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MannKind Corporation (NASDAQ:MNKD)

Q1 2013 Earnings Conference Call

May 9, 2013 5:00 p.m. ET

Executives

Matthew Pfeffer - Chief Financial Officer, Principal Accounting Officer and Corporate Vice President

Hakan Edstrom - President, Chief Operating Officer and Director

Alfred Mann - Founder, Chairman and Chief Executive Officer

Robert Baughman - Senior Vice President, Clinical Sciences

Analysts

Keith Markey - Griffin Securities

Matthew Luchini - Piper Jaffray

Sarah Blum - Bank of America Merrill Lynch

Jason Butler - JMP Securities

Michael Higgins - Brinson Patrick Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation First Quarter 2013 Conference Call. (Operator Instructions) As a reminder, this call is being recorded today, May 9, 2013. Joining us today from MannKind are Chairman and CEO, Alfred Mann; President and COO, Hakan Edstrom; and Chief Financial Officer, Matthew Pfeffer.

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

Matthew Pfeffer

Good afternoon and thank you for participating in today's call. I'll be summarizing our financial results for the first quarter of 2013 as reported earlier today. Hakan will then discuss our current operations and I will conclude with an overview before we open up the call to your questions.

Before we proceed further, please note that comments made during this call will include forward-looking statements within the meaning of federal securities laws. It is possible that 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 and is accurate only as of the date of this live broadcast, May 9, 2013. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

So for the first quarter of 2013, total operating expenses were $36.4 million, compared to $33.5 million for the fourth quarter of 2012 and $33.9 million for the first quarter of 2012. R&D expenses were $26.4 million for the first quarter of 2013 compared to $25.3 million for the fourth quarter of 2012 and $24.2 million for the first quarter of 2012.

The increase in R&D expenses for the first quarter of 2013 compared to the same quarter in 2012 was primarily due to an increase in clinical trial-related expenses, partially offset by a decrease in facilities related costs and depreciation. Increase in R&D expenses for this quarter from last quarter was primarily again due to increase in clinical trial-related activities.

General and administrative expenses were $10 million for the first quarter of 2013 compared to $8.2 million for the fourth quarter of 2012 and $9.8 million for the first quarter of the previous year. General and administrative expenses increased quarter over quarter primarily due to an increase in non-cash stock based compensation expenses related to employee stock awards granted during the first quarter of 2013.

The net loss applicable to common stockholders for the first quarter of 2013 was $41 million or $0.15 per share compared with a net loss applicable to common stockholders of $38.2 million or $0.27 per share for the first quarter of 2012.

Our cash, cash equivalents and marketable securities at the end of the first quarter of 2013 totaled $28 million, which compares to $61.8 million at yearend 2012. Financial resources, including the remaining credit facility from Al amounted to $125.4 million as of March 31, 2013. Our cash burn increased from $29.1 million spent in Q4 of 2012 to $33.5 million in the first quarter of 2013. As previously stated, we expect our spending in 2013 to be higher than 2012 as we complete trials approach commercialization.

With our cash on hand and the amount remaining available under our credit facility from Al, we believe we’ll be able to fund our operations into the fourth quarter of 2013. We continue to pursue additional funding opportunities to extend our cash (runway), but I cannot comment further until we have something definitive to announce.

With that, I’d like to turn the call over to Hakan. Hakan?

Hakan Edstrom

Thank you, Matt, and good afternoon. Let me start today’s call by saying that our key activities are proceeding according to plan. The trials are progressing as indicated to you earlier as we described the clinical timeline and the two studies will be completed in May and June respectively as we have already communicated. Following the last patient’s last visit, the database lock will take place for both trials in the first half of July. All key (inaudible) have been planned down to the minute details and I’m very confident that we’ll be able to fulfill the requirements in a timely manner.

As of May 3, only 78 subjects of the 518 randomized subjects remain in Affinity 1 trial. And in fact, all of the patients in Affinity 1 trial are now through the treatment phase. And 91 subjects of the 353 randomized subjects are continuing in the Affinity 2 trial. All other patients have concluded their treatment phase in both trials.

The other important milestone we have achieved for resubmission purposes that we have reached an agreement with the FDA regarding some of the particulars of the submission package and hence can proceed in an expeditious manner towards the resubmission. So the next public milestone event will of course be the sharing of the Affinity 1 and Affinity 2 clinical data, which is targeted for mid-August and then the resubmission of the NDA in late September to early October. So this is a snapshot of the clinical trial status today and the regulatory preparedness.

So with those few words let me introduce Al for further comments.

Alfred Mann

Thank you, Hakan, and good afternoon ladies and gentlemen. We are in the midst of some especially exciting times at MannKind. As Hakan noted, we are nearing the last patient last visit for both Affinity 1 and Affinity 2. Actually the treatment phase for Affinity 1 is now complete and such completion for Affinity 2 is scheduled for next Monday. The trial metrics are tracking nicely to our projections and we expect both studies to conclude in about a month, with enough subjects to fulfill the full statistical power of our planned analyses.

For a month now, our team has been working towards the rapid database lock. We are positioned this summer to quickly crunch the data after the last subjects exit the trials. We plan to announce the results of both studies by way of a conference call in mid-August. Our objective is to resubmit the NDA to the FDA in early October, plus or minus a couple of weeks.

Since we are so close to completion of these trials and the availability of the actual data, I will not project quantitative results. I will simply remind you that the two Affinity 2 trials have major and unique differences from the earlier studies, and that I will just comment on the key differences of the respective protocols. Until now the basal-bolus trials in type 1 diabetes have all compared the effect of AFREZZA to those of rapid analogues such as NovoLog and Humalog. To minimize the risk of hypos resulting from the extensive persistence of current prandial insulins, fasting glucose in such therapies is almost always managed at very high levels.

Since AFREZZA does not have such persistence, fasting levels can be safely reduced. However, since in the earlier trials the basal insulins were not study drugs, they were not really titrated. A very significant difference in the Affinity 1 is that the protocol includes the [fourth] titration treat-to-target algorithm for dosing of the Lantus basal insulin during the basal optimization phase, requiring an increase in dose until the fasting glucose levels are lowered to below 120 mg/dl and lessens the hypo incidence.

In the event of a hypo, the basal titration was to be truncated. We then optimize the prandial insulin aspart or AFREZZA over a 12-week period and continue the stable insulin dosing for an additional 12-weeks. The primary objective in this study for approval is simply to show non-inferiority in average HbA1c for the group using AFREZZA delivered with a Dreamboat inhaler compared to that for those subjects using injected insulin aspart with a pre-determined delta of 0.4%.

The Affinity 2 trial is a very different evaluation in insulin-naïve type 2 patients who are not well controlled on metformin, or metformin plus one or two additional oral medications. I had always that thought that AFREZZA would be a very effective antiglycemic in early type 2, but it was the FDA who has actually guided us to do this study. AFREZZA certainly should significantly reduce prandial excursion. And that should result in clear differentiation from the placebo cohort in this trial.

Additionally, in our earlier studies, we have seen reductions in fasting glucose levels, which key opinion leaders say is because AFREZZA lowers insulin resistance. To meet the primary endpoints, the combination of those two effects needs only to result in reduction of HbA1c greater than 0.5% more than that observed in the placebo cohort. The availability of this Affinity data will be a pivotal event for partnership activities. Discussions and some diligence efforts are underway with a number of prospective partners. Several others have indicated they will require and resume their diligence activities upon the availability of the AFREZZA data in August.

Having multiple potential partners engaged in last step will keep us fairly busy this fall. At the same time, our potential partners will themselves have to be quite focused. The company that can quickly translate its diligence findings into a decision to move forward will have a distinct advantage over its peers in the partnering process that we are creating.

So we are expecting some exciting events that we’re confident will lead to FDA approval and launch of this important drug device combination which is to address the enormous diabetes pandemic. The need is so great that I believe AFREZZA could potentially even become the most significant [medical] product ever. People ask why at my advanced age and after such a successful career I’m so committed to AFREZZA, even having personally provided about $930 million of the $2 billion so far invested. If we could significantly contribute to resolution of the enormous diabetes crisis, wouldn’t that justify all this? Perhaps you can now understand what is driving me.

So thank you all for joining us today and we’ll now open up the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Ian Somaiya with Piper Jaffray. Please go ahead.

Matthew Luchini - Piper Jaffray

It’s Matthew on for Ian. Just a couple if I may. So on the partnering front, I just was curious if you could give us an update on maybe the mix of title partners that you’re seeing in terms of global versus regional and if any new ones have emerged in the mix now that we’re getting closer to data. And then I have a financial question for you Matt after that.

Hakan Edstrom

In regards to partnering, I would say that all of those that you mentioned are represented, both global partners that have the right title say representation on a global basis and the skills that they were looking for. But there also being some strong regional partners. So at this point in time we are entertaining say all of them that we deem to be qualified to launch the product on either global or regional basis. And as we had mentioned earlier, yes, new potential partners actually came say to the party following the announcement that we would also launch the clinical trials in type 2 patients which certainly significantly increased the market potential for the product. So with that you can ask the question to Matt.

Matthew Luchini - Piper Jaffray

And it had to do with the -- I just was wondering if you could remind us how you’re accounting for the insulin supply that you have and just quickly just give us some color on how that will change once AFREZZA is launched and the timing for that. Thanks.

Matthew Pfeffer

Sure. I’m happy to. So it’s pretty simple really. All insulin that’s been purchased to date has been expensed. So it’s not being carried in our balance sheet which means that we’ll bear no cost. Those costs will not be reflected in our P&L until such time as we have to start acquiring insulin again. Typically we cannot capitalize those kinds of raw material costs until such time as you have an approval. So it’s going to leave us with a slightly artificially low COGS number for a good period of time until we use up all the insulin. Assuming all the insulin we have on hand is usable, we expect that will probably be somewhere in the neighborhood of $10 billion with a B revenue before we’re going to ramp with our existing insulin supply. So we should have pretty decent COGS numbers for quite a while.

Alfred Mann

For at least a couple of years.

Matthew Luchini - Piper Jaffray

Is there anything to suggest that the end of plan will -- the shelf life or anything like that will prevent at all from being useful? And I’ll just get back in the queue.

Alfred Mann

We evaluate it regularly. We’ve seen no degradation so far. It’s all in freezers.

Matthew Pfeffer

Ultimately we can’t answer that question with certainty, but yeah, the rules say you do it to make sure it’s still (inaudible) before you put it into use. It’s not really known what the ultimate shelf life is going to be, but Al is correct. We do check it very regularly. We’ve not seen any noticeable degradation so far. It won’t be typical to expect it to happen all at once. You should expect it to be a slow gradual process. So our expectation is it’s going to be usable for a good long while. But we’ll keep our fingers crossed there. We’re hoping that Al’s right and it won’t take us very long to generate $10 billion of sales and use it all up.

Operator

Your next question comes from Cory Kasimov with JPMorgan. Please go ahead.

Unidentified Speaker

Hi, this is actually Whitney on for Cory. Two quick questions. First, if you could comment on the dropout rate in the Phase III that’s ongoing. And then if you could also, I guess tell us a little bit about the pulmonary safety study that’s currently enrolling and kind of how that fits into the development program.

Alfred Mann

We are going to ask Bob to respond to your question. Bob Baughman, please.

Robert Baughman

Hi, this is Bob Baughman in Danbury. The current dropout rate in both studies is tracking our schedule. It is slightly higher than the original protocol in the type 1 study but we did have some over-enrollment because it is a global study, and you literally can't shut it down all in the same day. Both studies are currently tracking to meet their statistical endpoint of being able to provide 90% [power] for the statistical evaluation. As to the study, the 134 study, which is begin conducted in asthmatics and COPD subjects, that’s a study that’s been on the books for many years. We filed that study on ClinicalTrials.gov in 2008. It is a very difficult study to recruit. We not only have diabetes component but we have pulmonary function laboratory test confirmed asthma or COPD. And unfortunately, many of the subjects cannot participate because they have exacerbations of their within a year of the study. So we have been working very hard. We are currently expanding to about 70 sites in the U.S. We will be in eight foreign countries, Russia, Ukraine, Slovakia. We will be going to Argentina, Brazil and elsewhere. The study will be ongoing at the time of our planned submission just like it was for Exubera when they filed. And the pulmonary safety issue is always a discussion item when you get to the label with the agency. So based on the available data and those subjects that will continue to enroll after we file, that will be part of the discussion with the agency for what will appear in the label. Did I answer your question?

Unidentified Analyst

Yes, you did. Thank you very much.

Operator

The next question is from Keith Markey with Griffin Securities. Please go ahead.

Keith Markey - Griffin Securities

I was just wondering whether or not you feel that the limitations of cash on hand getting into the fourth quarter, might influence your decision making regarding the partnership, perhaps in the third quarter?

Alfred Mann

It's a [content] question.

Matthew Pfeffer

The simple answer is no. I mean that’s why we -- if I remember back, many quarters we have reported much lower cash balances than this because we typically respond with, what we call financial resources which includes available borrowing. So we think we are in pretty good shape from cash standpoint. That said, we are always looking at other opportunities. I do not believe we will let any cash considerations affect our partnering activities.

Keith Markey - Griffin Securities

And then by saying that you have enough cash on hands to go into the end credit, to go into the fourth quarter. That doesn’t take into account the potential conversion or exit size of the warrants that are outstanding. Does it?

Matthew Pfeffer

No, it does not. And that’s strictly based on the way the auditors characterize these things or (inaudible) they characterize them. So we are not taking that additional $90 million so that we expect to get from warrant exercises into consideration into that. If we took that into consideration than obviously it would go much further.

Keith Markey - Griffin Securities

Great. And then I was just wondering if you might be able to give us a little bit more color on the agreement that you reached with the FDA regarding the submission package.

Hakan Edstrom

Yeah, basically it was sitting down in the pre-NDA meeting to have an agreement in regard to the statistical models utilized and what else would go into that one. So I don’t know, Bob, if you have any further information give on those agreements?

Robert Baughman

No, that’s correct, Hakan. What we did is we asked for the agency for the format in which they wanted the data presented. As you know the guidelines have changed over the last couple of years and we had sent down a number of questions on the format of the resubmission and with the new statistical tests that are being evaluated and we got a very positive response from them. So we feel that we’re on the right path for the resubmission.

Operator

The next question comes from Steve Byrne with Bank of America Merrill Lynch. Please go ahead.

Sarah Blum - Bank of America Merrill Lynch

This is actually Sarah on for Steve. I had a question. Do you need long term safety data under meta-analysis of cardiovascular risk to re-file and has the agency asked for this?

Alfred Mann

Not really. We have already a cardiovascular ratio of 1.01. That’s based on prior studies and we’ll of course update that with the two Affinity trials. But we can’t imagine any problem that’s essentially a non-event in cardiovascular risk.

Operator

The next question comes from Jason Butler with JMP Securities. Please go ahead.

Jason Butler - JMP Securities

Just wanted to follow up on the fourth titration aspect of the trial protocol. You’re able to monitor whether physicians are adhering to this titration protocol. Are you seeing a lot of protocol violations? And have you been able to impact those violations?

Alfred Mann

Bob, you want to answer that?

Robert Baughman

Yes. We use an electric diary. The patient does the self-monitored blood glucose. They enter it from their glucose meters into the e-diary. That gets uploaded to an independent titration management committee and they evaluate the glucose and the subject’s insulin dose. They then evaluate that in our algorithm and they communicate with the prescriber. They make a recommended dose and the prescriber can choose to follow that dose or he may not or she may not if she believes that it is not medically appropriate. They then fill out a form indicating their options and then that gets filed. So what I can tell you, we’ve had two independent reviews of our forced titration program and both have come back with pretty good marks. We’re very comfortable that physicians are following the protocol.

Operator

(Operator Instructions) the next question is from Michael Higgins with Brinson Patrick Securities. Please go ahead.

Michael Higgins - Brinson Patrick Securities

Wanted to ask on a potential marketing scenario. You talked about you guys finding a partner and that partner takes the product through all the different physician types. Would there be a possibility that you hang on to the core promotion rights? And if so, would you consider picking up a sales force or (inaudible) prior to that launch?

Hakan Edstrom

Yes, that is a potential particularly for the North American market where we believe it is of value for us to stay in touch with the clinical community. So for instance you could see a situation where a partner would take say the PCP market and we would focus on the endocrine market which would require substantial less sales people, but still keep you involved with the clinical community. So that will certainly be a component of our discussions with a potential partner.

Michael Higgins - Brinson Patrick Securities

And if you did that and if you kept the endo rights for example, any thoughts on picking up an endo sales force endo product prior to the launch of the product?

Hakan Edstrom

We really have not gone that far in regards to say picking up (inaudible). Actually we will most likely make sure that we have the right to do so, but not the obligation. Then it will be really be determined by our own readiness, our financial readiness and the type of arrangement that we make with a potential partner. So you would expect this to happen in conjunction with a partnership, not (inaudible).

Alfred Mann

It will really depend upon which partner and what their capabilities are and what their market presence would be. So it’s hard to really make a statement at this point until we get a little further along with the partnership discussions.

Michael Higgins - Brinson Patrick Securities

Okay, that makes sense. Maybe a co-promotion on those (inaudible). Any [new things] you can mention to us regarding meeting with the European authority?

Hakan Edstrom

Not more than I know, that is currently being discussed with them, the clinical and regulatory organization back in (inaudible) We have basically said that, really as of say the fourth quarter as when we had submitted the file to the FDA, we will again refocus our efforts in regards to European application. And again as we have said before, also depending on the partner and the timing of a partner, we will certainly utilize their resources and their capabilities. But we are readying ourselves and actually we are, from a staffing point of view, looking at that we have the capabilities inside if we will need to pursue independently.

Alfred Mann

Keep I mind that we extended our trials, the two Affinity trials by extra two weeks. So the data would comply with the European requirements for an approval.

Michael Higgins - Brinson Patrick Securities

One last one on housekeeping. I assume you have put out in the press release this morning, (inaudible) on the completion of the trial?

Matthew Pfeffer

It's quite possible we haven’t actually made that determination but a lot of people ask that question and it becomes -- more people ask the question, the more likely we are do it. Frankly, I think our expectation was, it wasn’t that important since we are on target and we are saying now just a few weeks away, we are going to hit those dates. But there is a very good chance we will do it anyway just to reassure people.

Operator

That was the last question, I would like to turn the call back over to Mr. Mann for any closing remarks.

Alfred Mann

Thank you, operator, and thank you ladies and gentlemen for joining us today. Our next quarterly call will be in August. In all likelihood we will have to release our second quarter earnings shortly before we are ready to release the Affinity results. If so, we will timely publish our earnings results but will delay our typical quarterly call for the few days until we can provide a comprehensive presentation of the Affinity trials along with a discussion of the financial results. So with that I thank you all for joining us today. Good day.

Operator

Thank you. Ladies and gentlemen, this concludes MannKind Corporation's first quarter 2013 conference. Thank you for participating. You may now disconnect.

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