BTIG.

Congrats on the progress in 2018. It was meaningful, as you said. And I appreciate some of the comments on the TV campaign with the 5x increased traffic and the lowering by 50%. Do you have a sense, and you said it early days, Mike, but do you have a sense of how that's influencing scripts? Is it influencing scripts? Just any kind of anecdotal evidence would be helpful.

Yes. No, I can tell you because the way TV is running is it's a national campaign along with a subregional campaign, meaning there's about 10 markets where we are adding a little bit more value to kind of measure if you do TV nationally, what does that impact into white space, because remember, we pulled out of 14 states this year so we can see what's happening in states where we don't have sales force versus where we do have sales force. And then we can also look at it where we have a little bit more TV in certain markets and look at prescribers. So we'll have a good analysis when we wrap up in Q1 for where to continue to focus that effort. I can tell you anecdotally, it's really opened up a couple doors into our markets, where reps couldn't get in and all the sudden people are asking for the drug and the reps want to come in or be invited to come in. So that's part of why you do TV. And I think that's important. I think also remember our customers are consumers of TV. So it also reinforces their confidence when they see it on TV, for whatever reason, and that gives them confidence to prescribe and continue to prescribe. So I think all those anecdotal things we've heard, whether it's from our sales force, it's the patient, if you just look on, there's a Facebook chat room, I get notified whenever I see interesting posts or if some of our patients post and copy me. But that traffic goes up significantly. You can see all the chatter. And it's great to see a self-help community when patients are learning from each other. They post a comment; within 10 minutes, they got 20 comments back. And that continued community and self-help is amazing. And as it grows, we just expect to continue to see that kind of help in the noise spread. So I think it's all starting to work. We're just early days. And I think the next 5, 6 weeks will be important when we look at TV.

Great. You made some comments on cost of goods earlier. And I'd like to try to maybe put a finer point on it. So as we think about things, you have the direct purchase program. You have Brazil, potentially coming on board. How do we think about the -- and you don't expect any more write-offs. But how do we think about cost of goods sold as we move through 2019, and maybe into 2020 as well?

So, Bert, it's Steve again. So because of the under absorption underutilized plant, I wouldn't anticipate there being a material change in our cost of goods. I mean, as our volumes go up, you will see the cost from the product rolling through our cost of goods throughout the year. But until we reach a point where we are absorbing all our costs, I don't see a significant change in our cost of goods. The Brazil and the direct purchase program are going to have a minimal impact in terms of volumes in 2019.

Okay. Thank you for that. And then just one final one. On the unnamed compound with the United Therapeutics, you listed that as a milestone. Could you just remind us of the terms of the development or the interaction with United Therapeutics on that? And how should that development proceed if it proceeds according to plan, just general terms?

Yes. We don't want to speak for UT, and I think that's important because they have a different perspective of what they share and when they share it. Obviously, we're smaller, so these things are more important to our shareholders. So we try to bring some clarity to you within the confines of the agreement. But the first step here is making sure that we can make a inhaled version of a molecule they want us to look at. And then once that's done, they have an option to license that in, and that would result in additional milestones and royalties already predefined in our agreement. So that's not a new negotiation. It's an opt-in opportunity. And we would expect that discussion to happen after we complete part one, which is the formulation work. There are, and I'll just remind you, the UT agreement has exclusivity for pulmonary hypertension products. So as you saw, they license an Arena product and there's a particular agreement on that. So we look at United as just a strong partner as we go forward. We think there's a lot of synergies within the companies and what they're doing in the lungs and the types of products they're looking at. I can tell you, the collaboration is one of the best I've ever had. And I've been through all the big companies in this industry, so I can tell you which ones are good and which ones aren't good. I'm very, very happy and proud to be working with them. I think they're a phenomenal group of people. And culturally, we're just aligned when it's a mission-driven culture like we are and they are, to help support those patients suffering from PH. They're an amazing company and just an amazing partnership. So we look forward to continuing a dialog with them. And as Steve mentioned earlier, we're in the process of building out a permanent high potency manufacturing facility which will bring in new capability to the company, and we think about products like epinephrine, we'll then be able to continue to bring other products forward because now we've built in clinical development a lot of high potency capabilities you need to build clinical supplies, et cetera. So people underestimate what that takes. But it does take a lot of work in a company to be able to have that capability. So we're excited. UT continue, you know, they come to inspections. They looked at everything we do, our quality systems, and have met all the requirements that they look for in a partner in order to produce and manufacture and be a good quality partner. So that's all positive. And I think you'll continue to see clarity with our UT alliance throughout this year. So they have various data set readouts they're looking at. And I think as those things to continue to evolve, then we'll continue to bring transparency to market.

That does conclude today's conference.

Thank you, everybody.

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