MannKind CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.10.11 | About: MannKind Corporation (MNKD)

MannKind Corporation (NASDAQ:MNKD)

Q4 2010 Earnings Call Transcript

February 10, 2011 4:30 pm ET

Executives

Matthew Pfeffer – Corporate Vice President & Chief Financial Officer

Hakan Edstrom – President & Chief Operating Officer

Peter Richardson – Chief Scientific Officer

Alfred Mann – Chairman & CEO

Analysts

Simos Simeonidis – Rodman & Renshaw Llc

Cory Kasimov – JPMorgan Chase & Co.

Mimi Pham – Weeden & Company

Tom Russo – Baird

Steve Byrne – Bank of America/Merrill Lynch

Michael Tong – Wells Fargo Securities, Llc

John LeCroy – Hapoalim Securities

Avik Roy – Monness, Crespi, Hardt & Co.

Keith Markey – Griffin Securities

Kevin Tang – Tang Capital

Operator

At this time, we would like to thank all participants for holding and that you know you will be on a listen-only mode until the question-and-session of today’s conference call. Also, the call is being recorded. If you have any objections, you may disconnect at this time. Thank you, sir. You may begin.

Matthew Pfeffer

All right. Thank you very much. This is Matt Pfeffer, Chief Financial Officer of MannKind Corporation. I would like to welcome you to today’s call. With me today are our Chairman and CEO, Alfred Mann; our President and COO, Hakan Edstrom; and our Chief Scientific Officer, Dr. Peter Richardson.

So, I am going to start and then turn the call over to Hakan to continue. First, I want to summarize our financial results for both the fourth quarter of 2010 as reported earlier today, and then, Hakan will provide an operational overview, and then Peter will address the clinical and regulatory matters, and then, finally Al will comment on the current situation and our outlook going forward. We will 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, including statements regarding our plans to complete the development and commercialization of AFREZZA. It is possible that the actual results could differ from these stated expectations. For factors which could cause actual results to differ from expectations, please refer to the reports filed by the company with the Securities and Exchange Commission, under the Securities and Exchange Act of 1934.

This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, February 10th, 2011. Mannkind’s management undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

Let’s start with the financials. For the fourth quarter of 2010, total operating expenses were $32.1 million compared to $55.8 million for the fourth quarter of 2009 and $42.5 million for the previous quarter of this year.

Research and development expenses were $24.2 million for the fourth quarter of 2010 compared to $43.1 million for the fourth quarter of 2009, and $31.4 million for the third quarter of this year. The decrease in R&D expenses for the fourth quarter of 2010 compared to the same quarter in 2009 was primarily due to the non-recurrence of the write-off of previously capitalized costs related to our first generation inhaler MedTone recorded in the prior-year quarter, as well as decreased costs associated with the clinical development of AFREZZA. The decrease in R&D expenses this quarter from last quarter was primarily due to a reduction in raw materials purchased in the current quarter.

General and administrative expenses were $7.9 million for the fourth quarter of 2010 compared to $12.7 million for the fourth quarter of 2009, and $11.1 million for the previous quarter of this year. The net loss applicable to common stockholders for the fourth quarter of 2010 was $38.3 million, or $0.33 per share compared with a net loss applicable to common stockholders of $59.5 million, or $0.53 per share for the fourth quarter of 2009.

For the year ended December 31st, 2010, total operating expenses were $152.6 million, compared with $209.8 million for 2009. R&D expenses were $112.3 million in 2010, down $44.1 million from 2009, primarily due to the non-recurrence of the $12.8 million loss on the previously-mentioned write-off of fixed assets in 2009, decreased costs associated with the clinical development of AFREZZA and reduced salary related and other research costs as a result of the April 2009 reduction in force.

These reductions were partially offset by increased raw materials purchases. G&A expenses decreased by $13.1 million to $40.3 million for 2010 as compared to 2009 primarily due to decreased salary related costs resulting from the April 2009 reduction in force as well as the non-recurrence of costs related to the insulin acquisition transaction with Pfizer during the second quarter of 2009 and decreased professional fees related to market studies conducted in 2009.

The net loss applicable to common stockholders for 2010 was $170.6 million, or $1.50 per share compared with a net loss applicable to common stockholders of $220.1 million, or $2.07 per share for 2009.

Our cash, cash equivalents and marketable securities at the end of the year totaled $70.4 million, which compares to $98.0 million at September 30th, 2010 and $32.5 million at December 31st, 2009. Our cash on hand in the remaining credit facility from Al amounted to $168.4 million as of December 31st, 2010.

As promised in our previous call, and as we have reported earlier today, we have already taken significant steps to reduce our planned spending including a reduction in force of 179 employees or approximately 41% of our workforce. This will reduce our payroll spending by about a third. We have also terminated our long-term insulin supply agreement with Organon. Severance and related costs of about $6 million as well as non-cancellable costs under the Organon purchase agreement, we currently expect the fees and other measures will extend our financial resources, including the $98 million still available in the credit facility from Al to fund our operations to roughly the end of 2011.

With that, I would like to turn this call over to Hakan Edstrom, our President and Chief Operating Officer who will comment on our current operations. Hakan?

Hakan Edstrom

Thank you, Matt, and good afternoon. If you can imagine, the receipt of the CRL put out into full contingency plan mode, we are certainly resolved to pursue the approval of AFREZZA, however, the focus right now is on a realistic and achievable plan to get from here to approval. The contingency actions are fully underway. As you have heard, we have terminated our insulin supply agreement with Organon. We have ample quantities of insulin even without taking into account the fact that insulin that we purchased from Pfizer. So, this termination will not interfere with our ability to conduct a clinical trial requested by the FDA or supply commercial material as we transition to the Frankfurt insulin.

As well, earlier today, we implemented a significant reduction of staff at all of our sites, reducing the headcount by approximately 179 people, representing about a 47% [ph] reduction of our employee base. We are also in the process of performing a detailed internal review of projects, ongoing activities and spending priorities. Our goal is to ensure that we can manage our existing resources to the greatest extent possible through the period of time required to conduct the additional clinical studies.

Of course, we still need the FDA guidance in order to plan and conduct additional clinical studies, and Peter will provide more information about our plans to interact with agency in the very near future. Upon receipt of this guidance, our next planned action is to arrange meetings with potential partners. The intent of those meetings will be to share with them the details of the CRL, our plans going forward and to get their perspective on the regular path to approval as it relates to partnership negotiation.

In the coming months, we will certainly continue to pursue partnership opportunities and we will also explore other funding options and alternative transactions. However, our main focus for the present is to deliberate and judicious management of our existing financial resources as we pursue approval of AFREZZA.

From an operations viewpoint, we are ready to resume the clinical trial as soon as we have a confirmed alignment with the FDA. Our manufacturing group has all of the MedTone C supplies on hand and is certainly ready to supply the Dreamboat cartridges and inhalers in ample quantities.

So, in transitioning the call over to Peter, I want to emphasize that while the CRL certainly was an unpleasant surprise, the organization has responded admirably, and is ready to bring AFREZZA the rest of the way.

Peter?

Peter Richardson

Thank you, Hakan, and good afternoon. As you may imagine, this has been a busy and challenging period to the organization for the contingency plans that we have set in place that has allowed us to move quickly and decisively and preparing to address the agency’s requests as laid out in the response. We won’t let know all the details until we have received further feedbacks from the FDA and are assured that we are fully aligned on the approach we will take in the clinical trials.

We have agreed with them that we will seek their specific review with the protocol and meet with them as suggested as an end of review meeting. As you know, we have put in place studies, which in terms of their basic design appear to fully meet the agency’s request to study the safety and efficacy of the new device in the clinic, ensuring adequate titration of AFREZZA and relatively stable insulin dose for 12 weeks.

These two studies, Affinity 1 in Type 1 patients and Affinity 2 in Type 2 patients have adjusted to meet the agency’s instructions, will form the basis of our response, and we are positioned to be able to execute these studies efficiently as a result of having trial supplies and investigate to sites already in place.

Affinity 1 has not so far started recruitment and Affinity 2 has screened sufficient patients to anticipate approximately 40 or 45 patients being randomized. A major challenge in revising these protocols is how to introduce the comparison with our MedTone Model C inhaler to allow a head-to-head comparison of pulmonary safety with Generation 2. Our proposal is to introduce the MedTone arm in both of these studies and then determine the logistics of doing so would be practical given supplies of devices we have presently available. However, given that we wish to do all that is possible to ensure that the details of the design meet the agency’s requirements, we will not do this until we have had the detailed review of the proposal with the agency to ensure that our approach is acceptable.

We have deferred to start the recruitment to Affinity 1 and have suspended screening of additional patients in Affinity 2 until we have completed the review of the protocols with the agency and fully clarify what is needed at an end-of-review meeting. We will use this time to confirm that we have achieved the short-term titration goals we require in the existing patients in Affinity 2 and review with FDA whether we will be able to use them in the final study. Meanwhile, we will be working to the test sites, supplies and the necessary logistics to conduct this program expeditiously as soon as we have full clarity from the FDA on the acceptance of our clinical approach.

Although it is impossible to give definitive times to the conduct of these studies, we would anticipate being able to restart enrolments soon after we have conducted our meeting and receive feedbacks from the division reviewers. We are presently submitting our questions to the agency and we will be submitting our revised protocol in the next few days. The present studies were planned to randomize about 360 patients each. We are randomizing half to the new device and half to injected rapid-acting analogs. We are proposing to add a further 75 patients in each study using MedTone inhaler that was originally used in the long-term pulmonary safety study.

We intend to expediting enrolment, that recruitment is expected to require at least six months. Although only 12 weeks of stable treatment is required, the entire treatment time since screening through to completion is expected to be approximately six months. Following completion, we will of course need to assemble our resubmission, which should take around two to three months. We will be looking at ways to optimize and shorten our execution of these studies and set in place capabilities to reflect data electronically and manage investigator sites directly, which should lead to benefits and cost time and quality.

The manpower reductions that Hakan has spoken about will not empower our ability to manage these studies with the human resources that remain focused on this task. As you look at other programs in research and development, we will be looking at various approaches to ensuring the viability of the assets we have in terms of the Technosphere platform and our oncology pipeline, whilst deserving cash and resources on the AFREZZA program.

I would now like to turn the call over to Al.

Alfred Mann

Thank you, Peter. Now that we have had about three weeks to deal with the reality of CRL, I am a little less discouraged about the setback and somewhat more optimistic. Yes, the CRL presents some challenges to us that we must now address, and yes, the impact of the delays in approval is very serious. But we believe the CRL indicates a path to approval, and we will work with the FDA to further clarify this path.

The principal comment in the new CRL is directed to confirmation of the lowering of HbA1c with the new device and a bridge for pulmonary function between a new inhaler and the previous device. The additional clinical study that’s similar to the two Phase IIIb Affinity trials we have already been implementing for marketing purposes. The rest of the FDA letter sets forth readily accessible requirements such as additional patient usability and handling evaluation for the new device, and further instructions regarding product packaging and marketing.

As I said, the protocols for the trials called for in the CRL map quite nicely into the protocols for the first two Affinity trials, except that we must add a MedTone cord to at least one of the trials in order to bridge pulmonary function effects in a head-to-head comparison of the new device to the clinical device. Our team has prepared and proposed amendments to the protocols, which are being submitted to the FDA in anticipation of our meeting. When we initiated the Affinity trial series, our intention had been only to complete preparations, contract with clinical investigators, gain approvals from the RBs and then conduct small 50 to 60 patient free trials of the largest studies.

For Affinity 2, this initial stage was well underway. The data from this stage will give us some very useful information about the more aggressive titration protocol that we have adopted for these trials. For Affinity 1, we have initiated sites, but have not yet enrolled any patients. Given the CRL, we have stopped further enrolment of both studies until we meet with the FDA and will then proceed to do full trials.

We plan these trials to better demonstrate the true benefits of AFREZZA. A challenge in registration trials for a prandial insulin is to get investigators to reduce vaccine levels closer to normal. Other companies have faced this problem before. In the Affinity trial, passing blood glucose will be titrated during the run-in period until there is a high (inaudible) or until passing blood glucose is beating 100 and 120 milligrams per deciliter. And dosing the AFREZZA will be adjusted to keep the postprandial rise in 90 to 120 minutes to under 140 milligrams per deciliter.

With this titration protocol, the expectation is that the AFREZZA cords will achieve much better HbA1c, with a higher probability that most patients on AFREZZA will reach HbA1c of under 7% and possibly under 6.5%. As Peter said, we are preparing for a meeting with the FDA regarding the trials in the path forward in approval. We want to make sure that the final study protocol meet all agency for the 2b market configuration.

In particularly, we want to reach agreement on the size of the trial and the inclusion of the head-to-head comparison of pulmonary function with the new device of the MedTone clinical device. We are on a clear path to approval. Once we have been confirmed that we are aligned with the FDA, our clinical operations group will go into high gear to recruit the necessary patients and moving them through the titration and treatment phases.

Questions have been asked about the impact of the new CRL and partnerships and finance. All the potential partners in the queue are experiencing and evaluating such responses from the FDA. They can understand and deal with such actions. Once we have received guidance from the agency, we believe we should be able to have a meaningful dialog with our potential partners without any remaining trials and regulatory risks.

Of course, there are likely still to be uncertainties about the label and the timing of the launch. Nevertheless, we tend to explore any deal or opportunities that are available. There are a number of interested pharma companies. After all, there is great need by pharma for late-staged products and there are not many late-staged opportunities, certainly not any with the market potential of AFREZZA. Notwithstanding the CRL, our premier asset AFREZZA targets the greatest healthcare challenge facing the world today with a game-changing therapy.

We are committed to getting this therapy into the hands of diabetes patients where we will consider any reasonable plan that allows us to accomplish this goal. In the meantime as described by my colleagues, we have already taken some painful actions to strengthen our cash burn. In our AFREZZA operation, we are retaining what is needed to deploy the path to approval. In certain other areas especially in our oncology program, we are only retaining critical resources. This is not a happy day for MannKind Corporation. We are letting go a lot of very good people who have made important contributions to the company.

However, we have no choice given the singular focus we must have on securing approval for AFREZZA, we simply cannot afford to do much else. I have tried and described the current situation, the impact on our plans and how we are seeking to deal with the complete response from the FDA. So, now let’s open up the call to your questions. Operator? Sorry folks. Matt?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Simos Simeonidis. Go ahead, Simos, your line is open, sir.

Simos Simeonidis – Rodman & Renshaw Llc

Thanks for taking the questions. Can you tell us, have you contacted the FDA and/or has that meeting with them being set up yet?

Hakan Edstrom

Not yet. They will get a schedule for us for probably a week or two.

Simos Simeonidis – Rodman & Renshaw Llc

But you have requested a meeting?

Hakan Edstrom

We tried to request, but it’s being reviewed now, so it’s probably going in tomorrow morning.

Simos Simeonidis – Rodman & Renshaw Llc

Okay. In terms of the cuts that you made, the 100 or something people that you laid off, can you give us maybe where the, I mean, which department we are in?

Matthew Pfeffer

I would say they were across the entire company. We have certainly made sure that we retain the critical people that will bring us to the approval that we are pursuing for AFREZZA, but otherwise the cost that – all the functions were impacted to a great extent.

Simos Simeonidis – Rodman & Renshaw Llc

And a final question, the toughest question for Matt. Matt, can you give us an idea going forward what the spent for quarter is going to be, or can you tell us how much will it take in terms of cash for you to get to an FDA decision?

Matthew Pfeffer

You are right, Simos, that is a tough question, and I am not sure I am completely prepared to answer it. I gave what guidance I could at this point, remember, this is all happening very real time and we are still making a lot of assessments and we have made some very difficult decisions today. We have a lot of things, other things being evaluated. I feel comfortable saying we have cash that should take us to about the end of the year. But we are looking at things that might take us beyond that or improve upon that situation. So, I really rather not lock us into a particular number at this point, however, especially because of our spending tends to be a little lumpy if not always very even.

If you take the financial resources that we have disclosed today and divide it through the end of the year, you will get a rough idea of what our (inaudible) going forward from this point.

Simos Simeonidis – Rodman & Renshaw Llc

I had to give it a shot at least, all right. Thank you.

Operator

Our next question comes from Cory Kasimov. Go ahead, Cory, your line is open.

Cory Kasimov – JPMorgan Chase & Co.

Good afternoon, guys. Thanks for taking the question. Regarding your meeting with the FDA, are you going to wait for the minutes from that meeting before restarting the Affinity trials?

Alfred Mann

Peter, would you like to?

Peter Richardson

I think that really, those depend in terms of what we would anticipate, and we have had opportunity to speak to the agency in terms of what we are going forward with it. They have actually agreed to us that they will do a two parallel review process the end of the review meeting, but also access the review of the two protocols filed to the IND for the review, which will give us additional feedback.

If by the time we get to the meeting, we have written answers to the questions which would be normal before the meeting and we are in a agreement, then I would love to starting the study as soon as we would show that we have alignment and we have got the protocols finalized that level. We have all been waiting to minutes. If however, that is main disagreement, I think the important thing is that we agree the details of the any changes that need to be done to the protocols at that point.

Cory Kasimov – JPMorgan Chase & Co.

Okay. And then, Peter, I just want to be sure from the timelines you had outlined in your prepared remarks that I am clear here, so if the two Affinity study, assuming they are successful, you would be looking at about 15 months from the time you restart the trials until you are in a position to resubmit, so are you looking at kind of mid-2012ish or something, is that the right way to look at it?

Peter Richardson

Certainly, I indicated that it would be at least six months in terms of our previous history and knowing recruitment times in this area for recruitment and each patient would be six months, we also set two to three months for preparation of the NDA. But I think at this point, we really got to look at how we optimize, we have some decisions in terms of how we execute, in terms of sites that we met on. So, we are certainly out to give you a much better idea of the detailing planning when we know the details of the protocol. Clearly, giving real guidance on this at the moment depends on the numbers and the calculations that are being accepted.

Cory Kasimov – JPMorgan Chase & Co.

Okay. And then, my final question is regarding Al and Hakan’s comments on meeting with prospective partners. I am just trying to understand, if you wouldn’t partner AFREZZA before the prior to PDUFA dates, but are you considering taking less money now to keep the product moving forward, or is this something that, that contingency plan if you don’t have other financing opportunities?

Hakan Edstrom

I wouldn’t say it is contingency dependent. We have been in contact with the persons on an ongoing basis. As Al mentioned, a CRL is not a kind of unusual event that the potential partners have not seen in the past. So, we will sit down particularly after we have met with the FDAs, and we understand what is required of us in the go-forward clinical trials. We think that we will provide clarity in terms of what type of deal arrangements that we could be looking for, but certainly increasing flexibility is part of the, say, modus operandi going forward.

Cory Kasimov – JPMorgan Chase & Co.

Okay, thanks for taking the questions.

Operator

Our next question comes from Mimi Pham. Go ahead, Mimi, your line is open.

Mimi Pham – Weeden & Company

In terms of resources, you talked about having enough funds to operate through year-end. Assuming you need another 150 million to 200 million or somewhere around the same levels to fund through FDA approval sometime end of 2012, when do you plan to start raising those additional funds if that’s not an issue?

Alfred Mann

Matt?

Matthew Pfeffer

Mimi, as with general practice, we have never pre-announced financing plans, and I don’t intend to start doing that now. We reflect in having a lot of different potential opportunities. I wouldn’t expect that we would be considering doing anything prior to meeting with the FDA when we have a bit more clarity, and to make a more important choice about which of the financing options and other things we might be looking to do.

Mimi Pham – Weeden & Company

Okay, and then, I guess. Okay, go, sorry.

Matthew Pfeffer

So, all I can say is stay tuned.

Mimi Pham – Weeden & Company

And I guess maybe directly just asking Al, in terms of if the financing options fall through, if there an option still to provide some resources through the Mann group?

Alfred Mann

I can’t make any commitment at this point. Obviously, I believe in this product, and I have invested in it, because I believe in it, and I have got to find a solution for this.

Mimi Pham – Weeden & Company

Okay. And then just in terms of the R&D and G&A spend, can you at least directionally help us with the $24 million you spent in fourth quarter for R&D, will we expect post work force reductions and with the clinical, that directionally be the same levels or above or below and similar question for the $8 million in G&A post the work force reductions, is it the same level, below or above?

Matthew Pfeffer

Well, obviously with the reductions, I assume this is for me, Hakan?

Hakan Edstrom

Yes.

Matthew Pfeffer

The spending is going to go down in most of the areas, the only place it will likely go up a little bit is once these new trials are in full swing, you will see some additional clinical spending there. Obviously, we chose not to be carefully specific when that might happen, because frankly we don’t know what’s the certainty, but the general, the kind of background spending should certainly decrease, just payroll is going to take us down about a third right there. And then, once the trials get underway, you will see a pickup a little bit at the end, hope get some help.

Mimi Pham – Weeden & Company

Okay. So, I guess take a third of the $24 million of R&D and take that out to reflect the work force reduction and similar take a third of the $8 million in G&A to reflect the work force reduction and then we can figure out how we estimate increments from clinical?

Matthew Pfeffer

To be perfectly honest, I mean, we are still kind of modeling this ourselves. We can certainly see the work force reduction effects, because we can quantify that. When you start rippling it through and taking the associated spend out, it’s hard to – it takes a little longer to do that, and we are doing it even as we speak. Obviously we couldn’t let this information become too widely known in advance of announcing it. So, it limited our ability to do full analysis, but we will be re-forecasting and re-budgeting in the days ahead.

Mimi Pham – Weeden & Company

Okay. Thank you very much.

Alfred Mann

Yes, Mimi, I think it’s also appropriate to say that the Affinity 1 and Affinity 2 studies, they were planned as marketing studies, that’s part of our budget for 2011. So, from that point of view, the studies that we are transitioning to responding to the FDA request is not fully incremental to our planned spending for 2011.

Mimi Pham – Weeden & Company

Okay. Thank you very much.

Operator

Your next question comes from Tom Russo. Go ahead, Tom Russo, your line is open.

Tom Russo – Baird

All right. Good afternoon, and thanks for taking the questions. There is still a lot of continued talk about potential partners which is frankly rather than usual to hear to such an extent and so frequently from a public company. Can you comment, have any talks actually advanced or occurred since the setback last month?

Hakan Edstrom

Depends how you define. Yes, we have certainly been in contact and we already contact with those many companies that we have been talking to kind of some of them significant amount of time. Have we entered into negotiations? No, we have not, we think that would not be appropriate until both parties have a full understanding of the outcome of our discussions with the FDA.

Tom Russo – Baird

But are you – I guess I am also just trying to understand, how you could negotiate with potentially interested parties while kind of in this financial predicament, is it – would one come before the other in terms of showing up the balance sheet before really being able to even consider negotiating or we start another way around it.

Hakan Edstrom

We have several plans going forward. But really until we get full clarity on the path to approval, that we hope to get at this meeting, we can’t really define the final program, but I think it’s premature for us to give any further details of the various opportunities. We have several very significant opportunities.

Alfred Mann

Yes, and also remember, as Matt mentioned in his remarks as the fact that the company, we all finance at this point in time to roughly at the end of the year. So, it’s not that we are sitting at a cliff there.

Tom Russo – Baird

Okay. And then last question. This came up a month ago or a few weeks ago, but it seems to be getting more emphasis now. Can you give a little more clarity on this pulmonary function head-to-head? What exactly does FDA need to see or not see? What is the concern there?

Alfred Mann

Peter, would you please?

Peter Richardson

Of course, until we spoken further with the FDA, I can’t give you a definitive answer on that, I think it has go with the head-to-head comparison of the pulmonary safety of the MedTone Model C with the next generation inhaler. Interpreting that, and I think based on what we have done previously in the two-year studies and in all of the studies so far is that would be based upon an assessment or probably a function using smile on the trade and/or other measures to assess pulmonary function change. That’s one of the important things we have got clarity with the agency. They have not – in this area of comparison of efficacy.

Tom Russo – Baird

But your understanding right now is if the new device performs similarly to the old device on pulmonary function, is that acceptable?

Alfred Mann

Tom, remember that we had only about a little over 2% to 3% reduction, clinically insignificant reduction that was non-progressive, happened early in the use and didn’t change until we stopped and then it recovered. There was no aspect on pulmonary tissue and we now believe it was really probably just a reaction to inhalation by people. We don’t have a lot of data with the new device, but with the new device, it appears to be even less, but is already clinically insignificant. So, the FDA just wants us to confirm that we are at least as good as MedTone.

Tom Russo – Baird

Okay. Thanks Al.

Operator

Our next question comes from Steve Byrne. Go ahead, Steve Byrne, your line is open.

Steve Byrne – Bank of America/Merrill Lynch

Got a couple of more Seaside equity purchases in January and if so, where does that put your cash balance roughly at now?

Hakan Edstrom

Matt?

Matthew Pfeffer

Yes, well, obviously we did have a couple of more of those. We haven’t closed January yet on – I am not sure I know myself exactly where the cash balance is.

Steve Byrne – Bank of America/Merrill Lynch

And when you projected having sufficient funds through year-end 2011, was that counting on drawing on that $98 million loan agreement or not?

Matthew Pfeffer

Yes, that assumes that we could still drop on that $98 million loan agreement. Obviously, we only ended a year with some $78 million or so in cash. It did assume that – it did not assume any additional financing sources from Seaside or anywhere else.

Steve Byrne – Bank of America/Merrill Lynch

Okay. And has your, the R&D program on the active immunotherapy program been halted and do you see potential value in selling some of that IP?

Alfred Mann

Pete, do you want to talk about oncology?

Peter Richardson

Really in today’s restructuring, focused very much in terms of the assets that we have in that area both with the oncology small molecule and the active immunotherapy program. So, we retained a small key team as we move with in terms of looking at that small ongoing clinical study. I think we are looking at ways that we can approach that with minimal cash burn, clearly in terms of looking at partnering, I don’t know, this is too early to say what the impact of this has been.

Steve Byrne – Bank of America/Merrill Lynch

And one last one for you, Peter. In the initial phase of the Affinity 2, have you found any of the test centers to find your treated target for forced titration protocols difficult to implement?

Peter Richardson

Certainly, actually being very demand in the protocol. I think that’s one of the things in intense treat to target, we certainly have set some ambitious goals. I am not only saying telemetry data, but I am encouraged by what I have seen to date, and I think actually they are helpful to actually have the opportunity to look at the small number of patients in terms of ensuring that the titration regimen gets to the point where we can reach what are difficult goals.

Steve Byrne – Bank of America/Merrill Lynch

Okay, thank you.

Operator

Our next question comes from Michael Tong. Go ahead, Michael, your line is open.

Michael Tong – Wells Fargo Securities, Llc

Thanks. This is maybe for Al or for Peter. Can you just confirm whether the FDA has indicated to you that MedTone is considered safe and effective, so that when you have the Dreamboat inhaler being equivalent to MedTone that there is that translation equivalency that actually applies?

Alfred Mann

I think you can assume that. What they are asking is to essentially bridge from the MedTone program to this one. There were some elements of the MedTone that we have not responded to, mainly the marketing of the cartridges, but I think that the way the CRL reads, it would imply that if we can show that, that our results in both efficacy and pulmonary function or safety are as good as they were with Dreamboat, then we should be on a path to improve, but that’s one of the thing that we want to make sure when we meet with the FDA at the forthcoming meeting.

Michael Tong – Wells Fargo Securities, Llc

So, you would actually seek clarification from the FDA that indeed that’s the case?

Alfred Mann

I think the inference from the way it’s written, they are basically saying that they wanted to show that the new device is good than the old device, and you got to draw that conclusion yourself, Michael. Peter?

Peter Richardson

Just a help a little in terms of the specifics, and I think in terms of the wording that has been chosen. And that’s just compared to safety and efficacy as the new device, not wording in terms of the – in terms of that, in terms of the comparison. And secondarily, they ask the pulmonary safety in comparison to the MedTone. So, that’s why the thoughts in terms of the design of the studies in the way that in terms of a comparison to rapid-acting analog, and it seems appropriate in answering that question.

Alfred Mann

They have not raised any safety issues even in the first CRL. They have not identified any issues of concern, in any of the letter [ph], and in this case they want to make sure their new device is as good as the old device.

Michael Tong – Wells Fargo Securities, Llc

Okay, thank you.

Operator

Your next question comes from John LeCroy. Go ahead, John, your line is open.

John LeCroy – Hapoalim Securities

Yes, thanks for taking my call. In Affinity 2, to get the patients down to the 140 postprandial number, how many puffs of the AFREZZA device is that taking? Could you make a guess maybe?

Alfred Mann

It’s only one puff with the cartridge period.

John LeCroy – Hapoalim Securities

Right, but how many cartridges do you guys –?

Alfred Mann

It depend on the patients. The average that we have seen is about 30 in the cartridge. We have larger cartridges, but they require a small change of the formulation, so that at this point, if a patient needs a lot of insulin, they are going to have to use a couple of cartridges. Later, we will have larger cartridges that will have to be approved after we get the initial approval of the 10 and 20 unit cartridges we have now by the way, and I said 30, I was referring to MedTone, which is 20 with Dreamboat.

John LeCroy – Hapoalim Securities

All right. Thanks, and then, what sort of hypoglycemia percentage rates were you looking for in the titration period?

Alfred Mann

Peter?

Peter Richardson

Hi John, I am not quite sure in terms of percentage rates. What we –

John LeCroy – Hapoalim Securities

The percent of patients that might get a hypo?

Peter Richardson

That depends in terms of the Type 1 and Type 2. Really in Type 1 patients, we are expecting a large proportion of patients that have a mild to moderate hypoglycemia when you titrate. What we are looking for is a significant reduction in that between rapid-acting analog by injection and AFREZZA. They should be lower in Type 2 and so, hypoglycemia – we expect lower percentage numbers.

John LeCroy – Hapoalim Securities

Okay. And then, it looks like from your timing, you are expecting kind of an average titration of about 12 weeks, is that right?

Alfred Mann

Well, the titration, we have to be 12 weeks of reasonably stable dosage. It will take several weeks. We don’t want to say how many, but it could take up to six weeks or more to do the titration to get the patients down in both the basal rate and the prandial rate.

John LeCroy – Hapoalim Securities

So, that 12-week stable dosing is before the –

Alfred Mann

No, the stable dosing is after the all titrations.

John LeCroy – Hapoalim Securities

Okay, all right. So, you think the titration takes about six weeks?

Alfred Mann

Well, it could be up to or it depends. The plan is to titrate the AFREZZA first. I mean, to get it down under 120, and then to titrate the AFREZZA to make sure that we are under 140/90 [ph] to 120 minutes. And once we get there, then the patients enter the treatment phase and that’s, well we –

John LeCroy – Hapoalim Securities

Okay, great. And then finally, for the Organon deal that you are cancelling, what’s the penalty on that?

Alfred Mann

It's not resolved just yet. But we will see.

John LeCroy – Hapoalim Securities

Any kind of rough ballpark?

Matthew Pfeffer

We did disclose a potential penalty that we are payable at the end of this deal, it’s 22.7 million that’s to be negotiated, and it’s very much dependent upon whether they are able to sell the insulin elsewhere. So, to that end and to think to the extent they are successful, there is no penalty.

John LeCroy – Hapoalim Securities

Okay, all right. Thanks.

Operator

Our next question comes from Avik Roy. Go ahead, Avik Roy, your line is open.

Avik Roy – Monness, Crespi, Hardt & Co.

Hi guys. I have two questions for you. First, given the complete response (inaudible) contain a complete accounting for all the FDA’s objections or concerns about a filing, why do you think they have brought up these concerns about the inhaler in the second CRL and not in the first CRL? Do you think they would have addressed that in the first CRL?

Alfred Mann

We have not applied with the new inhaler. We changed the inhaler and they decided they needed these studies as a bridge with the new inhaler. That’s what it’s all about.

Avik Roy – Monness, Crespi, Hardt & Co.

Yes, of course. And then, I recall with the Study 117 that was terminated early, you mentioned at that time that the reasons for the termination was that it was done with the original device and you stopped that study when you got producing the old device and decided to make a change over to new device, which suggests that it takes a while to ramp up and down production of the MedTone inhaler. So, I guess I am curious, how long do you think it will take you to ramp up production of MedTone to conduct these, to add those study?

Hakan Edstrom

Actually, as I said in my script, is that we do have the MedTone, the inhalers and cartridges in ample supply. We would be ready to go with an immediate start. We also have ample supply of the, what we call, the Dreamboat inhaler and cartridges. So, supply is not a narrow sector for us at this point in time.

Avik Roy – Monness, Crespi, Hardt & Co.

So, just understand then with the 117 Study, was the 117 Study terminated because you ran out of cartridges or because strategically you decided because of the study which being conducted with the old cartridges that wasn’t worth continuing.

Alfred Mann

Because of the latter.

Avik Roy – Monness, Crespi, Hardt & Co.

Okay, thanks a lot.

Operator

Our next question comes from Keith Markey. Go ahead, Keith, your line is open.

Keith Markey – Griffin Securities

Hi, thank you for taking my question, but they have already been answered.

Alfred Mann

Thank you.

Hakan Edstrom

Thank you, Keith.

Operator

(Operator instructions) Our next question comes from John Lemke. Go ahead, John, your line is open.

Kevin Tang – Tang Capital

Actually, sorry, it's Kevin Tang with Tang Capital. How are you doing, guys?

Hakan Edstrom

Fine.

Kevin Tang – Tang Capital

So, I just want to clarify on the financial guidance of resources sufficient until the end of the year, of the $22.7 million of estimated maximum penalty for the Organon termination, what did you build into that projection?

Matthew Pfeffer

We didn’t because that wouldn’t be until the following year.

Kevin Tang – Tang Capital

Okay.

Matthew Pfeffer

It’s now, we have disclosed it, but it’s not anything certain at this point.

Kevin Tang – Tang Capital

So, that payment would not be due until 2012?

Hakan Edstrom

That is correct.

Alfred Mann

Yes, it relates to the purchase of material that was scheduled for next year.

Kevin Tang – Tang Capital

Okay. And why then in 2012 would that payment be due?

Matthew Pfeffer

March.

Kevin Tang – Tang Capital

March of 2012, okay, thank you. And then my second question is, do you intend – I should define you. Does MannKind, the company, intend to draw down the $98 million on the credit facility?

Alfred Mann

Matt?

Matthew Pfeffer

Probably but not certainly. It depends on what happens between now and when we might need to draw upon that line.

Kevin Tang – Tang Capital

Okay. So, you have not decided to draw down – if you raised money otherwise, you may not draw down?

Matthew Pfeffer

That’s actually possible.

Kevin Tang – Tang Capital

Okay. And then one clinical trial question. First of all, the titration period, in currently in the Affinity protocols we discussed this on the last call, it's fixed to four weeks, but it sounds like you are talking about modifying that to be longer? Is that what I should infer by the six weeks?

Peter Richardson

Yes, we had looked at this, and I think that we really want to be conservative in terms of ensuring that we optimize the titration and then have that relatively stable period. So, we felt that it would work given the importance of getting this right in these studies that it would be worth extending to six weeks if necessary in the patients.

Kevin Tang – Tang Capital

Okay. As you probably gather from my comments last time, I would agree with that conclusion. And then I just want to – I wasn't going to ask this, but that was just reminded by I think two callers ago, the number of cartridges that the amount of delivered insulin in Dreamboat per cartridge is the same as MedTone? Correct?

Alfred Mann

The amount actually delivered is the same.

Kevin Tang – Tang Capital

Yes, okay. I know the amount in the cartridge is less, but the amount delivered is supposed to be the same, all right?

Alfred Mann

Yes.

Kevin Tang – Tang Capital

Okay.

Alfred Mann

Precisely the same amount of the very same powder in both devices.

Kevin Tang – Tang Capital

Okay. So I think if I remember right from the Lancet article in the Phase 3 Type 2 study, the average number of cartridges used at the end of the study was 7. Is that not correct, Peter? I'm sorry?

Peter Richardson

Per day if I'm remembering correctly there, so that's two at each meal is a typical dosing in the Type 2 patients.

Kevin Tang – Tang Capital

Okay. So, it was six point something. I remember seven.

Peter Richardson

Some patients will take a dose with snacking and of course an average across that, and the vast majority of patients managed a single or two cartridges with that, and we anticipate that being the same with Dreamboat.

Kevin Tang – Tang Capital

Or I guess my question is if the average was six or seven and before the aggressive force titration that will occur in the new studies, would it not be – will you not end up delivering more insulin in the new studies, so the average would actually be probably more likely greater than seven inhalations per day?

Peter Richardson

I think that remains to be seen, because I think the combination optimizing the fasting and then moving with the titration, we will see what that occurs, I wouldn't want to speculate that would increase the amount that's needed.

Kevin Tang – Tang Capital

Okay. But typically if you are doing a forced titration trying to get anyone down more aggressively the way you do that is you give more insulin, right?

Peter Richardson

Correct, and we will be doing so in both arms.

Kevin Tang – Tang Capital

Correct. Okay. All right. I think those are my questions. Thank you for answering them.

Matthew Pfeffer

Thank you.

Operator

Our next question comes from Jason Butler. Go ahead, Jason Butler, your line is open, sir.

Jason Butler – JMP Securities

All right. Just sticking with the Affinity trials. Can you give us an overview of the statistical plan in terms of what you are aiming to show in terms of A1C compared to Humalog or Novolog even?

Peter Richardson

Yes, it’s pretty much the same design that we use in 117 studies in terms of 0.4 margins. And not inferiority in HBa1C after that 12-week period.

Jason Butler – JMP Securities

Okay, great. And then you mentioned earlier that you had data on the lung function safety side for Dreamboat. Have you or do you intend to present that data at any time?

Peter Richardson

We presented some of that short-term data in the DTS, Diabetes Technology Society meeting.

Jason Butler – JMP Securities

Okay, great. Thanks a lot.

Operator

Our next question comes from Mimi Pham. Go ahead, Mimi.

Mimi Pham – Weeden & Company

Hi, just a couple of follow-ups. First, in terms of your strategy for AFREZZA on the regulatory front in terms of Europe and other countries, where do you stand there?

Peter Richardson

I think we are looking here at the opportunity of using these studies as substantial basis for filing of the Dreamboat inhaler in Europe, but looking at our strategies of how we can do that, I would anticipate once we have moved to the meetings with the FDA, that we then look in terms of how we can approach the European authority and establish what plans would be adequate there.

Mimi Pham – Weeden & Company

Okay. So, I guess if it requires additional studies, you will reassess and if it require, if you can use what you are doing in the US, then maybe you could file sometime in next year also for Europe?

Peter Richardson

Yes, that would be an ideal realistic plan, but it’s too early to say whether that will be the case.

Mimi Pham – Weeden & Company

Thanks. And then the second question, in terms of the Seaside financing, can you lower the minimum to the $5 range, or is that discussion even an option right now?

Alfred Mann

It was our choice to set it where we did. They have approached us earlier before the recent period suggesting they would be receptive to something, but we haven’t had any discussions with them since the CRL.

Mimi Pham – Weeden & Company

Okay, thank you very much.

Operator

At this time, I would like to return the call back over to Mr. Al Mann for some closing comments. Thank you.

Alfred Mann

Thank you all for joining us today. We look forward to updating you at our next quarterly call. We hope we have some positive news to give you at that time. Thank you.

Operator

This concludes today’s conference call. Thank you for attending. You may disconnect at any time.

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