Mannkind Corp Q1 FY2022 Earnings Call

Good afternoon and welcome to the MannKind Corporation First Quarter 2022 Earnings Call. As a reminder, this call is being recorded on May 5, 2022, and will be available for playback on the MannKind Corporation's website shortly after the conclusion of this call until May 19, 2022. This call will contain forward-looking statements. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from the stated expectations. For further information on the company's risk factors, please see their 10-K report filed with the Securities and Exchange Commission this afternoon, 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 would now like to turn the conference over to Mr. Castagna. Please go ahead, sir.

Thank you. And thank you all for dialing into our earnings call today. We're in unprecedented times, as we look at the volatility in the stock market, as well as our biotech sector having lots of unfortunate mishaps these days in terms of companies facing challenges on a daily basis. From a MannKind perspective, we're expanding and hiring, so we're able to find great talent. However, from an industry perspective, we see lots of change ahead. When I think about Q1, we had some great opportunities to continue to advance our transformation in Afrezza, which I'll talk about today, as well as advance our pipeline progress with clofazimine, and we will give an update today on Tyvaso. So those will be the three focuses of our conversation. I just got back from our ATTD Diabetes Conference in Europe, where I was able to meet about 10 to 15 of the top regional thought leaders in those countries represented in the European Union to really talk about Afrezza, its potential, and the pediatric trial and studies we're doing. I returned invigorated about the opportunities for how we can continue to advance the science within diabetes. We've also had several FDA interactions regarding Afrezza in the pipeline, thinking about label changes, as well as preparing to advance clofazimine into Phase 2. Additionally, we had an Advisory Board meeting with roughly 10 of the top thought leaders in nontuberculous mycobacteria to assess how we think about NTM, position clofazimine, and confirm our strategic direction regarding our clinical trial before we submit to the FDA. Our PDUFA date for UT is May 2022, and we eagerly await notification from the FDA. We are focused on preparing to support the expected commercial launch of UT in June. On the pipeline, our SAD trial is nearing completion, and we expect full results from the MAD section in Q3. Both MNKD-201 and MNKD-501 are progressing nicely with ongoing animal inhalation studies. On the Afrezza side, we had $9.8 million in revenue for the quarter, reflecting 21% growth year-over-year. Our Afrezza pediatric trial site certification is increasing each month, and we're on track for our patient goals in 2022. We also kicked off the Afrezza basal combination study, and we finished the quarter with $233 million in cash. Regarding Tyvaso DPI, we are deferring any questions related to indications, FDA approval timelines, or label inquiries to UT, as they are handling daily communications with the FDA. We are excited to focus on what we can control, which is manufacturing commercial products for launch in Q2 and expanding our plant to support additional readouts for COPD and IPF. For MNKD-101, our clofazimine product, we completed Part A yesterday. We have tested cohorts A1, A2, and A3, with up to 90 milligrams, the highest dose we decided to administer, and we have seen great tolerability with no safety signals. Now we await the full data set to analyze along with PK and PD and assess the proper doses for Part B. On the low end, we will go to 30 milligrams, which we believe is sufficient to overcome any MICs, and we are contemplating whether to proceed to 90 or 60 milligrams based on the data from Part A. We expect top-line results in Q3, and the safety and tolerability of clofazimine looks very strong in the nebulized formulation. I'm now going to discuss Afrezza briefly as we haven't focused much on it in the last few earnings calls. Starting in February, we have had a refocused effort that is beginning to show early signs of impacting our NRX ultra-acting share. On the left side, this is our patient funnel for Afrezza Assist, our reimbursement hub, cash program, and free goods program, which address costs that were present in our old program. We are currently at about 187 patients a week in these three programs, up from 122. This activity indicates continued growth and momentum in our diabetes franchise. On the right side, we are refocusing our efforts on ultra-acting share, which has seen a multi-year decline. We revamped our field incentive compensation plan and target lists to promote a market share rebound this year. Our first in-person sales meeting in the last three years due to COVID took place, and we are seeing early signs of progress in NRXs, gaining almost 1% market share from January to April with this new focus. We are monitoring this closely as it is one of our key metrics for 2022, and we are excited about its potential. On INHALE-1, our pediatric trial, we now have 18 confirmed sites led by top investigators from leading academic centers, as well as some top private practice doctors. We are exploring interest in countries like Germany, Israel, and Italy for potential additional pediatric sites to gain experience with inhaled insulin as we consider filing in Europe in the future. Our U.S. enrollment is meeting and exceeding targets, though there are a couple of weeks' delay between enrollment and randomization. So, while it looks like we've lost patients, it's just a delay in the process. We have only had one randomization failure so far. The next trial I want to discuss, previously referred to as the pump-switch trial, is officially the Afrezza with basal combination study. Many people with Type 1 diabetes use insulin pumps for mealtime insulin. Through our script refill trends, we learned that many Type 1s use Afrezza occasionally alongside their pump. Currently, we lack clinical data on what Afrezza combined with an automated insulin delivery (AID) pump looks like, and we have zero data on switching from a pump to Afrezza. This trial will compare using Afrezza in conjunction with a pump versus switching entirely to Afrezza for mealtime insulin, maintaining a control group using just the pump. The goal is to understand how best to clinically position Afrezza in different combinations, with the primary output being that there is no difference in A1C between the three treatment options. We are excited about the imminent enrollment completion of this trial, expecting results in late Q3 or early Q4. Enrollment excitement indicates the trial's appeal— we successfully enrolled these 25 patients in just 60 days. Now, I will turn it over to our CFO, Steve Binder.

Thanks, Mike, and good afternoon. I'm pleased to review select first-quarter financial results. Please supplement this call by reading the condensed consolidated financial statements and MDNA, as well as the 10-Q being filed with the SEC this afternoon. Let's start with revenues for the first quarter of 2022. Afrezza net revenue was $9.8 million, versus $8.1 million in 2021, indicating a growth rate of 21%. This increase was driven by wholesaler inventory ordering patterns during the first quarter of 2021, which were negatively impacted as wholesalers decreased inventory levels, plus price adjustments and underlying TRx growth. Moving to collaboration services, revenue for the first quarter was $2.2 million versus $9.3 million for 2021. This revenue was mainly tied to United Therapeutics, specifically their next-gen R&A efforts, clinical supplies for the brief study extension, and some pass-through expenses. We did not have revenue from our commercial supply agreement with United Therapeutics in the first quarter, though we anticipate starting to recognize revenue from that agreement in the second quarter. Revenue for manufacturing activity in the first quarter of 2022 was deferred on the balance sheet in the amount of $7.4 million, which I will discuss further in a few minutes. From a cash standpoint, we were able to invoice and collect from United Therapeutics for these manufacturing activities. On the next slide, you will see a graph depicting the quarterly Afrezza gross margin trend from Q1 2021 to Q1 2022. Our gross margin for Q1 2022 was a record 77%, driven by the increase in Afrezza net revenue and lower costs of goods, primarily due to the absorption of indirect and overhead costs at our factory, where we now produce two products. We expect the gross margin for Afrezza to remain at least 70% for the full year 2022, though it may fluctuate quarter-to-quarter depending on manufacturing activity and expenditures across both products. The next slide shows a similar view as previously presented, indicating we've been deferring revenue associated with our Tyvaso DPI manufacturing activities since Q2 2021, and will not be able to recognize this revenue until we sell the product to UT, which we anticipate will occur in Q2 2022. In Q1 2022, we accumulated $7.4 million in manufacturing expenses recognized in P&L without a corresponding revenue offset, accumulating $21 million since Q2 2021, which is now on our balance sheet as of March 31, 2022. Deferred revenue will be recognized over the life of the manufacturing services agreement running to 2031, with United Therapeutics funding these costs, as we've been invoicing and collecting from them. Now, looking at Afrezza and collaboration services side by side, please note that collaboration and services revenue is mainly tied to our agreements with UT. Afrezza gross margin increased from 47% in Q1 2021 to 77% in Q1 2022. Gross profit associated with Afrezza increased nearly 100% to a record $7.5 million. The collaboration services had a loss in Q1 2022 mainly because of revenue deferral I just discussed. We expect a positive term once we sell product to UT, allowing for revenue recognition. To conclude, having executed our convertible debt and sale-lease-back financings in 2021 before the capital market downturn this year, we hold a strong financial position with a cash and investments balance of $233 million as of March 31. Given the increasing interest rates likely ahead, we're well-positioned with minimized interest rate risk. The majority of our debt, including convertible notes, is fixed at 2.5%. Additionally, during the rising interest rate environment, we negotiated a ceiling for our floating rate debt with midcap, limiting our maximum exposure to only 1% over the current rate. Operationally, we are demonstrating continued progress in turning Afrezza into a profitable brand, and we are preparing to support the expected commercial launch of Tyvaso DPI as the FDA action date approaches. Thank you, and I’ll now turn it back to Mike for further comments.

Thank you, Steve. Mentioning the money-making brand was a great comment. We remain very excited about our pipeline. We've spoken about Afrezza, Tyvaso DPI, and clofazimine. Over the coming quarters, you'll also hear about imatinib and the outcome of the bleomycin model, as well as DNA alpha and Thirona. These programs require a bit more time initially, but once we streamline the CMC part, they progress quickly. Additionally, Receptor Life Sciences received IND approval from the FDA to further their development, and we continue to communicate with Fosun regarding their small molecule inhibitor's development. We will actively pursue more collaborations on our technology platform as we move forward following the next FDA action date with Tyvaso. Regarding our 2022 milestones, we have clearly laid out objectives, and so far, we are on track to meet or exceed them, despite not hitting the first milestone around the Tyvaso DPI PDUFA date, which was extended to May. We remain optimistic about that date and our potential to bring Tyvaso to patients in Q2. I believe an important takeaway from our next earnings call will be the two additional sources of revenue relevant to the Tyvaso manufacturing and royalties. The growth trajectory for MannKind continues to ascend, and we are looking forward to the exciting opportunities to exponentially grow revenues in the coming years, encompassing Afrezza, collaboration services, business development, manufacturing, and royalties. We’ll stop there and open it up for questions.

Thank you. Your first question comes from Brandon Folkes from Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my questions, and congratulations on another good quarter. I'm obviously confident in the Tyvaso DPI approval. However, how should we think about operating expenditure in case Tyvaso DPI does not get approved this month? Can you provide any insight into potential levers in your current OpEx spend that may decrease? Additionally, regarding Afrezza, can you elaborate on wholesaler inventory levels at the end of this quarter? Thank you.

Okay. Regarding your first question, Steve can help clarify. The inventory for Afrezza and Tyvaso is largely managed by UT, and that is why you see some of the deferred revenue in our P&L; it doesn't affect our cash burn. As for inventory specifics, Steve?

Yes. Inventory levels remained essentially constant between December 2021 and March 2022, so there wasn't a significant change in wholesaler inventory levels.

Great, thanks. One more if I may. With your strong cash balance, how do you feel about potentially bringing in or licensing a few more pipeline products? You have a solid pipeline, but could you sustain additional products, given the current market valuations for in-licensing opportunities?

Yes, Brandon. M&A is a consideration we continue to evaluate. We've received a lot of inbound interest regarding various opportunities in 2022. Many companies—around 170—are trading below their cash value, presenting opportunities. Additionally, companies are streaming their focus products, creating plenty of pipeline opportunities. However, we feel confident in our existing projects and we will focus on finding cash-generating assets as we streamline G&A expenses and our overall infrastructure. We will be vigilant regarding the opportunities as valuations appear to be stabilizing after previous ridiculous highs, placing us in a good position.

Thanks. That's very helpful. I appreciate it. Congratulations again.

Thank you.

Your next question comes from the line of Gregory Renza from RBC Capital Markets. Your line is open.

Hey, good afternoon, Michael and Steve. Congratulations on the progress and thanks for taking my question. Building on the previous question regarding the Tyvaso DPI decision, could you discuss scenario planning? How do you envision potential outcomes affecting your strategy around business development?

Hey, Greg. I cannot comment too much, as we're just weeks away from the FDA decision. Wait for that decision to clarify the concerns voiced by our shareholders, including indications, platform implications, and the overall impact on MannKind. We're emphasizing product supply readiness upon launch and approval. Any potential delays in Tyvaso wouldn't fundamentally alter our operations. We have sufficient cash, a strong balance sheet from last year, allowing us to fund our pipeline and growth independently of FDA decisions. Our goal is to supply our partners and patients as soon as possible, ensuring we have inventory ready day one.

Great. That's really helpful. Appreciate all the color and looking forward to the update.

Your next question comes from the line of Thomas Smith from SVB Securities. Your line is open.

Hey guys. Good afternoon. Thanks for taking my questions and congrats on the progress. Concerning Tyvaso DPI, I understand UT handles FDA communications directly. Can you comment on requests for data to the agency since the last submission in February that led to changes?

I don't want to comment on behalf of UT. They'll need to address any specific requests. To my knowledge, major requests have not occurred since the initial submission, but I'd defer to UT for a complete answer.

Okay. That's helpful. Can you update us on the Tyvaso DPI commercial manufacturing preparations? Have any plans or forecasts changed as we approach the anticipated launch later this year?

No, we're continually working to ensure our equipment is operating optimally and maximizing yield. Operator training and achieving proficiency among the team has been vital. We're ensuring all teams operate effectively as we prepare for the impending launch and maintain efficiency across the board. Overall, it's about sustaining our talent and providing them with the support they need for optimal operations.

Got it. Lastly, on the Afrezza pediatric study, how many sites are you targeting? As you think about expanding sites to Europe, what balance do you foresee between U.S. and non-U.S. enrollment?

Regarding sites, we're targeting between 25 and 40. If we can get 25 sites enrolling 10 patients each, we'll complete the study in roughly nine months. It depends on how quickly enrollment progresses. We will assess as we go. In Europe, there’s no fixed target, but we've heard from top presenters interested in involvement. Having a few sites there won't hinder us but will allow us to gain insights, especially given the market dynamics and reimbursement landscape. Understanding Afrezza's value as an infusion alternative to pump-using patients is critical. Ultimately, achieving positive results in pediatric trials will inform our international strategy.

Thanks for the insights, guys. Appreciate it.

Thank you.

Your next question comes from the line of Bert Hazlett from BTIG. Your line is open.

Yes, thanks. Congrats on all the progress. Apologies if some of this has been discussed, as I came in late. Regarding Afrezza's focus on ultra-acting share, it's great to see salesforce meetings resumed. Are there considerations for potential salesforce expansion if we see positive traction?

Bert, we will always consider strategies for faster growth. If Alejandro, Ben, and our team lead effective marketing programs that show positive, consistent growth week-over-week and month-over-month, we have the capital ready for deployment. We have an important plan for ADA and AACE this year with significant podium presentations. If we observe positive momentum, we are open to fueling that growth.

Okay, great. Regarding Tyvaso DPI, have you discussed expectations regarding the label, and could you comment on the competitive landscape in relation to the DPI rollout?

I won't comment on the label. UT held an earnings call yesterday but said little about it. I will deflect that to them. Regarding the competitive landscape, there are ongoing patent disputes between UT and Liquidia. I will defer those questions to the experts, as we’re close to the PDUFA date. Let's reach that date, and then I’m happy to discuss.

Okay. Thanks for the clarification.

Thank you, Bert. I appreciate it.

Your next question comes from the line of Steven Lichtman from Oppenheimer. Your line is open.

Hey, this is David on for Steve. Thanks for taking the questions. What's your latest outlook on the macro landscape? Are you encountering supply disruptions or inflationary pressures, and how might that impact your gross margin outlook for the remainder of the year?

Yes, overall, the company had to offer higher raises than in the past, and some suppliers are raising prices slightly. But I'll let Steve elaborate. Inflation is impacting everyone, but fortunately, our operations mainly consist of fixed costs rather than variable costs.

Yes. Many of our large supply agreements were locked in for a fixed period, with some expiring during the year requiring renegotiation. I don't anticipate substantial increases, but there will be slight increases from previous years. Nevertheless, we're in a good position.

Moreover, the Euro's depreciation against the dollar has positively affected our insulin supply costs, creating a balance. We’ve built safety stock to mitigate any shortage risks, making sure minimal variables cause delays. The most significant issue has been the BluHale device chips going out of stock, requiring revisions to the mother and daughter boards. However, this won't affect our timelines for Afrezza or Tyvaso as they enhance our growth prospects.

Great, appreciate the insights.

Thank you.

Thank you, Steve. I want to express my gratitude to everyone for listening today. I recognize this is a turbulent time, and there's an immense amount of pressure to perform. Fortunately, we are emerging from the COVID crisis, albeit entering an inflationary period with stock market volatility. MannKind holds a robust position to weather these storms; we've navigated through severe challenges over the past five years. We are optimistic about our standing as well as the potential to grow the company for our shareholders and help patients. Thanks to all for your work, and we look forward to executing plans for this year and hopefully achieving great results in 2022. We will have several investor conferences in May, so you'll hear about those soon.

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