Mannkind Corp Q1 FY2021 Earnings Call

Good afternoon and welcome to MannKind Corporation First Quarter 2021 Earnings Call. As a reminder, this call is being recorded on May 12, 2021, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call until May 26, 2021. This call will contain forward-looking statements. Such forward-looking statements are subject to risk and uncertainty, which could cause actual results to differ materially from these stated expectations. For further information on the company's risk factors, please see their 10-Q report filed with the Securities and Exchange Commission this morning, the earnings release, and the slides prepared for this presentation. Joining us today from MannKind are Chief Executive Officer, Michael Castagna; and Chief Financial Officer, Steven Binder. I'd now like to turn the conference over to Mr. Castagna. Please go ahead, sir.

Thank you and good afternoon everyone. Welcome to our Q1 2021 quarterly earnings call. I would like to start by reporting that our total revenues for the quarter reached $17.4 million, which is a 7% increase compared to 2020. As some of you might remember, we faced a challenging comparison in 2020 due to the surge in COVID-related demand, but we saw notable contributions from wholesalers and patient stockpiling, which we will discuss shortly. Overall, the increase seems modest, possibly not meeting our expectations for year-over-year comparison. In terms of our Joint Ventures and partnerships, progress continues. Our collaboration with United Therapeutics on the Tyvaso DPI was submitted to the FDA for both pulmonary arterial hypertension and interstitial lung disease indications. We are hopeful for acceptance from the FDA later this quarter and aim for approval by the end of the year. On the pipeline front, we completed our first toxicology studies for clofazimine (MNKD-101) and finished dosing in the dog study, which will conclude very soon. We are also in the process of producing API supplies and identifying a site for the Phase 1 study by year's end. Several new formulations for collaborations have been initiated, and our team in Danbury is quite busy. We have expanded our R&D staff, and we are eager to advance our pipeline and new collaborations throughout 2021. Regarding Afrezza, it showed growth of $18.1 million, representing a 1% increase from Q1 2020. It's essential to focus on true demand growth; when we exclude factors like inventory shifts and variations in prescriptions, the actual demand grew from $7.3 million to $8.8 million, a 21% increase year-over-year. Our investments in Afrezza have also increased. The $3 million rise in expenses is not solely attributed to Afrezza as several elements contributed to this change, such as the expansion of our sales force in Q2 2020, which is now becoming apparent in Q1 2021, and an increase in our medical liaisons. We have also invested more in preparation for the pediatric trial, which has received final comments from the FDA and approval from the IRB for the protocol with minor modifications. We are set to commence this trial in the latter half of the year, and I am enthusiastic about the groundwork laid by our team. In Q1, we engaged in co-promotion efforts and will continue to enhance our marketing materials as markets reopen from COVID. On our balance sheet, we ended March with $278 million in cash, primarily due to a convertible debt issuance of $230 million. We have also restructured our debt, with most debts now due in 2026, and are gradually addressing our historical legacy debt as of April. Factors like the bridge program ending in January complicate the visibility of prescription trends, but if we analyze TRx and our free goods alongside cash pay from Q4 to Q1, we see a generally flat trend. Traditionally, we experience a decline in Q1 compared to Q4 as patients tend to maximize their benefits before the year ends. In Q1, we conducted a virtual sales meeting, equipping reps with new materials focused on speed. We launched a nationwide CME covering both revenues and funding with TCYOD and enhanced our marketing efforts to increase the awareness of inhaled insulin. On the patient engagement side, we piloted expanded digital marketing in selected states, seeing significant website traffic increase and plan to support third-party advocacy groups. We are finalizing investments to build awareness of inhaled insulin now that vaccination rates among our field staff approach pre-COVID levels. As for the Tyvaso timeline, we have completed our planned activities and are awaiting acceptance from the FDA. We are also actively hiring to prepare for Q3 manufacturing of Tyvaso, and our site expansion presents opportunities for future growth with additional indications. A huge thank you to the team in Danbury for their hard work during these challenging circumstances with increased equipment demands during COVID and producing high-potency molecules. We aim to be on track for our targets by the end of this year. Steve, I will now turn it over to you.

Thanks, Mike, and good afternoon. I am very pleased to review First Quarter 2021 financial results and a number of favorable changes we've made that changed with our lenders. Please supplement this call with the dense consolidated financial statements and MD&A contained in our 10-Q which was filed with the SEC this afternoon. Let's start by looking at revenues for the first quarter of 2021; total net revenue was $8.1 million versus $8 million in 2020, a growth rate of 1%. As Mike said, you may recall that in the first quarter of 2020, it was favorably impacted by approximately $0.5 million due to shipments to wholesalers related to patient stockpiling as the COVID-19 pandemic started to heat up. Excluding the impact of the first quarter 2020 stockpiling, non-GAAP growth was approximately 8%, mainly due to favorable price including gross to net. Also, as Mike spoke about, there was a further demand sales increase of 21% for the first quarter of 2021 versus the first quarter of 2020. Demand sales reported by Symphony and adjusted by MannKind net. The most significant reason we don't see a similar increase in Afrezza net revenues is because of wholesaler buying patterns. Specifically, the increase in the first quarter 2020 inventory levels for patient stockpiling that I just mentioned, plus as we expected, wholesalers have lowered the inventory levels in the first quarter of 2021, primarily related to the termination of the free goods program, as well as seasonality, which impacted Afrezza net revenues by approximately $1 million. Moving to collaborations and services; revenue for the first quarter was $9.3 million versus $8.2 million for 2020, representing a 13% increase. The increase was mainly due to higher revenue related to our United Therapeutics collaboration as we prepare for the commercial manufacturing launch of Tyvaso DPI, as well as revenue from the site liquidity co-promotion agreement. The liquidity launch was approximately midway through the first quarter. In addition to the new quality collaboration revenue, we expect new business development deals will further add to our collaboration revenues this year. We've been quite busy raising capital and restructuring our balance sheet to make the company financially stronger. In early March, we raised $30 million by issuing 2.5% senior convertible debt by taking advantage of strong market conditions and demand for MannKind convertible debt reflected in a substantially oversubscribed offering. The cash received from this convertible debt offering has resolved significant risks and uncertainties regarding sources of liquidity, which previously raised substantial doubt about the company's ability to continue as a going concern. Our 10-Q filed today with the SEC reflects the absence of a going concern disclosure. In April, with our improved financial condition, we used some of the proceeds from the convertible debt issuance to pay down some of the higher cost debt and negotiated more favorable terms with our lenders. Specifically, we paid down $10 million of mid-cap debt, with an interest rate of 8.75%, which reduced the outstanding balance to $40 million. We also paid off the Mann Group term loan with an interest rate of 7% in the amount of $35.1 million and outstanding accrued interest to the Mann Group in the amount of $4.9 million. Overall, in April, we decreased higher interest rate debt by almost $50 million. In addition to reducing debt, we also renegotiated terms on the mid-cap and Mann debt. For our senior secured credit facility with MidCap, we increased tranche 3 from $25 million to $60 million, which is available to us between December 2021 and June 2022, with Tyvaso DPI approved by the FDA. The interest rate on the loan was lowered by 1.5%. The LIBOR interest rate flow was lowered by 1% and we added an interest rate cap of 8.25%. We also extended the interest-only period by one year to August 2023. In addition, financial covenants were relaxed. Specifically, our minimum cash balance was lowered from $30 million to $10 million, and upon FDA approval of Tyvaso DPI, the minimum cash balance requirement is eliminated entirely. As long as we maintain at least $90 million in unrestricted cash equivalent, the Afrezza 12-month trailing net revenue covenant is suspended. For the remaining Mann Group debt of $18.4 million, the interest rate was lowered from 7% to 2.5% to match the rate we obtained on the March convertible note issuance, and the maturity was changed from November 2024 to December 2025. The impact of the changes just discussed results in an annual interest expense reduction of $5 million. To conclude the finance section of today's call, we've strengthened our financial position by adding a substantial amount of cash to the balance sheet, reduced our cost of debt, as well as lowered the hurdles associated with our debt covenants, which allows us to better fund pipeline opportunities, including the pediatric clinical trial. Afrezza growth opportunities allow us to focus on the preparation for manufacturing Tyvaso DPI for our collaboration partner, United Therapeutics, which should begin in the third quarter of 2021. Thank you. And now, I'll turn it back over to Mike for additional comments.

Thank you, Steve. Let me start as we think about the future of the company and the pipeline of technical opportunities. A key player on the collaboration revenue line. I encourage our shareholders and analysts to continue to watch that line because that is where additional revenues are going to start to show up, whether it's the liquidity fees that come in or just the formulation work we're doing; the formulation work we're making for the pipeline for partners such as life sciences, these extra revenue streams are going to start to fall under collaboration. I think that's important for people to continue to focus on. As you look down here in our pipeline, you can see further indications that liquidity and our 2 Phase 3 marketed products we have. Pediatrics has gone quickly into Phase 3, which will be dosed here in the second half, and international expansion is not just focused on disciplines here in India as well as Australia. We are now also looking at Europe and Canada next milestones to file the presence. On the Tyvaso DPI side, that's on track to be filed this year and approved by the end of the year, all goes well. MannKind-101, as I mentioned earlier, we are making additional supplies to run the Phase 1 study, and we are just finishing up the large animal tox study, which will be wrapped up here in Q2 especially Q3 and set us up for Q1 opening that opportunity. The next 3 assets, I won't go into details in any one of them, but I will say they all continue in terms of formulation optimization PK dosing the hurdles to get us ready to move these at least hopefully to these programs in the tox studies as we believe this year. The second life sciences project is set to see more activity from them. As we look to be CMC manufacturer for the Cannondale franchise with or less. On the 2021 milestones, we have several items to work on here in the last quarter, particularly the Levine Type II study we just published and that was an important study as it showed you how to dose a fixed-dose way and inform your time patient. If you recall that study had a 1.6 reduction in A1c in 12 weeks with no significant material hypoglycemia rates increasing. We find this to be a really important study that we're looking to use as a basis in our Indian trial as well as some future trial designs we're looking at. Additionally, there is a trial we conducted here in Q2 almost completed in a couple of weeks where we are looking at a higher conversion dose than what's in our label as we want to step it up for our pediatric study and potential label changes, enabling us to get patients started on the right dose at the right time to increase patient retention. Finally, as Steve mentioned, the $60 million debt tranche will increase from $25 million and otherwise. All these milestones continue to remain on track for this year as we look forward to continue to execute against our plan. One exciting thing to announce is that we are engaging Conor Daly, who is a patient living with diabetes, at the Indy 500 this weekend. You will see a MannKind car hopefully doing very well with Conor's help. This reflects our unbranded campaign around raising awareness of inhaled insulin, and I hope you have a chance to tune in and watch it. We are one of the growth areas expected to accelerate, and we see no reasons not to capitalize on this opportunity and drive faster demand as we go out there. I hope you have a chance to see the car and hopefully have a good race outcome. Just wrapping up, next week we are getting ready for the Annual Shareholder Meeting. I want to thank everybody who has voted their shares already, over 50% have been voted. Please intend to spend 15 minutes for the start and our 3 proposals, nothing major here but making sure we elect our 9 directors, ratifying our auditors, and approving the compensation for our named executive officers. If you have questions you want us to be prepared to answer, please feel free to send them. I have already received at least 10 or 15 from shareholders and we will collect those and try to organize our answers in a way that we can group questions and provide the feedback that you're looking for. So I'm going to stop there and I think we'll take the questions.

Your first question comes from Oren Livnat from HC Wainwright.

I have a couple on Tyvaso DPI, and then one big-picture. On the DPI program, you mentioned manufacturing moving forward quickly, and I'm just curious, since you're expecting December approval, what sort of manufacturing revenue and how material could that be actually this year ahead of approval potentially? And do you book that? And then, also, I guess as we try to figure out if this is going to be a big product. How do we gauge manufacturing revenue as a percentage of end sales so to speak, and what sort of margin is there on that, and then I have a question on BREEZE. Thanks.

We are finalizing our commercial supply agreement. We expect to provide more guidance on margins and percentages by Q3. I will now hand it over to Steve to share his insights. Once the manufacturing agreement is finalized, there are different ways we could recognize revenue, and we will ensure accuracy in that process. You can expect an update by the second quarter.

The short answer to your question, Oren, is that there will be a positive impact this year, and we will be booking once final metrics are completed.

I guess we'll cross that bridge later. I think I've asked you about this before, and I don't know if you could talk about it or not. So you could shut me down if not. But obviously, they filed with the BREEZE results, which I think was just like a dose-for-dose switching study from Tyvaso, the old formulation, and I'm just curious if there is or is there ongoing extension to that study perhaps studying at higher tolerable or max tolerable doses using the DPI such that maybe we can learn that in fact you can go a lot higher with your product. And maybe you can give even superior efficacy even if it's not statistically controlled head-to-head study.

Oren, great question. So you are correct in that the first trial was a dose-for-dose conversion, ensuring we were no worse than previous formulations and did not have any surprising safety signals. They enrolled 51 patients, and I believe 49 rolled into an optional extension phase. The therapies allow patients to continue for over a year, I think I'll need to get approvals, which should be almost two years. We will have good long-term follow-up on efficacy and safety, and in that optional extension phase, people could titrate up to higher doses. We understand what that looks like and know the average dose from where it started to where they ended up after one or two years. I think that's important data demonstrating safety and efficacy. As you may recall, we were able to get to a maximum tolerated dose of 150 micrograms.

If I may be greedy, I apologize. I just missed going forward also; are they using your device for additional extension label expansion studies that they're discussing now, COPD, etc., or are they using Tyvaso, the old formulation, and then plan to wait for approval of the DPI to then try to expand that label after approval, or are they using your device going forward even pre-approval for clinical trials?

Yes. I think in fairness, everything they're doing outside of the extension study is using the Tyvaso nebulizer. Whether they switch over to the DPI formulation will depend on approval down the road, so I wouldn’t expect that to happen until we see the approval.

Your next question comes from the line of Thomas Smith from SVB Leerink.

Congrats on the progress. Just a couple on my end. First, I guess now that the NDA has been submitted for Tyvaso DPI, can you talk about your expectations for pre-approval inspections and I guess how you are preparing for this? Do you have any expectations on timing?

Yes, we will be prepared for a pre-approved inspection. Whether or not we need one is a question we don't know the answer to; that's up to the FDA. They inspected previously, I want to say in mid '19, if I recall. Everything looks really clean, and so the FDA is only looking for established places with the Boston office and Denbury due to its history. We don’t expect that to be an issue, given our situation.

Some of Steve's comments suggested that you're looking into new business development deals. Maybe you could just speak to some of the types of deals you're evaluating and any sense on when we could expect to hear about next steps here?

Yes. Recently, we started discussions with a few partners to lower the operative cost upfront to conduct some formulation work, allowing us to look at feasibility studies and share risk with our partners. We aim to show that we can take our technology and another product, making this a scalable opportunity for other BD opportunities and ultimately royalties. We're working on several of these in the last few months and formulating Be it on stability and other new not-linear entities which could be NCEs we are considering.

That’s helpful insight. Maybe just a last question, with ADA just around the corner, could you talk to expectations for data we should be watching out for us at the conference?

Sure. There are two conferences; it’s actually ATTD, which is coming up in about 2.5 weeks. We will distribute our poster for that, focusing on nocturnal hypoglycemia from the tox study with a new analysis. At the ADA, we’ll have 2 posters; one is about daytime time range, based on wind data recently published, showing improved time and range. The other study presented at PDA will be regarding PK studies. I think that will be one of the first halves of the delta, as we begin preparing the market for pediatrics in the coming years.

Your next question comes from the line of Robert Hazlett from BTIG.

Hi, this is Terry on the line for Bert. Thanks for taking my question. I have an additional question on potential development opportunities, specifically for Tyvaso DPI. Has there been any ongoing discussion with UT regarding additional indications such as PH, COPD, and IPF that they're currently investigating? And could we expect any future updates regarding additional opportunities?

Yes, and I think we've been clear from UT that the good news is in the FDA, and I listened to their earnings call last week, we have in writing from the FDA that any additional indications that Tyvaso gets, our formulation will be eligible to fold into the label and may be protected with UT patents. So, if COPD were to get approved for them, if IPF got approved, those indications could expand Tyvaso DPI's label. We are preparing for success in those markets and opportunities. We just are planning to file with the IRBs and then plan to anticipate a readout on COPD next year, if I recall.

Your next question comes from the line of Steven Lichtman from Oppenheimer and Company.

On Afrezza you mentioned an estimate regarding how much channel inventory is there that might still need to be worked down due to the end of the free goods program?

We don't believe that the reduction in channel inventory was mainly in Q1. What we've seen in April is that we haven't seen any further work down in inventories.

I was wondering if you could update us on some of the initiatives. You highlighted some already. Maybe if you could talk a bit more about how the Afrezza effect is performing for you guys.

Yes, two great questions, Steven. Thank you. As you saw, 25% of our volume went through in terms of new prescriptions. We're seeing anywhere between 60 and 90 prescriptions coming into the fibrosis, obviously, with incentives to our sales force to improve that. An example is that we're looking at one large PBM, where 100% of claims are getting approved. That helps us fine-tune our contracting strategy. So now, we are seeing 90% of claims get approved on PBM 1 and 80% for PBM 2. So it has given us critical insights into how we invest to remove friction from the prescribing process, which is one of the things we continue to work on. Afrezza is providing us with a roadmap on how to improve. And certainly, we see this process with doctors who just don’t know how to write a prescription. They are new prescribers, and now we can go back and educate them on the correct writing process. We've gathered a lot of good insights allowing us to keep working those teams to keep moving the friction and make those offices more efficient.

And could you, maybe just lastly, Steve, mention that gross margin ticked down here sequentially; so any unusual aspects in product revenue COGS that you'd call out?

Yes, Steve, thanks for the question. It's related to the manufacturing activity for the first quarter for Afrezza. We didn't have a lot of Afrezza manufacturing in the first quarter, so the excess manufacturing costs fell through the COGS line without getting capitalized since there was no actual manufacturing activity. In the second quarter, we have a lot more manufacturing activity, so you should expect the gross margin to be higher than the first quarter.

There are no further questions at this time. I'd like to turn the call back over to Michael Castagna for closing remarks.

Right, well, thank you everyone. The good news is that COVID is slowly getting us back to normal. I personally have been meeting customers last week and am very excited about being able to meet large practices, understanding where we have and haven’t gone right with Afrezza and where we can turn the corner. I think the team is doing a great job focusing on the right things. We are currently looking at how to get each of our district managers leading growth quarter-to-quarter. I think we're on track, probably this quarter for the first time for 7 out of 9 to see double-digit positives as we close out Q2. So we are excited to see the momentum. We have a lot of great new salespeople out there, and a lot of our current reps had to work through the Free Goods lending here in Q1. That was a little friction they had to overcome, but a lot of that is now behind us. I expect we will see stabilization at this point, and we should start to continue to see growth as we go forward. We're investing for future growth. I look forward to everyone talking here in Q2 about new data sets and continue to move Tyvaso and our pipeline forward. MannKind will be in the best position we've been in the last 4 years, and I'm looking forward to continuing the march along in 2021 and hopefully starting to grow this company a little bit faster. Thank you for everyone's support, and I look forward to talking to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.