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MannKind Corp. (NASDAQ:MNKD)

The Piper Jaffray 25th Annual Healthcare Conference

December 4, 2013 10:00 AM ET

Executives

Matt Pfeffer - CFO

Hakan Edstrom - President and COO

Analysts

Josh Schimmer - Piper Jaffray

Josh Schimmer - Piper Jaffray

We are all set. Okay. Good morning, everyone. Thanks for joining. My name is Joshua Schimmer. I am one of - the new Senior Biotech Analysts at Piper Jaffray. I am pleased to join a terrific team and be able to host our conference today.

I am quite happy as well to introduce MannKind. Before I begin, I must draw your attention to certain disclosures regarding the relationship between Piper Jaffray and MannKind posted in the back of the room and at the registration desk. And so, with that, please welcome Matt Pfeffer, the [Chief Executive Officer] (sic) (Chief Financial Officer); and Hakan Edstrom, President and Chief Operating Officer.

MannKind recently resubmitted the NDA application for AFREZZA, the inhaled insulin program after completing two new Phase 3 studies with the Dreamboat inhaler, the PDUFA date is now April 15th, so an exciting 2014 ahead.

And maybe we can start, Matt, if you can give us a little bit of background and put this application into context and how these new trials address the concerns that the FDA had with the original application?

Matt Pfeffer

I’ll try and I’ll ask Hakan to join me in most of this discussion. By the way thank you for the promotion, I’m actually the Chief Financial Officer.

Josh Schimmer - Piper Jaffray

I am sorry.

Matt Pfeffer

All right.

Josh Schimmer - Piper Jaffray

I’d moved you to CEO, it just a matter of time. I was just kidding, just kidding.

Matt Pfeffer

I hope Al is not listening to this.

Josh Schimmer - Piper Jaffray

Al, yeah, yeah, Al knows that well.

Matt Pfeffer

So, yeah, good question. As most of you probably know, we have submitted to the FDA before and most recent submission before this one they did ask us to do two new trials because we had changed the inhalation device to a new much better device in many ways.

We submitted that device with a lot of data supporting that it was bioequivalent to the previous device. That said, at the end of the day, the FDA decided they would like to see some studies using this device in longer-term efficacy studies and asked for two new studies to be done, one in type 1 and one in type 2, which was in fact exactly what we did.

We did invest a lot of time which equates to a lot of money. Meeting with the FDA to get their full agreement on what our approach was and help them review the protocols and so forth in multiple meetings with them, during the course of that same year we got the response letter before beginning the trials.

The trials were successful. They hit the primary endpoints very nicely. And so with that data we resubmitted to the FDA. That filing has been accepted now and we have a PDUFA date, as you mentioned of April 15th. So we are pretty confident as much as is ever possible to be I suppose with the FDA but we’ve given them what they would like and we are moving forward.

Josh Schimmer - Piper Jaffray

So, I guess, though, maybe just give us a little bit of more context on the dialogue with the FDA, because you did have one resubmission that that didn’t run clinical trials and so, when did you really have the opportunity to sit down and truly appreciate what the agency’s concerns were and then get the confidence that these are right trials to satisfy them?

Hakan S. Edstrom

Well, really, following the second [inaudible], we internally decided that we would not proceed until we felt that we completely understood what the FDA was looking for and they knew what we were doing. So, I, actually participated in a couple of the meetings with the FDA in regards to what we are discussing even the trial designs.

And actually the type 2 design that we had was upon suggestion by the FDA because initially we came in with two basal/bolus trials both in type 1 and type 2 patients. And the statement from one of the members [inaudible] was why are you doing kind of the same type of study in both types, saying, once you got approval for type 1s in basal/bolus that wasn’t applicable for type 2.

The reason we did that originally was the fact we felt that FDA might be a little bit conservative in regards to who patients would be included in the clinical trials for a new insulin type product. But upon the discussions with them, we came up with the placebo-controlled study for type 2 patients.

So actually the statement before we started the trial, with them was that next time we expect to see you will be in the pre-submission meeting and we felt that going forward, and we still have the comfort factor that we will address what they were looking for and the studies certainly did meet the targeted end points.

Josh Schimmer - Piper Jaffray

Are you expecting an FDA advisory committee review and if so what might topics of that review be?

Hakan S. Edstrom

We don’t know at this point in time. Probably earliest we would know would be in conjunction with the 74-day letter. We know that the application has been accepted by the FDA and the 74-day letter is somewhere in between the 28 and the 30th of this month. So again, it has not been addressed by the FDA. There has been a change in the leadership from Mary Parks to Dr. Guettier, whether that will change the projection for a potential advisory board or not, we don’t know at this point in time.

Josh Schimmer - Piper Jaffray

When does that leadership change?

Hakan S. Edstrom

Mary Parks was promoted probably back in the August-September timeframe. I don’t remember exactly. We know that she is still somewhat enrolled with application but we know that the leadership role has been taken over.

Josh Schimmer - Piper Jaffray

Maybe you can help us understand where AFREZZA fits in, because there is an existing insulin treatment paradigm with long-acting and short-acting and now you are coming in with two different kinds of messages, right, it’s a different route of delivery and it’s a different PK profile. And so how does this work its way into the existing treatment paradigm?

Hakan S. Edstrom

Right. There is probably three different areas why you could see this would benefit the patients. Certainly, we have today over I think 3 million patients there are on prandial insulins in conjunction with -- usually with a long-acting insulin; then if you want to really enhance compliance simplify the procedure at meal-time avoiding injections that’s certainly one group of patients that would benefit from this product.

The other one is what’s called insulin intensification. Maybe you are on a long-acting insulin alone and you’re - the disease is progressing over time and you need to add another product to that. I mean, this would be at a time for AFREZZA, at meal-time.

And thirdly, it’s what we call the insulin naïve patients, i.e. type 2 patients on oral anti-glycemic drugs that again needs intensification of their therapy and that’s really what we did demonstrate in the Phase 3 trial that we just concluded with superiority in terms of the A1C outcome.

Josh Schimmer - Piper Jaffray

And, so I guess in terms of moving from injectable to inhaled, if you can give us a description of the Dreamboat and how easy is it to use, how easy it is to load and unload, I know it’s a pretty nifty elegant device?

Matt Pfeffer

Well, I sure brought one out of my bag, but I know there are so many people on the website, it is very simple. And I think the key thing here is that in our minds of a compliance. We know there is a large body of people out there that frankly probably ought to be on insulin that are not because they are resistant to taking that leap into an injectable product.

It has stigma associated with it, it’s kind of like you really have a serious disease now when you get to that stage. And people don’t want to do it. Giving them something that’s sort of whistle-sized and you can easily hide it in the palm of your hand, if you wish to, or if have large hands like me, you can.

It’s relatively small, and discrete, easy to use. I generally have one in my pocket but I don’t today. So it’s easy to carry around with you. It isn’t large that I should have to carry this in a case or anything like that. I usually have to check my pockets. I’m not sure which one it’s in. And this is this little, very tiny cartridges, carrying the powder and then you change those, one for each meal probably depending on how much insulin you need. And I’ll retrieve it before the next question.

Josh Schimmer - Piper Jaffray

And maybe the start to finish time to load, unload, dispose, maybe just kind of a mechanics of it?

Hakan S. Edstrom

You could easily do it within a minute. Actually, we’ve done qualitative studies that we’ve had by diabetes patients although we actually placed the inhaler and the cartridges in the middle of the table as they come into the room. And within a couple of minutes, they can figure out without any guidance, how to use the product, how to load the product.

So it’s very simple and that’s also why it’s been very attractive to particularly GPs because they usually don’t have the diabetes education. They don’t have the infrastructure to support the patients with an intensive educational program. So from that point of view, it’s -- patient like it because you could sit down to a meal, you can take a inhalation. Nobody really knew what you did because you could do it very, very conspicuously. You don’t have to look for a restroom or something like that in an environment where you can have more privacy.

Josh Schimmer - Piper Jaffray

Is this -- to what extent, is this a GP market versus an endocrine specialist market. And I guess, in diabetes, the gap between those two practices has always seemed challenging to bridge. So how do you -- do you start with the endocrine group and move into GPs, do you find a partner [inaudible]…?

Hakan S. Edstrom

Usually, what you see is that GPs, I mean are following what’s going in the marketplace and certainly from that point of view, we think that having kind of the endocrine and the specialist understand the product, has kind of endorsed the therapy itself is an important part and certainly of the introduction and marketing of the product.

But we also very much see the GPs being enthusiastic about this product from the point of view of the fact that with significantly less risk of hypoglycemic events for the patients, weight neutrality and most of the time initially even weight loss and good AC control.

It is an opportunity for the GPs to retain the patient inside their practice because normally otherwise as the patient transitions from say oral drugs into injectable drugs and insulin, the GP tend to lose those patients to the specialist. This is an opportunity for them to retain the patient to actually retain the revenue from the patients and that’s where the simplicity of our system is very attractive.

Josh Schimmer - Piper Jaffray

And I think Matt you had mentioned that your plan is to find a commercial partner. Would there be a scenario in which you undertake a limited focus [endocrine] [ph] launch, or are you not even thinking of that path because you are so confident that you’ll have a strong partner always of the drug?

Matt Pfeffer

Yeah. We’re really thinking we are going to have a partner and much more pretty confident that we will ultimately have that. The timing’s open to questions, but ultimately we think we will be successful on getting the right partner.

Josh Schimmer - Piper Jaffray

What are the gating steps to identifying the partner? So as I recall there were some partnership discussions going on a couple of years ago, maybe you can give us some color on what the partners were looking to see and incrementally then what the interest level was at that point and where you are in terms of re-engaging and re-sparking that interest?

Matt Pfeffer

We are very much involved in the process right now and we have retained an advisor to help us with the process to manage it more effectively. So it’s very active and underway. I am not going to talk about too much detail there because it gets a little bit risky to do so. But we are managing the process and them moving forward.

I’d characterize it as similar – the people were interested before [are still there] [ph], but there are some new people that were not as interested before that are more interested now. And I think we attribute that mostly to the potentially much greater label that we have with this earlier type 2 indication coming out of those studies we just did. I think that maybe part of what’s behind that. So it’s kind of sparked some new interest though.

Josh Schimmer - Piper Jaffray

Are there certain aspects of the label that partners are particularly interested in and focused on? Is the label, and to your expectation, going to be gating step for the partner because I guess that would - one might think, could then form the ultimate commercial opportunity?

Matt Pfeffer

I haven’t heard that that’s become issue yet. So I have to say, I don’t know of a specific issue they are concerned about. I know that we talked about pretty broadly that when we embarked upon these studies with the kind of different direction in the type 2 market that we took with the study in early stage, potentially insulin naïve patients, so first insulin in, that potentially opened the label to potentially the entire diabetes market.

So that was pretty exciting to us and I think it was likely exciting to potential partners as well. That said, nobody has raised particular concerns of the label, will be driven by the studies in the space are pretty well known at this point.

Josh Schimmer - Piper Jaffray

And how do we think about how one might construct a partnership because targeting the primary care market, obviously a significant upfront investments just from the infrastructure, the commercial, I mean some companies already have some of that built up? But as you structure a collaboration, does that kind of push economics to MannKind more towards the backend and once these franchises become profitable or…?

Matt Pfeffer

Not necessarily, but I think philosophically that would likely be our preference. I think we found from past experience of taking big upfront payments tend to cost you a lot at the backend, if you push for that. And I think we are very confident in the ultimate market success of the product, so we would like to take a bigger piece of that as we can once that finally occurs.

That said, I mean, you would expect some sort of an upfront, we have invested pretty significant monies into those products at this point, roughly $2 billion is going to startle you if you think of, so we would like to see something there.

Josh Schimmer - Piper Jaffray

You might not get a $2 billion upfront?

Matt Pfeffer

No. I wouldn’t, we are really happy to take however longer period of time. But we do expect to get significant return from this investment and a good portion of money was put in by our CEO personally, so I know he is interested in that as well. So the elements of the deal are likely fairly traditional with a couple of twists, so I am sure you will see something probably upfront, but I think the real profitability that the deal is going to come from market successful products and most likely a royalty arrangement, since those are easier -- easiest to do but not necessarily.

But you will see some other things. Now remember we will manufacture these ourselves, so you would anticipate some sort of transfer pricing in margin on manufacturing as well. So you’ll see different elements and how they might all come out at the end of the day, it’s too difficult to predict at this point.

Josh Schimmer - Piper Jaffray

How do we think about margins and specifically on the manufacturing side, I thought you had inventory built up or API built up, I am not sure where it is on the balance sheet though or…?

Matt Pfeffer

It is not on the balance sheet. So, if you are having trouble finding it that would be why. Anything related to inventory or raw materials is expensed at this point and that’s really a typical practice for a product prior to approval. So, it isn’t on the balance sheet but we do we have -- you are right, we have significant amounts of API, which is the insulin somewhere in excess of 5 metric tons which is quite a lot.

So that’s a good thing. It just helps the cost of goods little bit for a while, because that is the single largest individual component of the product but there are obviously a lot of others. And we haven’t really disclosed a lot around pricing or margins, probably because pricing ultimately, as they are known at this point, we anticipate, as our standard we would price similarly to pen delivered rapid-acting analogs.

Josh Schimmer - Piper Jaffray

And is that per unit or per…?

Matt Pfeffer

No, it tends to be priced on a kind of a per day use total cost basis, not per unit. So, we look to essentially have the cost the same as existing rapid-acting analogs in pen form. So that’s how we would anticipate pricing it. But of course, the commercial partner, once that person or that company has identified, we will have a lot to say about that so that what we anticipate. So that will drive the margins to some extent.

Beyond that we haven’t said too much. Obviously it does take us a little more insulin to have the same effects, not as much as prior examples by dramatic difference but we are getting better. But we are not perfect by any means in that sense. So, yes, the margins are going to be good and better than I think most people are expecting. I think the closest if it ever come disclosing what our margins are, I’d say that’s probably not the margins you would expect from a pill, but it's not the margins you would expect from the device either, we’re kind of a drug-device combination. And I usually say we are more like a drug than a device.

Josh Schimmer - Piper Jaffray

I guess, when we layer in a royalty obligation, how do you still make it attractive for a partner to really invest heavily in this, I mean can you use your inventory? I mean is the expectation that you would charge for the inventory or can you give the inventory away as an initial incentive in return for the royalty to make those margins attractive early on?

Matt Pfeffer

I think the margins will be very attractive regardless, and I think we have the data to support that. Like, as you would expect for any manufactured product, the cost goes down as the manufacturing quantities go up. So, I think having that inventory essentially at no cost in the early days will help offset the higher cost of manufacturing and ramp up. So, I think that will aid us and keep it at more constant level of profitability for us as opposed to something we’d necessarily pass on to the partner but we’ll see it, I mean, they’ll be negotiated at the end of the day.

Josh Schimmer - Piper Jaffray

Maybe I will just pause there and see if anyone's got some questions.

Question-and-Answer Session

Unidentified Analyst

I have a quick question, how many injections does a typical patient takes a day and after the products are approved, how many will they still take or not take?

Hakan S. Edstrom

Normally, what you would expect today is that the patient takes either one or two injections of long-acting. And with the prandial insulins today, there would be one per meal, so there could be in between four and five injections a day. With our products, you could then basically eliminate certainly three injections in conjunction with the meal. You may have one long-acting or possibly two injections of a long-acting insulin.

Unidentified Analyst

In terms of the inventory, is that really [inaudible] or do you have $1 billion inventory?

Matt Pfeffer

No, no, that’s what we were talking about earlier so. Now, we do have somewhere in north of 5 metric tons of insulin. This is the raw regular human insulin. It’s kept 20 below zero in dry powder form. So that’s the active ingredient of the product. So it’s one of the raw materials. It’s not worth a billion dollars. The replacement cost would be probably several hundred million though. It’s not trivial.

Unidentified Analyst

Okay. And the other thing is regarding the pricing, what is the pen delivered rapid [inaudible]?

Hakan S. Edstrom

I don’t remember all today, if I recall on a monthly basis and it’s usually about a 20% premium over injectable insulin. And it’s in the $360 to $370 a range a month in cost. And then of course, you have a different type of discounts levels on that based on who you’re dealing with from a managed care [inaudible].

Unidentified Analyst

So it sounds about $10 to $12 a day.

Hakan S. Edstrom

Actually it’s less than that when it comes to it. I would say, at the time we get out, you probably would assume after discount that somewhere in the, let’s say -- I would say, $6.50 to $7 a day.

Josh Schimmer - Piper Jaffray

I get questions from investors, who kind of say well, if you look at the type 1 data, the short acting subcutaneous insulin, maybe had a better hemoglobin A1C benefit than AFREZZA. It certainly didn’t stop Bydureon from getting approved when they were strong as Liraglutide in one of those studies, but maybe you can talk a little bit about that difference in hemoglobin A1C. Is it a reflection of the PK profiles, why do we see it and is it something that you see as a commercial obstacle or even a regulatory obstacle?

Matt Pfeffer

Well, remember the difference is relatively minor. I mean, it’s within the bounds of non-inferiority as established by FDA, with us in cooperation with the FDA. And that was the most recent study and other studies we have at least one or two, I know I remember one, because [inaudible] we were numerically superior. So it can go both ways. But I think -- I don’t think it’s going to be an obstacle because there’s a lot -- from a regulatory standpoint, there’s a lot of history there and precedence that would show that and discussions with the FDA that would support that as well.

From a market standpoint, if I were selling rapid acting analog, I would probably try to use that to my advantage in detailing the product. But at the end of the day, I think, the other benefits given the relatively small difference we’re talking about coupled with the benefits in hypoglycemia, weight gain, things like that. I think -- and just the form factor and ease of use and likely better compliance I think will all aid in the market a great deal and will easily overcome that.

That said, we think we know what’s causing that difference. We probably don’t think it us. I think our kinetic profile does very nicely mimic naturally the physiology in healthy person which is good in most respects but we do see [inaudible] levels rising throughout the day because frankly it’s hard to control your basal insulin properly and to some extent that’s going to be masked [inaudible] persistence of the existing rapid acting analogs.

We don’t have that which we think is an advantage, which is one of the advantages that leads to the hypoglycemic benefit but it’s an issue how to address in practice. So it’s going to take [inaudible] it used to. This being a fundamentally different insulin, different than it was used to at least. So to use it properly, it’s going to take little more training I think. But along the way, I think the patients will be benefiting at each step. So I think it will ultimately be successful in the market.

Josh Schimmer - Piper Jaffray

And maybe just a last question on your cost structure, how much of the cost that you are incurring now will be offloaded once you have AFREZZA on the market and a commercial partner?

Matt Pfeffer

Yeah, I’m glad you asked that question because I guess -- maybe just because I’m basically a glorified accountant, I’m often surprised by these things. But we are spending a lot of money and people [inaudible] they show these expense -- hold these expenses continuing, and they don’t fully appreciate that.

Most of the cost today are in our manufacturing organization and gearing up for commercial manufacturing. Ultimately once we have a commercial product being sold, those cost will -- they are not going to away but they’ll certainly be transferred into the inventory or cost of goods. So they are not going to appear in the same way.

By the same token even some of the remaining costs, we would expect the likely partner agreement with - they would assume a lot of the cost we have going for ongoing studies and those sorts of things. So I think it’s going to dramatically change our cost structure.

Josh Schimmer - Piper Jaffray

We’re very excited for April 15 and [inaudible] and best of luck and hope that you will come back with Al next year to join us at the conference. Thank you so much

Matt Pfeffer

Thank you.

Josh Schimmer - Piper Jaffray

And thank you every one for joining.

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