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MannKind Corporation (NASDAQ:MNKD)

Q2 2009 Earnings Call

August 3, 2009 5:00 pm ET

Executives

Matthew J. Pfeffer - Corporate Vice President & Chief Financial Officer

Hakan S. Edstrom - President & Chief Operating Officer

Alfred E. Mann - Chairman & Chief Executive Officer

Analysts

Cory Kasimov - J.P. Morgan

Jon Lecroy - Natixis Bleichroeder

John Newman - Oppenheimer & Co.

[Semos Semonita - Rahman and Renshaw]

Keith Markey - Griffin Securities

Michael Tong - Wells Fargo Securities LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MannKind Corporation second quarter 2009 conference call. (Operator Instructions)

Joining us today from MannKind are Chairman and CEO Alfred Mann, President and COO Hakan Edstrom, and the 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 J. Pfeffer

Good afternoon and thank you for participating in today's call.

I'll summarize our financial results for the second quarter of 2009 as reported earlier today. Afterward Hakan and Al will comment on current events. We'll then 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 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 Exchange Act of 1934.

This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 3, 2009. MannKind's management undertakes no obligation to revise or update any statements to reflect events and circumstances after the date of this call.

So let's start with the financials.

For the second quarter of 2009 total operating expenses were $53.4 million compared to $80.9 million for the second quarter of 2008 and $57.8 million for the first quarter of 2009.

R&D expenses were $39.8 million for the second quarter of 2009 compared to $67.6 million for the second quarter of 2008. The decrease of 41% or $27.7 million in R&D expenses for the second quarter of 2009 was primarily due to decreased costs associated with the clinical development of AFRESA and decreased manufacturing costs associated with raw material purchases.

General and administrative expenses were $13.5 million for the second quarter of 2009 compared with $13.3 million for the second quarter of 2008 and $14.9 million for the first quarter of 2009.

The net loss applicable to common stockholders for the second quarter of 2009 was $55.6 million or $0.54 per share compared to a net loss applicable to common stockholders of $79.8 million or $0.79 per share for the second quarter of 2008.

Our cash, cash equivalents and marketable securities at the end of the second quarter totaled $34 million, which compares to $46.5 million at December 31, 2008 and $30.2 million at March 31, 2009. Our cash burn for the second quarter of 2009 was $48.3 million in Q2 compared to $76.3 million in the first quarter. With our cash on hand and the availability of the remaining credit facility from Al of $215 million as of June 30, 2009, we now believe we will be able to fund our operations through at least the second quarter of 2010.

I'd now like to turn the call over to Hakan Edstrom, our President and COO, who will provide an overview of significant events during the last quarter.

Hakan?

Hakan Edstrom

Thank you, Matt, and good afternoon.

During the last quarter the most significant event was certainly the acceptance by the FDA of our NDA submission. The acceptance occurred on May 16th and we actually received our 74-day letter about 10 days early. Thus, our [inaudible] date is now January 16, 2010 and we are now at the stage of fielding questions from the agency. To date, the questions have been very straightforward and consistent with our expectations. We are encouraged by the interactions with the FDA.

We're also preparing to meet with the agency in order to discuss our development plans for the next generation device, which we recently disclosed on our website and in an interview with CNBC. We have already evaluated this next generation device known internally as Dreamboat, in two Phase I clinical studies. The first of these studies showed that the Dreamboat device is quite insensitive to inhalation technique and supported by a simple patient instruction program using a DVD. The studies have shown that inhalation of 20 insulin units with AFRESA administered with the Dreamboat device produced plasma insulin concentrations comparable to the administration of 30 units using the current Medtone device.

We plan to discuss with the FDA the definitive bioequivalent study design and to map out the approval pathway for the Dreamboat inhaler for use with AFRESA. We are very excited about this next generation device and would like to get it into the hands of patients as quickly as possible.

The question of whether to launch AFRESA with a Dreamboat inhaler instead of the current Medtone inhaler has been discussed extensively with each of the potential partners with whom we have been in discussions during recent months. The resolution of this question is tied directly to our partnership efforts, so I'm afraid I cannot give you a definitive answer at this point.

Regarding the status of our partnership activities I will only say that we are rapidly moving to a very advanced stage. We have previously announced that our corporate objective is to reach a partnership deal this year and with an internal goal of a deal agreement by the end of the third quarter.

Another event during the second quarter that I wish to highlight at this time is the completion of our transaction with Pfizer. In March of this year we entered into a rather complex set of agreements pursuant to which we agreed to purchase a number of assets from Pfizer, including an insulin factory in Frankfort, Germany. In June Sanofi Aventis exercised its right of refusal to acquire the real estate and related assets so we did not end up purchasing the factory. We did, however, acquire a quantity of bulk insulin and license to the manufacturing process. We also have an option to purchase an additional quantity of bulk insulin from Pfizer at a specified price.

The transaction was designed to be a win for all parties, no matter which one of the several possible outcomes actually occurred. For us, the outcome of this transaction allowed us to obtain a supply of insulin that, together with our existing supply from Organon, is enough insulin to make billions of AFRESA cartridges, enough for several million patient years of therapy.

Peter's on vacation this week, so we will not have an update from him in this call, so I'd now like to turn the call over to Al.

Alfred E. Mann

Thank you, Hakan, and good afternoon.

I'd like to take a moment to comment about some market research results that we recently disclosed. We have contracted for several such market studies over the past several years as we approach commercialization. In May of this year we engaged BioVid Corporation to conduct quantitative research about the potential uptake of AFRESA so we might better assess the current potential global physician interest. BioVid is a well-respected pharmaceutical market research consultancy based in Princeton, New Jersey and was actually recommended to us by one of our potential partners.

The research was conducted with physicians who were instructed to base their responses on actual patient records. Before participating in the study, the physicians were asked to pull records of adult patient with Type I and Type II diabetes. For Type II patients they were instructed to have equal numbers of patients who are currently on insulin and patients that had never been on insulin. The participating physicians were then given a product profile based on our proposed label for AFRESA and shown a video that described how to use our next generation inhaler. The physicians were then asked a series of questions about their prescribing preferences for the particular patients whose records they had pulled in advance.

This study was conducted in the U.S. and Europe. The results from the European physicians are still pending. In the United States, 101 endocrinologists and 102 primary care physicians expressed an overall preference for AFRESA for approximately 25% of both their Type I and Type II patients. This study included only adult patients since our clinical program was only evaluating AFRESA in patients over 18 years of age and our current NDA seeks approval only in adults. Of course, we will be seeking to extend the pool to pediatric patients and approval for that segment will hopefully not be appreciably delayed. After all, the kinetics of AFRESA and its convenience are expected to be even more important for pediatric patients.

These results are markedly higher than those we obtained last year when we conducted research immediately after the negative publicity regard Exubera. Even then we were encouraged that physicians expressed a preference for AFRESA for about 8% of their Type I patients and 6% to 7% of their Type II patients. Based on the latest study it would appear that physicians are now better able to differentiate AFRESA from competing insulin products. Moreover, this new survey was conducted before the release of all of the positive information and the data about AFRESA that was disclosed at the American Diabetes Association meeting in June, so we would expect that the message would now penetrate even further into the physician community.

Because previous research focused only on the Medtone inhaler, the current results also show a strong interest for our next generation device. Hakan mentioned our current efforts to accelerate the development timeline for the new inhaler. I believe that the combination of AFRESA powder delivered with a Dreamboat inhaler is a major advantage, an advance that will enable AFRESA to change the treatment paradigm for diabetes.

Preference shares do not translate directly into sales forecasts; rather, they are merely indicative of market potential. That said, we used an expert consulting firm that regularly generates forecasts from such market surveys for the pharma industry. Last year's study was translated into revenues in 2015 of much greater than $1 billion. I'd suggest that the more than three times higher preference share in this latest study would likely support our confidence that AFRESA will be quite successful. You do the math to make your own guess as to the opportunity.

I would like to comment on another issue. Several weeks ago Form 4s were filed by our senior officers, including myself, and some people interpreted this as sales of our stock. In reality, all these officers were acquiring MannKind stock, so let me explain.

Under our long-term incentive plan the company had granted restricted stock units or RSUs that vest over time. Since RSUs are a form of compensation, income tax must be withheld at the time of vesting. It is customary throughout all of industry for a company simply to withhold shares valued at the amount of that tax. In effect, the employee [doesn't] actually acquire any stock, but a lesser number from the grant.

The withheld stock for the tax is treated as a sale to the company's treasury, but not to the market. The SEC requires a Form 4 for the amount of stock that is withheld. The tax withholding is described in a footnote on the Form 4, but it seems that not everyone noticed the footnote.

I am mentioning all of this because we will shortly be filing Form 4s for additional RSU grants that vested on August 1st and there will be such vesting events in the future. Before reacting to any such Form 4s, please first look at the details of the transaction. To avoid concern about my own personal commitment I have elected to pay the tax on last Saturday's vesting in cash and not by withholding shares. Rest assured I am invested in MannKind for the long haul.

As Hakan mentioned, we are moving very quickly towards an advanced stage in our partnership efforts. As he and I have repeatedly said, we want a partnership in place before year end, with our internal goal of this quarter. I hope that we will be able to make an announcement by the end of this current quarter.

That's really all we wanted to say today, so let me now turn this over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Cory Kasimov - J.P. Morgan.

Cory Kasimov - J.P. Morgan

I won't ask anything on partnership right now, but I'm wondering from a clinical standpoint, some of the outstanding studies, the commercially focused studies like I think it's 117 and some of the other ones that are out there, when might we expect to get a read on any of those?

Alfred E. Mann

Well, Peter's not here today so I hate to answer for him, but the 117 program is moving forward, primarily with the Dreamboat inhaler, and can't restart until September, so you're not going to see data from this until well into next year, probably after mid-year.

Cory Kasimov - J.P. Morgan

And then as far as that Dreamboat inhaler is concerned, can you talk a little bit about what you believe at this point in time you need to do from a regulatory standpoint? And when you talk about potentially using this as the inhaler at launch, would that imply a protracted timeline to get that ready to go?

Alfred E. Mann

We haven't really said that. We're simply saying that it depends to a large extent on what the FDA requires for us to do. When we changed to the Model D Medtone from the Model C, which was just a moderate change in the design in order to make it more rugged and more manufacturable, the FDA simply - actually at the pre-NDA meeting at the very last minute a member of the FDA team from the Device Bureau said I think we'd be more comfortable if you did a bioequivalency study, so that's what we did and that's what delayed us a few weeks, which was why we didn't finish by the end of the year. But we did complete that study and it showed bioequivalence and that was fine.

We are hoping that that's all that the FDA will require this time because we're not really changing the powder and the Dreamboat is simply much more effective in emptying the cartridge and doing it more consistently, so we're hopeful that the FDA will accept the introduction of Dreamboat, which would have a lot of advantages for the patients as well. But we can't make the decision until we get a response from the agency.

Cory Kasimov - J.P. Morgan

Okay, but it's safe to assume that at least in terms of the Phase I data that you have in hand now that [PK] profile with Dreamboat is in line with what you've seen with Medtone based on your internal [inaudible].

Alfred E. Mann

Well, for emission it actually reduces the amount of powder by roughly a third, which is very nice because, among other things, it lowers our cost of goods, but more importantly even than that is that it improves the performance for the patient in many ways.

By the way, not that Medtone was not great; it was also great. This is even more great.

Operator

Your next question comes from Jon Lecroy - Natixis Bleichroeder.

Jon Lecroy - Natixis Bleichroeder

So did the FDA institute any of the changes to the inhaler or was that all internal at MannKind?

And then can you discuss a little bit about what was in your 74-day letter from your filing of Technosphere Insulin?

Hakan Edstrom

The development of the next generation device which we call the Dreamboat was certainly all an internal effort where we found ways to further improve the delivery efficacy of the product, so from that point of view that was not done because of any type of outside experience.

And in regards to the 74-day letter, at this point in time, with Peter not here, I would say that certainly did not have the content of anything that was of surprise, so we are working very effectively with the FDA, moving forward on our NDA.

Alfred E. Mann

What I'd like to say is the letter included a number of questions, none which were difficult but which really shows that the agency had even by that time already begun very thorough review of our submission. We were pleased and excited, actually, that they had made so much progress.

Jon Lecroy - Natixis Bleichroeder

Your stock's up pretty substantially. Any thoughts of raising money here or if you'd looked into that, maybe how the discussion's going?

Matthew J. Pfeffer

That sounds like a question for me. As you know, this is a heavily regulated area so as a matter of policy at MannKind we don't comment on financing plans generally.

Operator

Your next question comes from John Newman - Oppenheimer & Co.

John Newman - Oppenheimer & Co.

I'll ask a question about the partnership second. First, if you were to launch AFRESA using the Medtone inhaler and then you were to follow that with the Dreamboat inhaler, it sounds like the Dreamboat inhaler is a bit more efficient and you're using less drug. So how would you deal with a potential reduction in revenue per patient if you introduced that switch?

And then secondly just one quick question on the partnership. What kind of expectations would you have for an upfront milestone there or would you be looking at a partnership that's more backend loaded?

Hakan Edstrom

First of all, in terms of the efficacy of the product, at this point in time we will sell our cartridges in 15 and 30 units. We do not expect to see any type of pricing difference there, so it leaves a cost difference but not a pricing difference on the product.

And in regards to any upfront discussions, those are, I would say, outside of our area for comment at this point in time.

Operator

Your next question comes from Semos Semonita - Rahman and Renshaw.

Semos Semonita - Rahman and Renshaw

Was there a $45 million drawdown this quarter?

And then a question for Matt again: Would you think you've reached a steady state for just a couple quarters for your spending? Is it what we should expect for Q3 and Q4?

Matthew J. Pfeffer

Semos, I hate to be that specific about the burn rate. I think I said earlier in the year that we would be decreasing throughout the year most likely and that you should expect as the year progresses somewhere in the nature of a 30% to 40% reduction. We're essentially already there.

Beyond that I hate to comment too specifically about if it's going to continue to decline, but you may see some additional small declines going forward.

Semos Semonita - Rahman and Renshaw

And then there was a $45 million drawdown from Al's line?

Matthew J. Pfeffer

Yes, that's exactly right. It essentially consisted - you can see what our burn was for the quarter.

Operator

(Operator Instructions) Your next question comes from Keith Markey - Griffin Securities.

Keith Markey - Griffin Securities

I was just wondering if you could give us an update on or what your plans are as far as the pediatric indication goes?

Alfred E. Mann

We are in discussions with the agency now. We need to create a plan for the pediatric. As they are typically very conservative about youngsters, they wanted us to get the program completed for adults before we started. We don't have anything specific to announce, but we believe this will be a major opportunity because for pediatrics the kinetics and the convenience would even be better than - it'd be more important, I mean, not better - it'd be more important than even for adults.

Operator

Your next question comes from Michael Tong - Wells Fargo Securities LLC.

Michael Tong - Wells Fargo Securities LLC

Just a quick question on the pros and cons of launching with Medtone or Dreamboat. Who's actually driving that decision process in terms of which inhaler to launch with? Is that MannKind or is that actually the potential partner?

Alfred E. Mann

The potential partners are really very involved in that discussion and no final decision has been made yet. It really depends on when the agency will approve it more than anything else.

Michael Tong - Wells Fargo Securities LLC

And so just to follow up on that then, given the mid-January [producer] date, what's a possible scenario that the partnership can or the partner will step forward that milestone event?

Alfred E. Mann

Before the [producer] date?

Michael Tong - Wells Fargo Securities LLC

Yes.

Alfred E. Mann

Well, we've said that our goal is the end of this year and internally we've set our comp plans on the expectation that we would secure an agreement by the end of this quarter, so that's before the [producer] date, so we expect this to be done before the [producer] date.

Operator

Thank you. This concludes the question-and-answer session for today's conference.

Alfred E. Mann

Thank you very much, ladies and gentlemen, for joining us today. We look forward to updating you at our next quarterly call or sooner. We're making great progress and we are very pleased with how things are going for us today.

Thank you very much.

Operator

Thank you. This concludes today's conference. You may disconnect at this time.

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