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Edited Transcript of MNKD earnings conference call or presentation 25-Feb-20 2:00pm GMT

Q4 2019 MannKind Corp Earnings Call

VALENCIA Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of MannKind Corp earnings conference call or presentation Tuesday, February 25, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael E. Castagna

MannKind Corporation - CEO & Director

* Steven B. Binder

MannKind Corporation - CFO

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Conference Call Participants

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* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Dylan Edward Dupuis

SVB Leerink LLC, Research Division - Associate

* Oren Gabriel Livnat

H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst

* Robert Cummins Hazlett

BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Welcome to the MannKind Corporation Fourth Quarter and Year-end 2019 Earnings Call. As a reminder, this call is being recorded on February 25, 2020, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call until March 10, 2020. (Operator Instructions)

This call will contain forward-looking statements. Such forward-looking statements are subject to risks and uncertainty, which could cause actual results to differ materially from these stated expectations. For further information on the company's risk factors, please see their 10-K report filed with the Securities and Exchange Commission, the earnings release and the slides prepared for this presentation. Joining us today from MannKind are Chief Executive Officer, Michael Castagna; and Chief Financial Officer, Steven Binder.

I would now like to turn the conference over to Mr. Castagna. Please go ahead, sir.

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Michael E. Castagna, MannKind Corporation - CEO & Director [2]

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Thank you. Good morning, everybody. Thank you for dialing in this early. As many of you may have seen, we recently rebranded our company along with our mission and our strategy, and I'm here to share a few of those highlights today. One of the things unique about our mission is our product technology and our focus of our pipeline is really to give people control of their health and the freedom to live their life, which is one of the #1 things we hear around Afrezza and we hear the early results coming out of the BREEZE study for treprostinil. We continue to be excited about the feedback we hear directly from our patients and our key stakeholders.

Along with that comes a new strategy. And what that strategy is, as you'll hear today, is we'll move to a therapeutic focus in 2 distinct disease areas: endocrinology, which encompasses where we are today with Afrezza and continue to build out other areas, could be in metabolic diseases, diabetes and any symptoms around endocrinology disorders; and orphan lung diseases. These are the 2 areas that we believe we either have existing infrastructure or could build future infrastructure and make a difference in unmet needs. We will exploit our current proprietary technology but we'll not be limited by them. So if we find outside innovation, that's okay. Not everything will be on Technosphere as we look out there for pedia opportunities. We'll ultimately out-license or terminate pipeline products which are not in either of our 2 focal areas as we'll talk about later today. And we will focus, execute and deliver on these priorities as we go forward.

Before I begin our Q4 and 2019 highlights, I want to address the serious threat that many companies and people are dealing with when it comes to the coronavirus. We looked at our current supply chain and given the majority of our manufacturing is here in the U.S., we don't anticipate any impact or disruption for patients or third-party suppliers of our products. I want to put that question to rest because I know there's a lot of question on a lot of the earnings calls these days.

Now let me jump back into 2019 achievements. A couple of key areas. First, I want to highlight Afrezza. We recorded annual net revenue of $25.3 million and Q4 net revenue of $7.8 million, which was 22% growth over Q3. We are excited to finally get Brazil pricing and approval and launch here in Q1. We're only a few weeks in, so not much of a share. However, we have received the second order, and you can anticipate some of this will ship in Q1 and majority will ship in Q2.

With our United Therapeutics Alliance, we expect to receive -- we received 2 milestones of $25 million in 2019. We expect an additional $25 million in 2020. We also completed building out our high-potency manufacturing suite as we will become the manufacturing -- manufacturer for treprostinil version of inhaled when it launches. We expect FDA filing within the next 12 months. And as many of you may have seen, the results released yesterday by United Therapeutics around the increased trial will really -- we expect that to be in the label as we get ready for launch, and these results will really expand the potential population. If you look at what they've said, they expect this to go up to 30,000 patients or in WHO Group 3. We're very excited to continue to work with United Therapeutics to bring this incredible product to market.

On our pipeline, we progressed 2 products through formulation to animal PK studies, one of which I'll share with you today on the sumatriptan data. In terms of cash flow, as many of you realize, we recapitalized the balance sheet and ended 2019 with $50 million. We have access to $60 million in 2020 between our milestones from UT as well as our MidCap loan. Additionally, we're excited to have new research coverage going from 1 to 5. And we had a good shareholder return of 22%, which ranked us in the top 3 amongst our peer group that we compare ourselves to.

One of the unique things that we like about Afrezza, as you'll see here, is as our TRx growth happens, you continue to see a compound in revenue growth. So when you look back to Q1 of '17 when we put our MannKind commercial infrastructure in, our prescriptions have grown 3x since our 2017 launch. Additionally, we've had major changes in our packaging, and our number of cartridges per prescription continue to go in the right direction, which ultimately leads to retention of patients and a build of refills. We continue to work through, as you can see on the right-hand side here, $18 million in gross sales for the quarter with a net of $7.8 million. The reason for that gap is related to gross to net as well as our free goods program, and we're continuing to work on ways to change for -- our free goods into paid prescriptions.

As you look at Afrezza, net quarterly revenue is up 6x since Q1 of '17, and this just goes to show you the compound effect, as I just described. As we grow prescriptions, you will see an exponential growth in revenue due to the unique nature of 4, 8 and 12s being uniquely priced to the 4-unit cartridge. So what that means is as people talk about an 8U as double the revenue of a 4-year cartridge and a 12 as triple the revenue as insulin is unit-based pricing.

I'm going to stop there and turn it over to Steve.

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Steven B. Binder, MannKind Corporation - CFO [3]

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Thanks, Mike, and good morning. Very pleased to review our fourth quarter and full year 2019 financial results, which show record revenues, accelerating Afrezza gross margin and improving cash burn. I'll be discussing select financial highlights and urge you to read the consolidated financial statements and MD&A contained in our 10-K and additional quarterly information contained in our press release, both of which were filed with the SEC this morning.

Let's start out with looking at revenues for the fourth quarter, which appears in the middle box in the table. Afrezza net revenue for the fourth quarter was a record $7.8 million versus $5.7 million for the corresponding fourth quarter of 2018. The increase was generated by volume growth from underlying Afrezza prescriptions, up 13%, from having an extra week of shipment in the fourth quarter of 2019 worth about $0.5 million in price. There was no Afrezza international revenue in the fourth quarter. Gross to nets were 44% for the quarter, reflecting a 1% uptick in the fourth quarter 2018 as well as the third quarter 2019 mainly due to increased commercial and Medicaid rebates associated with the price increase taken October 1, 2019. The price protection from 1 of our 2 significant commercial contracts reset as of the first of the year, which will deliver a lower rebate rate for 2020 versus the fourth quarter of 2019. We expect gross to net to be in the 42% to 44% range for 2020.

Keeping in the middle box. Revenue from collaborations and services was $8.2 million for the fourth quarter of 2019 versus $10.3 million for the corresponding fourth quarter of 2018. The reduction in revenue was mainly due to the recognition of the $10 million United Therapeutics research agreement over the period of fourth quarter 2018 to the second quarter 2019, and our performance obligations were substantially completed.

Moving to the box on the right. For the full year 2019, Afrezza net revenue increased 46% versus 2018, which includes $0.7 million of sales for the Brazil market in the third quarter of 2019. Gross to net for 2019 came in at 42%, a 1% decrease from the prior year, which mainly resulted from the sales for Brazil which have no gross to net deductions. Collaborations and services revenues increased 257% to $37.7 million in 2019 mainly related to the United Therapeutics collaboration agreement, which started in the fourth quarter of 2018. Inception to date, we have recognized $37.6 million from the United Therapeutics license agreement and $9.8 million from the United Therapeutics research agreement.

Let's take a look at how our favorable product mix supported our 2019 growth. On the left-hand side of the slide, it shows our cartridge growth and mix favorability versus 2018. We grew our 12U cartridges at the fastest rate of 36%, followed by the 8U cartridges at 21%. The faster rates of growth in the 12U and the 8Us have a favorable impact on revenue growth due to the pricing that Mike just mentioned, the 12U being 3x the 4U and the 8U being priced 2x the 4U. The right side of the slide shows the same data but with 4-unit cartridge equivalents. The growth rates are still the same, but it shows visually that the sale of 12U and 8U cartridges are more impactful to our Afrezza revenue growth.

Moving to Afrezza gross margin. In the green box on the table, you will see the gross margin for the fourth quarter of 2019 was 40.3%, which has been accelerating throughout 2019 from 20.8% in the first quarter. Our cost of goods has remained relatively flat in 2019 versus 2018 due to production volumes remaining lower than our production capacity, which results in a majority of manufacturing expenses being recognized as cost of goods sold as incurred. As we increase Afrezza revenue, we anticipate growth in gross profit and gross margin as we expect sales increases to continue to outpace cost of goods increases in the near term.

The next slide shows how we use cash and operating activities in 2019. The gray bars represent the non-GAAP net cash used in operating activities. You can see a steady reduction in cash outflows quarter-on-quarter as we carefully managed our cash spending while we steadily increased the sales of Afrezza, as illustrated in the magenta bars on the top of the graph. Our employees understand the value of using our cash resources carefully, which has resulted in improved cash flow this past year, and we intend to continue this approach and spend our cash in a purposeful manner in 2020. Thank you.

And I'll turn it back over to Mike for additional comments.

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Michael E. Castagna, MannKind Corporation - CEO & Director [4]

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Great. I'd like to highlight a few other things that have happened either towards the end of 2019 or early this year and where things are going.

The first is our new preliminary data we just got in on the sumatriptan PK results showing an ultra fast onset using sumatriptan on our platform. The graph on the left highlights the PK curves as you look at the different formulations available today between nasal spray, powder, oral tablet and subcu injection. The thing you should note the most is the delay in absorption of an oral tablet shows you the delay in the peak versus the subcu injection. These are the current formulations of sumatriptan on the market.

We weren't sure how this would look in our rat PK study, but if this is any indication of the human data we expect, you can see first on the scale, please note it goes from 100 to 700 versus 0 to 120 on the left. And that results in a 2x higher peak concentration just off the first rat PK dosing we see here relative to subcu. As we think speed of onset is important to migraine, this is something we look forward to continuing to explore as we progress this program forward. At an IV-like response just like we see in Afrezza and the other products we put on our platform, we're very excited about this preliminary data. Albeit animal, usually for us, this is indicative of the direction we go as we go through dosing and toxicity studies.

And this program ultimately will be licensed out to a partner or spun out of the company. And if we can't find a partner for some reason, then at that point, we wouldn't invest any more MannKind resources in it. However, we think it's prudent to get us to a certain stage so that a partner can see the data and understand the value that this will bring in a unique market. And many people will say that sumatriptan is crowded with generics. I'll just highlight that Lilly and, I believe, Allergan just recently launched 2 new triptans in the marketplace. So a lot happening in migraine space and chronic prevention. We believe there's still a need for an acute treatment as we look forward.

Next, I want to talk about the 6 new scientific presentations. As we look out, we see Afrezza to be the fastest insulin in the world. We're very excited as we look about the continued change in CGM as it took almost 10 years to go from $0 to over $1 billion to change the standard. We are just scratching the surface and only 3% of our targets here in the U.S. have ever written their first prescription for Afrezza. These are doctors who write rapid-acting prescriptions every single month, and only 3% have written the first one. So we have a long ways to go to continue to penetrate this market, but we believe we continue to see progress on new writers and depth of prescribing year-over-year.

We think about how we're going to get there. Number one is our safety and PK in pediatric patients. This allows us to explore how to get to Phase III as the pediatric market is about 10% of the rapid-acting market and represents over $1 billion opportunity for Afrezza. As we think about getting standards of care change and adoption, that's around building prescriber confidence and educator confidence. And I'm proud to say these next 2 bullets around Afrezza BluHale were data sets that demonstrated last year that using a training device like BluHale that show proper inhalation will build someone's confidence and reduce teaching time, which ultimately reduces the administrative burden in these offices who are overwhelmed with paperwork these days. BluHale PRO will be the name of our health care professional addition that we will launch here in Q2.

Additionally, we were able to show new data from the Phil Levin study that we showed last year at ADA, showing almost a 1.6% reduction by adding Afrezza on top of orals regardless of the background therapy as long as they were on mealtime insulin. This is unbelievable result that we've seen with a very simple fixed-dose titration. As we want to see continued progress in helping change type 2 diabetes, we realize it's a very crowded space, which is one of the reasons we've refocused our energy this year into the type 1 market to drive faster adoption of Afrezza. However, we do believe long term, we need to be here to help people living with type 2 as well as type 1.

And the last bullet here was, I'll call, a pilot study done out of Yale showing reducing early glycemic excursions during a hybrid closed-loop treatment. This explored use of low- and high-dose Afrezza. I think in the study, when you look at the results, you can still see we got to optimize how Afrezza is used within these hybrid closed loops. But it is an interesting phenomenon as we go forward thinking about pumps and an inhaled insulin together. We're really excited to continue to get Blu out the door, move our pediatric forward and continue to explore new data opportunities in type 1 and type 2 space.

As we talked about recently in our Q3 earnings call, 2020 is really focused on placing key bets to drive wider adoption of Afrezza. One of the areas we want to go here is really around the type 1 focus. So as you think about this year, our sales targeting, our marketing efforts, our advocacy relations, our data generation and publications are all going to be really focused around T1D and starting to build our footprint into this market.

On the right side, we launched a specialty network in January that will help with reimbursement support, pharmacy fulfillment and started new patient persistency tactics around text, e-mails and increase in compliance. On the bottom left is really around patient training. We did a patient training pilot. That continues to go well. We'll scale it up as we go across the country; and finally, launch of BluHale PRO, which we'll be training our sales reps at the end of March on this device and how to get this out to customers as quickly as possible.

What do we expect over the next 12 months? I'll try to break this out for you in 4 buckets. Number one, Afrezza. The only thing stopping Afrezza's growth is continue the increase of sales force and depth of prescribing and breadth of prescribing. We expect to pass 1,000 TRxs a week. It's been a long time coming, and we're ready to hit this milestone and continue to grow from here. We're going to complete a deep dive on the pediatric landscape assessment before we initiate the Phase III trial, and we're very confident in the opportunity that exists here as we think it's a large opportunity that will start to change the standard of care for the next 100 years.

On the pipeline side on the right, we will progress 2 pipeline compounds in orphan lung disease. Those -- you can see in our website dornase alfa as well as cystic fibrosis with tobramycin. We plan to initiate new partnerships as we continue to explore opportunities to use Technosphere in our device platform with other molecules in the marketplace outside of MannKind and the things we listed already. We had animal PK readout on sumatriptan and the tadalafil data just came in. We have not seen it yet, but we'll share that at an upcoming call. We will spin out the nonstrategic assets in the pipeline, there's 4 of them, or terminate them if we can't find a partner. We believe each of these assets serves its unique marketplace, and we'll solve an unmet need. However, we can't continue to build infrastructure or dedicate resources beyond getting them to Phase I, which are not very expensive, and really leveraging the fixed costs that we already have within the infrastructure of MannKind.

On our alliance partners with United Therapeutics. The Tyvaso with interstitial lung disease expands our population to WHO Group 3, which I'll remind you again at 30,000 patients today. Current patients on all forms of treprostinil are around 7,500. This is a large expansion opportunity. We're very excited and happy for United Therapeutics that they will get this positive outcome and get this filed with the FDA. We will complete our clinical trials with TreT. We're almost 50% complete in BREEZE. It's going forward as we expected and very excited to continue -- to complete that program and file that within the next 12 months. And we are on track to achieve our Q2 and Q4 $12 million milestone -- $12.5 million milestone, respectively, each quarter.

One of the questions we get is around funding sources. We continue to reduce our cash burn, as Steve showed you, quarter-over-quarter. Q1 generally is a little bit higher than Q4, but we continue to have enough cash on hand. We'll reduce our cash burn. When you look at United Therapeutics milestones as well as the MidCap debt tranches, we feel very good about our current funding sources and don't anticipate a need to do an equity raise. We continue to watch the marketplace as we look at the elections, the political environment and the threat to the world currently around the coronavirus. But at this point, we remain very excited. We have enough cash to do what we need to do. And our main focus is growing Afrezza faster and continuing to manage our cash on the balance sheet.

With that, I think we'll stop here and take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go ahead and take the first question from Brandon Folkes with Cantor Fitzgerald.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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Congratulations on all the progress this year. Firstly, can you provide any detail on the persistency of patients on Afrezza? And then secondly, could you elaborate on the feedback you're getting from physicians in practice regarding the dosing conversion work you did with insulin? Was this a tailwind in 2019? Or should we think of that as a tailwind for 2020?

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Michael E. Castagna, MannKind Corporation - CEO & Director [3]

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Brandon, great. Thank you for the 2 questions. The first one on persistency is that we just finished up an analysis as we prepare for the Board meeting. And in that, we can definitely see a big difference in compliance in persistency through our copay card program on patients who are type 2 versus type 1 and prescribers for that matter that are type 2 versus type 1. So the data has obviously data gaps that come along with it. However, there is a distinct difference. And as we go look forward to expanding into type 1 market, we expect that persistency to increase. I don't want to share exact numbers. But I think in the upcoming meeting, once we go through the day a little further, we can go through that. But in general, half our patients on Afrezza today are type 2 and half are type 1. And then within the type 1 segment, they generally fall into 3 buckets. They use it exclusively full time. I'll call that 1/3 of the market. They use it 1/3 of the time on top of a pump. And then 1/3 of the time, they just use it in case of emergency for highs.

So that's probably what you see in our refills. They're not always 1:1 on a month-by-month basis. Because of how people are using Afrezza, it gives them the flexibility to control their disease. Obviously, we're moving towards more patients using it full time and really thinking about pumps-bearing opportunities that exist in the market. On the type 2 side, we see well over in general type 2 patients about 50% drop out by month 1 or 2. So that's a market that you see much higher dropouts in general just due to the nature of the patient population and the belief in treating the disease. I just hope that helps you a little bit on persistency and that explains why you see some chunkiness in the refills.

And then on the new prescriptions, remember, not every NRx is a new patient. It's probably about 25% of that on a weekly basis when we look at new member Rxs to the brand. And just to close on that last one, we're getting -- we're starting to now build enough patients week-to-week where we'll start to look at [longitudinal] basis and get better data here. But a year ago, the scripts were so infrequent. It was really hard to make any conclusions. I think as we go forward, it's getting a little bit easier to start to look at the trends.

The feedback on clinical practice and, say, why is Afrezza not growing faster. The #1 thing we hear is just top of mind, the second part is around dosing and the third part, I'll call managed care. So I'll break that out into 3 buckets. Top of mind, we are reducing our target focus from over 100 doctors per territory to well below that in order to make sure the reps have higher reach and frequency amongst the key rapid-acting insulin prescribers. That's number one, and we'll continue to fine-tune that list as we go forward.

On dosing, I think when you look at the David Kendall presentation last week at ATTD, that was probably the #1 topic there, which is how do I dose Afrezza and really trying to make it simple, say it's 1.5 to 2x. And we look at the glucagon market. For example, BAQSIMI is 3 milligrams and the injections are 1 milligram. There is just no correlation between an inhaled product and an injectable product. And we're really just trying to tell doctors the unique -- you treat them with uniqueness, but there seems to be a lot of confusion on 4, 8 and 12 versus fine-tuned 1-unit increments. And so I think as people get that clinical experience, the dosing question goes away, but it's the first apprehension of avoiding their first prescription. And I think that's really what we're focused on. It's the onboarding of those physicians. The Phil Levin is a great example where we just did a very simple 7-day titration. Let's say take 4 units for 3 days, 8 units for 3 days and then 12 units and titrate from there. That's how easy we're trying to make the dosing of Afrezza. Those data sets are just coming out and starting to get published, and that will help penetrate and then overcome the dosing objection.

And the third one is payers. And on the payer front -- I was looking at the data last night, we have almost 80% coverage on commercial. That's our main focus. That's a lot of words that type 1 exists. And we think about the type 2 market, a lot more Medicare and higher cost share, higher dropouts. So we feel decent about the managed care coverage and our execution of our commercial strategy in type 1. Most of our plans are pedia label. There is a [prior role], and we continue to remove and reduce those restrictions, and we're in several discussions with payers to continue to increase formulary access for 2020 and beyond. So we feel decent -- really strong that the managed care situation will continue to improve and barriers will continue to be reduced for Afrezza. And really, that comes with time and experience and demand. So the doctors continue to grow prescriptions, the payers are more likely to continue to add it to formularies and remove some of those barriers.

So those are the top 3 reasons for doctors. And if you look at clinically, we beat the standard of care on 11 out of 13 drivers of mealtime control and why they choose 1 rapid-acting over another. The 2 we fall short on are to the ones I just mentioned, managed care coverage perception and dosing. And so those are the 2 that we're really working to clean up this year.

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Operator [4]

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And our next question comes from Oren Livnat with H.C. Wainwright.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [5]

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Just a couple of questions. You really surprised me to the upside on the results for the quarter, which is great. And I just want to make sure I understand what's going on, on the underlying, I guess, economics of Afrezza or launch -- some pipeline stuff. So it looks like sales were up. Net sales, excluding Brazil, almost 36%, 37% quarter-over-quarter on like a 5% volume increase and plus some price. So I'm just wondering if you could give us some sense of sort of what the sort of, I guess, IQVIA or Symphony normalized value per script we should think of going forward if you're capable of doing that because I don't want to carry forward this value then be surprised to the downside in Q1. So any help you could give us there would be great. And I have a treprostinil question. That's a follow-up actually.

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Steven B. Binder, MannKind Corporation - CFO [6]

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Things to look at. One, in the fourth quarter, we did have an extra week of shipments. So compared back to the third quarter, it's about $0.5 million. So that's something you should take into your formulation. I don't have the average price per script with me at this point. You can follow up on that.

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Michael E. Castagna, MannKind Corporation - CEO & Director [7]

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And I think you're right, Oren. You did say 37% growth just on the net U.S. from Q3 to Q4. From our perspective, we continue to see volume mix look positive. We're trying to reduce the number of free scripts out there and trying to put programs in place to convert those to paid prescriptions. And I think this year, you'll see a big push there because almost 20% of our revenue or 15% of our prescriptions fall in that free goods program. And as we increase managed care coverage, there's no reason those don't turn into paid scripts. And so today, they reduce probably average script cost, but that's something we continue to focus on.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [8]

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Okay. And in Q1, with normal seasonality, should we expect -- or should we conservatively assume that it's a slog on that sort of realized value per script early in the year?

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Michael E. Castagna, MannKind Corporation - CEO & Director [9]

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I don't yet see that. I mean we're looking at our copay data, our out-of-pocket data come in every week. Our script trends are holding up decently. Our outflows and the wholesales are holding up pretty well. So -- and you usually see big out-of-pocket costs and big slowdown in prescriptions, but the year started off pretty strong. So I think we were just waiting for gross to net to make sure that looks good for the quarter. But at this point, we're optimistic for 2020.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [10]

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All right. Great. And on TreT, I'd look back at Martine's commentary from January at JPMorgan and she was talking specifically about finishing the study I think by May hopefully. And I got the impression that maybe stability is the only gating factor. I know it's not really your product to add commentary on she hasn't said. But can you just maybe help us understand? As far as you know, is that the only gating factor stability beyond the PK study? And do you see like any sort of risk around this PK study based on the data you've seen to date? Or is this just a bioequivalence box-checking exercise? Or is this a higher dosing and switch study stuff also important in any filing decision?

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Michael E. Castagna, MannKind Corporation - CEO & Director [11]

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Yes. I mean I think as time goes by, the risk in this program dramatically decreases. And I say that mainly due to the stability. We believe the product will work fine. We've done the STAT study. We've got some initial data out of the BREEZE study in terms of PK. We know the patient experience so far in the BREEZE study. We hear people rolling over into the extension phase. So there, they were able to change into the higher dosing. So it's a pretty straightforward program. We don't -- there's always risk in any development. But when you think about our technology is already FDA approved, treprostinil is already FDA approved, it's already confirmed the dosing, and we know it works in the inhaled route. So from a risk perspective relative to other programs we would do, like [our components of time], we believe this risk is low in terms of anything going wrong from here to approval. That said, it is a development program and we always have to be cautious. But in terms of rate-limiting effects, PK, we feel very good about that. We ran some sample PKs as we're getting into BREEZE study to confirm before we went to the major PK study. On a health -- human factor study, we feel very good. We've run plenty of those. We've learned the pros and cons on that one.

And then the final is just stability, and that just takes time. And so far, that continues to progress nicely. The plant is up and running. We continue to make batches. So we don't anticipate anything going wrong. And we feel pretty confident that when we think about our cash on balance sheet and cash expectation, we are betting $25 million on treprostinil this year, and we feel good about that opportunity. If anything, we got to really think about the factory we built and with this new WHO Class 3 is like we have to scale it even again. From scale, we'll just build. We'll continue to increase our conversations with UT. We meet with them quarterly. And usually, monthly, we talk. So everything is on track there. Teams are working great. We're just very excited. I know they're very excited and couldn't ask for a better partner.

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Oren Gabriel Livnat, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [12]

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All right. And can you comment on the competitive landscape there? Do you think based on what you know about -- I think Liquidia has a filing there imminent or maybe just happened. Can you remind us of maybe the differentiation there?

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Michael E. Castagna, MannKind Corporation - CEO & Director [13]

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Yes. I think there's a couple of things. Number one, their first time filing a drug-device combo or an NDA for that matter, that's a pretty huge task. As you know, many companies don't always get their file accepted or get for approval. I can't anticipate where they are. They've not received FDA acceptance of their file yet. When you think about the supply chain that comes along with such a complex drug-device combo, that's a hard hurdle for the FDA to get through. And so we feel good about our capabilities there, our technology and our partner in terms of everything we're doing. So I think that's just a big gap. I think then when you think about the clinical aspects of the product, they're very different when it comes to dosing and conversion of dosing. Those 2 attributes of the product are very different. When you think about the technology behind the product, it looks like they had a hiccup somewhere in their development around consistency and inhalation. They had to reduce some of their data, if I recall. In our particular case, we feel very good about the ease of our device, the consistency in dosing and the amount of powder that gets into the lungs to deliver the therapeutic benefit we expect. So I think from a consistency and quality and scalability, we feel very good about our platform.

And then finally, I think we've got a great partner. So when you think about UT's experience with these 7,500 patients in the marketplace, some of which are Tyvasos, some are the other 2 formulations they have, working with the market leader in those relationships, we think we're close enough in an approval sequence that it shouldn't be a big impact. And I think there are some other things we're working on that will continue to differentiate the molecule that I don't want to go into for competitive reasons, but we feel our overall strategy will be very strong in the marketplace to help continue these patients that are on Tyvaso and expand the market even further.

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Operator [14]

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And our next question comes from Thomas Smith with SVB Leerink.

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Dylan Edward Dupuis, SVB Leerink LLC, Research Division - Associate [15]

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This is Dylan Dupuis sitting in for Tom. Congratulations on a strong quarter, guys. Just a couple of questions. First, how are you guys thinking about expanding the number of reps and expanding territories and how this might impact your ramp in SG&A? And then I have another question after that.

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Michael E. Castagna, MannKind Corporation - CEO & Director [16]

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Sure, Brian -- Dylan. I wouldn't expect a major impact on our SG&A. We've been able to manage our overall head count in the company, continue to reduce our expense base through other cost savings. So when we look at the net-net reps and the increase, you'll probably see surely we'll be taking down probably 5 or 10 of the positions. We've already filled a couple. Some of them, we just haven't seen the right talent join us and apply. So we're not going to continue to be distracted by those particular markets. And some of them, you'll see some new ones pop up in markets that we're looking to increase our penetration. So net-net, you can anticipate a 5 to 10 FTE increase. And if you think about the next 3 quarters, you're talking roughly $1 million, $1.5 million. I don't think that's a significant amount given our current structure. And my guess is we can offset that through continued sales growth or a reduction in our expense base if we need to. So we don't anticipate any major or material impact on SG&A.

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Dylan Edward Dupuis, SVB Leerink LLC, Research Division - Associate [17]

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Great. And then kind of a broader question. When you guys were initially describing the plans to develop the Phase III trial in India, you talked about how you want to design a trial that was going to be differentiating and gave you guys new insight into Afrezza that you hadn't looked at before. I just want to see if you guys had any color you could give us at this time on how the trial might be designed and what is it you're looking for that might be new.

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Michael E. Castagna, MannKind Corporation - CEO & Director [18]

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Yes. So the Phil Levin data just got presented this week, showed you roughly the full cohort of patients. And that dosing regimen that we're using in the Indian trial is based on the Phil Levin data. So we're excited to see a trial that goes from, I'll call it, 25 patients in type 2 to now over 100 patients -- or 50, I can't remember the exact number, sorry. But it will be a Phase III trial head-to-head, placebo-controlled. So we're very excited about having that data in a different -- it will be a safety trial with an efficacy assessment. That trial kicks off in April-May time frame, and it's a 3-month primary end point, if I recall. And so that will be going forward, and we're excited to kind of get dosing data and a head-to-head placebo as we go forward. So we just finished up filling the placebos. Those will be shipped over to India very shortly. And the kickoff for the trial on Phil Levin is roughly the first week of April, if I recall.

So India is progressing as expected, and it just takes a little longer to get through all the regulatory hurdles there. But otherwise, everything is on track, and we'll look forward to that data set. There's probably some minor things like we're debating, do I leave it or not, and I think we're not going to get there because it's not approved in India at the time. We're looking to finalize the protocol. So -- but it'll show us pretty good data in type 2s in a market that has a very high unmet need with really high A1cs. So we're excited as we saw a 1.6 A1c drop. In the Levin study, hopefully, we'll see a comparable or more greater drop as the trial goes beyond the 12-week time period.

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Operator [19]

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And next will be Bert Hazlett with BTIG.

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Robert Cummins Hazlett, BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst [20]

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Great. I got 4 questions. Could you please let us know specific deliverables for TreT to get that product to an NDA?

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Michael E. Castagna, MannKind Corporation - CEO & Director [21]

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Sure. Bert, we haven't disclosed exactly what they're tied to in the milestones, but there are things in our control. And we've stated publicly in the past, it's around the stability, it's around making sure we prep the files because we have to write a lot of the NDA as well as United. So when you think about all the manufacturing, all the CMC, the supply chain, that's all on MannKind. So these are the types of things that are in the -- in our control that -- or responsibility as part of that filing. So hopefully, that answers, on a high level, what you're looking for.

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Robert Cummins Hazlett, BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst [22]

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Okay. And that's within the next 12 months, correct?

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Michael E. Castagna, MannKind Corporation - CEO & Director [23]

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Yes. That would be within the next 12 months.

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Robert Cummins Hazlett, BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst [24]

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Okay. Second question then is, does the scale for manufacturing that you've contemplated with United Therapeutics, does that include at this point the increased study results? And if not, are -- is there an option to potentially include that in your manufacturing effort?

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Michael E. Castagna, MannKind Corporation - CEO & Director [25]

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The factory scalability that was built was primarily focused on existing market of Tyvaso with some additional capacity, i.e., we can run the plant nonstop for 24 hours a day. But I think if we are looking at an expansion of double or triple the current Tyvaso revenue, obviously, we would have to expand the infrastructure we built around the factory today. And we have that space in Danbury. So that's not something that keeps us up. We built the factory as it exists very quickly. And if we had to build up another scaled factory, we have enough time to do that appropriately with UT as part of that.

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Robert Cummins Hazlett, BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst [26]

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Okay. And just remind us how the NDA is going to progress. Assuming expansion or assuming an inclusion of the increased data of -- for Tyvaso, how would that progress with regard to any filings with TreT?

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Michael E. Castagna, MannKind Corporation - CEO & Director [27]

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I don't know what UT wants to say publicly on that, Bert. So I'm going to not answer that one yet because I don't want to say something that they're not supportive of. I've done this in the past with the types of products and a 505(b) strategy. So maybe one-on-one, I can talk a lot, but I don't want to tip off anything related to United that they're not comfortable with sharing.

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Robert Cummins Hazlett, BTIG, LLC, Research Division - MD & Biotechnology Equity Research Analyst [28]

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Okay. And then last, I think you mentioned something early in the call about a second order from Brazil. Is that accurate? And as -- did you say Q1 shipment, there'll be some revenue in Q1 and some revenue in Q2? Or did I hear something else?

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Michael E. Castagna, MannKind Corporation - CEO & Director [29]

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No. You heard correctly. We received the second order from Brazil, just given the long lead times and the initial shipment shifts back in September, if you recall. So we anticipate shipping a part of that out in Q1 with the rest of it in Q2. So we haven't yet given a value or a breakdown. But I just want to give people a heads up that we expect another order, and you'll see some of that in Q1.

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Operator [30]

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And our next question comes from Steven Lichtman with Oppenheimer.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [31]

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Mike, can you talk a little bit more about how you're evaluating the pediatric opportunity, as you mentioned? Just curious on your areas of focus and the milestones ahead on that.

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Michael E. Castagna, MannKind Corporation - CEO & Director [32]

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So on the pediatric, I mean we're very excited to get alignment with FDA directionally on finalization of the part 1 of the 2 parts for approval. Part 1 was just confirming that our PK results meet the criteria of FDA for the 8- to 17-year olds. And then the second part of that alignment with FDA was that we're going to forgo a 4- to 7-year-old label indication, and they've aligned directionally to those 2 requests.

The next part is getting the Phase III study protocol approved. That will happen over the next 3 to 6 months. And then in that time frame, we'll be meeting with many of the thought leaders within the pedia endo space, confirming the end points that we're looking at as well as starting to build support and relationship but also really confirming what we believe is an unmet medical need, especially as it pertains to hypoglycemia and nocturnal hypoglycemia timing range, all the things that parents are looking for in their kids. We think we'll provide a unique benefit for Afrezza. We'll also get some quality of life data later this year out of our Kipnes study that I think will be important as we think about KOL claims. So kids will be an area that obviously we think we can make a difference and that'll be important.

And then the final is just the whole market assessment needs, and we really believe that -- my personal bias is that the way you change the standard of care for the next 100 years is really through pediatrics and type 1 and getting these patients started in early age, getting them to get great outcomes, proper dosing, will grow up on the product, they'll transition to adult endos, teenagers into college, more kids growing up that may never have to experience an injectable mealtime insulin or a pump for that matter. So we think that's the big opportunity, to start to lay out that foundation, and we'll confirm that through our market assessments that we're doing or we're conducting as we speak, looking to higher dedicated marketer to lead that up as well as a pediatric endocrinologist. So we're really going to start to focus our efforts to make sure we do a great job in the pediatric segment. And we think it's a big opportunity, but we'll confirm that through additional research.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [33]

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Got it. And then just secondly, Steve, your product gross margin was ahead of our thinking and up again sequentially. I know you don't provide guidance, but can you talk qualitatively about what could drive product gross margin further looking forward?

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Steven B. Binder, MannKind Corporation - CFO [34]

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Sure. Our cost of goods sold, because we've got the overcapacity, is going to remain fairly flat in the near term. So as we drive our top line sales, that'll drive both gross profit and gross margin in the near term. So we see that increasing. We're not going to give specific guidance on it, but I think you can do a pretty good job modeling that out.

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Operator [35]

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And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

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Michael E. Castagna, MannKind Corporation - CEO & Director [36]

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I want to thank everybody, all of our employees, our stakeholders, our investors. 2019 was a great transition year for the company. We were happy to finish up the recapitalization we began over 2 years ago. We finally have the right balance sheet. We have the right team, and we have the right mentality in order to take this company forward. We're very excited and optimistic about 2020. This is really our pivotal year as we think about TreT progressing to filing. Having that approval will bring in additional revenue into the company as we get double-digit royalties. Today, Tyvaso does almost $500 million. With the data readout yesterday, we're very excited about that. We'll continue to reduce, hopefully, the cash burn quarter-over-quarter as we go forward. And really, just our focus right now is helping as many patients as we can and getting many of the new prescribers onboard as we can in 2020 and launching some of the key initiatives we have. We think that will really start to build confidence and increase prescriptions for Afrezza beyond the trends we've had historically.

Thank you, everybody, for your time and patience. We look forward to talking to you soon. We'll be at an investor conference later this week in case someone's listening there. Thank you.

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Operator [37]

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Well, thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.