Earnings Call Transcript - MNKD Q3 2020

Operator, Operator

Good day, everyone. And welcome to the MannKind Corporation Third Quarter 2020 Earnings Call. As a reminder, this call is being recorded on November 4, 2020, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call until November 18, 2020. This call will contain forward-looking statements. Such forward-looking statements are subject to risks 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 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.

Michael Castagna, CEO

Thanks. And thank you, everyone, for dialing in on what appears to be a hectic post-election day here. So, as we get into the agenda, we’re going to go through our Q3 highlights, the financial review of Steve, and Q4 expectations followed by a Q&A. I just want to remind people about our mission, which is really to give people control of their health and the freedom to live life, and we call it, life more human. Our technology really helps provide quick relief of patients’ symptoms, such as high sugar, pulmonary hypertension, and migraine, almost at the onset of action and enables correction with a quick inhalation using our platform. We’re very excited to continue to expand our technology into other assets as we move R&D forward. I’d also like to announce a recent new addition to our team, Dr. Kevin Kaiserman, who will now be our Head of Medical Affairs and Safety. We expect to also announce a new head of regulatory next week. Kevin has 25 years of pediatric endocrinology experience, which we felt was very valuable given our direction to move further into pediatrics in 2021. He is well-respected as a thought leader. He had private practice here in California and was trained at Children’s Hospital of LA. He’ll be leading our medical affairs, expanded field medical team, our safety and pediatrics program. Let me talk about a few of the Q3 highlights. Afrezza’s third quarter net revenue was $7.3 million, which is 27% ahead of Q3 of 2019. In the U.S., our total prescriptions grew by 8% and sequentially 3% in quarter two. The market was down 3% year-over-year for rapid-acting analogs and 2% quarter-over-quarter respectively. So, we’re outpacing the market shrinkage and continuing to grow year-over-year despite the headwinds that COVID-19 presents. Access is continuing to open up for our field reps to reach customers. Obviously, certain areas of the country are more difficult than others, but our team has done a very decent job given the difficult circumstances they face. Our U.S. September year-to-date net revenue is $22.1 million, or 31% versus 2019, and our trend is starting to pick up nicely in Q4, as we hope to see prescriptions increase this Friday. Our collaboration with United Therapeutics regarding TreT remains on track to complete the critical NDA components here in Q4. Additionally, we recently received a $1.2 million purchase order for clinical supplies as we prepare for Q4 in 2021 and beyond. Our cash at the end of the quarter was $52.7 million, and we used $13.5 million in operating activities. We also reduced our debt by $2.6 million in October by prepaying our December promissory note as scheduled. When we look at Afrezza, the green line here is NRx and our magenta line is TRx. As you can see, we’re stable throughout Q3, with slight growth. We believe there might have been some small data issues here at the end of September, but overall, our Afrezza line is starting to trend back in the right direction, at 344 as of last week and 799. We expect to continue to see that trend as we proceed through Q4. However, I will highlight some differences we’ll see over the next few weeks and months as we end our free bridge program at the end of the call. Our clinical programs are tracking to a fourth quarter completion. I’d like to outline the four key pivotal tasks we need to complete by the end of this year. First is the BREEZE trial, which is almost completed enrollment and should wrap up here in Q4. The second is a pivotal PK trial, which is now complete and the study report is currently being written up. The human factors study is wrapping up as we speak, and we expect that to be done by next week with the report also coming in Q4. Lastly, our stability programs, for which MannKind is responsible, will wrap up in the next three to four weeks. As you can see, these four critical tasks will lead to a TreT filing in early 2021. We’re also excited to increase the potential that TreT has for the interstitial lung disease indication as United Therapeutics expects approval for Tyvaso in April 2021. We’ll soon learn whether this will be filed in our label proactively or if we need to do additional work; we’ll know that very shortly. I’d like to turn it over to Steve to talk about our financials.

Steven Binder, CFO

Thanks, Mike, and good afternoon. I’m very pleased to review our third quarter and September year-to-date 2020 financial results, which show continued U.S. Afrezza net revenue growth and Afrezza gross margin expansion rising above the 50% mark for the first time. I’ll be discussing select financial highlights and ask that you supplement this call by reading the condensed consolidated financial statements and MD&A contained in our 10-Quarter, which was filed with the SEC this afternoon. Starting with revenues for the third quarter and September year-to-date, U.S. Afrezza net revenue was $7.3 million versus $5.7 million in 2019, reflecting a growth rate of 27%. The increase was driven by volume growth from underlying Afrezza prescription demand, which was up 8% year-over-year, price adjustments including a more favorable gross-to-net percentage, and the continuation of a favorable mix of higher insulin unit cartridges. Please note that a reduction of $0.3 million in wholesale inventory occurred between June 30 and September 30, 2020, which adversely impacted our volume growth. The COVID-19 pandemic continues to affect our sales and marketing efforts in the third quarter. Physician access, including both face-to-face and digital interaction, was constrained in various degrees across different geographies, which impacted the effectiveness of our sales and marketing efforts. We've seen an impact on new Afrezza starts as some patients were reluctant to visit their physician to minimize exposure to COVID, while physicians increased the use of telehealth. We did not have any international Afrezza revenue in the third quarter of 2020, but we did record revenues of $0.7 million in the third quarter of 2019, which was our first sale of Afrezza to Biomm, our Brazilian commercial partner. Looking at the year-to-date comparisons, U.S. Afrezza net revenue grew by 31% versus 2019, driven by volume, mix, and price adjustments. Gross-to-net stood at 41% for the third quarter, slightly favorable to our expected range of 42% to 44%, and favorable to 2019 by 2%, demonstrating the impact of our efforts to lower gross to net. In September, year-to-date gross-to-net came in at the lower end of the expected range at 42%. Revenue from collaboration and services was $8.1 million for the third quarter of 2020 versus $8.2 million in 2019. Meanwhile, September year-to-date revenue was $24.4 million compared to $29.5 million for 2019. The reduction in the September year-to-date revenue year-over-year was expected, primarily due to the recognition of a $10 million research agreement with United Therapeutics that was recognized over the period of the fourth quarter of 2018 to the second quarter of 2019, when our performance obligations were substantially completed. This slide illustrates one of our commercial initiatives to lower our gross to net. Using full-line wholesalers can be very expensive for small biopharmaceutical companies like MannKind. Thus, we’ve shifted prescription fulfillment from retail to specialty pharmacies. Specialty pharmacies purchase Afrezza directly from MannKind instead of through a wholesaler. This strategy allows us to have lower fees and generally minimal product returns, which improves our gross to net. As reflected in the graph, we have increased specialty pharmacy shipments each quarter in 2020. We began the year with 6% of shipments going through specialty pharmacies, increasing to 8% in the first quarter, 15% in the second quarter, 17% in the third quarter, and in October, we saw 20% of shipments go to specialty pharmacies. We have shown this in almost every quarterly earnings call over the last two years. This graph illustrates how our product mix continues to positively impact Afrezza revenue growth during the September year-to-date period. Our successful messaging to physicians and enhanced patient understanding of our product have resulted in more appropriate starting doses for patients, as well as subsequent titration to higher doses, which has driven the growth of the 12-unit and 8-unit cartridges faster than the 4-unit cartridges. As a reminder, our 12-unit cartridge is priced three times that of the 4-unit cartridge, while the 8-unit cartridge is priced at two times that of the 4-unit cartridge. Faster growth of the higher unit cartridges results in a higher growth rate of Afrezza revenue compared to prescription growth. Additionally, as Afrezza revenues have increased, our gross margins have improved. This table shows gross margins from the first quarter of 2019 to the third quarter of 2020, where our gross margin topped 50% for the first time. We have had and continue to have excess manufacturing capacity, which keeps our cost of goods relatively flat quarter-to-quarter, as production volumes remain significantly lower than our production capacity. This results in most manufacturing expenses being recognized as cost of goods in the quarter incurred. Moving on to operating cash efficiency, we’re comparing September year-to-date 2020 against 2019 and 2018. The top of each vertical bar represents Afrezza net revenue, which has doubled over the past two years to $22.3 million, while the bottom reflects non-GAAP net cash used in operating activities, which has decreased by 45% over two years. The increase in present net revenue drives down cash burn, but to a larger extent, our continued focus on managing our operating spend is reflected in a reduction of $40.9 million for the nine months ending September 30, 2020. Regarding our average quarterly non-GAAP net cash used in operating activities, we have maintained a steady course in 2020 on a quarter-by-quarter basis, with the average being $13.6 million, and the actual amount for the third quarter of 2020 being $13.5 million. Before I hand the presentation back to Mike, let me summarize the third quarter financial progress. First, we had excellent U.S. Afrezza net revenue growth, even while continuing to face headwinds from the COVID-19 pandemic. Second, manufacturing TreT to support United Therapeutics’ clinical trials has allowed our manufacturing sites to absorb fixed overhead costs, favorably impacting the Afrezza gross margin. Lastly, we remain extremely diligent in managing our cash while supporting commercial efforts to grow Afrezza, supply TreT clinical products to United Therapeutics, and advance our pipeline. Thank you. Now, we’ll turn it back over to Mike for additional comments.

Michael Castagna, CEO

Thank you, Steve. Now let’s talk about growing our future together and where we’re heading as we close out Q4 and start to move into 2021. First, we completed our commercial and our medical team expansion by hiring 26 new employees in Q3 and early Q4 alone, with several committed employees expected to start in the coming weeks. We are expanding our integrated care model to improve the patient experience for Afrezza, as well as the margins on the product. AfrezzaAssist, which you heard us mention recently, has streamlined the reimbursement support program launched in Q3 and is being fine-tuned in Q4. This program aims to automate the process for prior authorizations and the adjudication of free goods. Additionally, we’re finalizing our telehealth collaboration with UpScript, which is weeks from launching. We’ve also engaged with another telehealth provider, called Steady Health, who is already processing Afrezza prescriptions via telehealth in California and Washington DC. We’re very excited about the early results they’re seeing. Third, we are transitioning our Bridge program, also known as our Free Goods, which reflects in our weekly prescriptions, to AfrezzaAssist. This change means that incoming prescriptions will not be visible on our company reports anymore, but will come directly from us, ensuring a smooth transition. New patients ended yesterday, and we expect all patients in the Free Goods program to conclude by 12/31/2020. Although there will be some impact to NRx and TRx over the next 12 weeks, we don’t foresee any negative impact on revenue, believing these will convert from free goods to paid prescriptions. We expect a good 50% to 80% of the company’s Free Goods program participants to get approved. These patients will transition seamlessly to paid prescriptions, so there's no impact on our revenue from the prior prescription data. We also plan to enhance our product distribution model to lower costs and improve patient access, as Steve discussed. Currently, 22% of every dollar is allocated to the wholesale channel and returns. We believe this can be dramatically improved by considering options like a consignment inventory model, which would minimize returns and allow costs to be incurred at COGS levels, rather than through wholesaler prescriptions. Next, we've achieved a reduction in our sample program volume by half, which we anticipate will yield better patient initiation as we rollout a new 27-count titration sample pack. This change will streamline prescribing while reducing the quantity of samples in the marketplace. We expect the sample pack to support patients for the first seven days, after which our new AfrezzaAssist program will ship products directly to the patient during the prior authorization process. We're also ready to launch our BluHale Pro. Despite delays due to COVID, we’ve already begun development on version 2.0, which will feature dose detection and integration with continuous CGM monitoring, alongside the overlay of dosing data with Afrezza. We have six new publication studies that we believe will be accepted and published here in Q4, in addition to the 14 new scientific releases we’ve had in 2020. As discussed in previous calls, a critical focus for Afrezza is education around market needs and the safety and efficacy of our product. In the last two weeks, I’ve had numerous discussions with the VA system, DL, Kaiser, and other key thought leaders nationally. We are determined to better position our information in front of the right audiences. We expect our pediatric Phase 3 study protocol to be submitted to the FDA here in Q4, and we’re in the late stages of defining the study details as well as selecting a CRO. Once we receive FDA feedback, we’ll decide when to begin that trial amid ongoing COVID-related challenges. Looking ahead for Treprostinil in Q4, we expect the fourth milestone to be $12.5 million. We anticipate shipping an additional $800,000 in clinical inventory in Q4 along with further purchases in 2021 as we explore ILD and continue supporting existing patients in their expansions while preparing for approval and building launch inventory. We expect to wrap up all clinical and CMC work here to support the NDA submission by the end of Q4. As you may have heard, United Therapeutics expects to file TreT by April 2021, with FDA approval anticipated in late 2021 or early 2022. The Tyvaso label expansion for ILD is projected for approval in April 2021. This is significant as there are no currently approved treatments for WHO Group 3 patients, totaling approximately 30,000 individuals. Today, Tyvaso's sales are based on only 3,000 patients. This represents a tenfold market expansion opportunity for TreT, which has a planned study, BREEZE-2, should it be needed, pending FDA feedback on our filing strategy shortly. United Therapeutics is also expected to announce additional readouts for PH-COPD, as well as CFILD, which could provide upside on our current TreT assumptions. Transitioning to the pipeline regarding Technosphere, we’ve just completed formulation work on two new opportunities, which we’ll discuss in early Q1. Sumatriptan is progressing well, having recently completed large animal testing with preliminary results looking very promising. We will provide a further update on the pipeline in early 2021 as we go through a prioritization exercise, aiming to provide clearer market guidance on our advancing compounds and new assets in development. When it comes to capital expectations, as Steve outlined, we are remaining prudent in reducing cash burn and managing our finances tightly with no major fundraising efforts in the last three years. We ended Q3 with $52.7 million. The anticipated Q4 milestone of $12.5 million will bolster our funds. MidCap has a third tranche available to us at $25 million between now and the first half of 2021, subject to milestone conditions. We are also looking into a sale-leaseback arrangement for our Danbury facility, where we would sell it to an investor and lease it back, which has received positive initial feedback. We’re actively searching for operational efficiency opportunities to drive both top and bottom-line growth by decreasing gross to net and tightly managing our cash expenditure while finding ways to increase revenue as evidenced by our recent field team hires. We expect an uptick in engagement across 11 new states, resulting in positive outcomes in Q4 and Q1 and beyond. As previously highlighted, our revenue growth drivers are finally starting to yield shareholder value as we reflect on our performance this year and upcoming readouts from our Technosphere platform advancing other assets. Our U.S. Afrezza for adults continues to grow year-over-year despite COVID-related challenges. Our pipeline is progressing well with TreT and exploring more collaborations with other companies. The international expansion of Afrezza has been impacted but trials in India are set to commence in November, conditions permitting. Our pediatric program is also on track to be filed with the FDA at the end of Q4, with a Phase 3 trial expected soon. Overall, we feel very optimistic about our current position and thank all our employees, shareholders, and patients for enabling our continuous success and growth despite the challenges ahead. Let’s open the floor to Q&A.

Operator, Operator

We’ll take our first question from Brandon Folkes with Cantor Fitzgerald.

Brandon Folkes, Analyst

Maybe can you just talk a little bit about how you think about your sales force now? Any color on if you plan to add reps, either in new territories or simply increasing the number of reps in your existing territories? Also, any insights on areas of the business you plan to invest in for 2021?

Michael Castagna, CEO

Brandon, I missed the 2021 part.

Brandon Folkes, Analyst

Just areas of the business you’re going to look to invest behind in 2021.

Michael Castagna, CEO

Great. Thank you. Sure. So, let me give some color on the sales force expansion. We made a decision in Q2 to expand our sales force. We hired quite a few people in Q2, trained them in Q3, and they’re out there now running. We’ve also expanded our medical team to include more medical liaisons and education providers, with one or two expected to start very shortly. One key part of Afrezza is that we’re finding many physicians are simply unaware of our data. They want to learn more, seek to understand how to prescribe it, and invite us out. I spoke with a physician today who receives four grand rounds in the next three weeks, with Afrezza being a significant topic. This is just one example of how having more people on the team allows us to engage with doctors giving grand rounds and other discussions to ensure Afrezza remains highlighted as one of the innovative medications available. Additionally, the other part is the expansion of the commercial team. We receive ongoing feedback regarding our online strategy, and as we look forward to 2021, we believe we can scale up our online presence even more efficiently. We know the sales force's impact will be somewhat tempered under ongoing COVID restrictions, resulting in fluctuating access for academic centers. We’re emphasizing education amongst healthcare providers as well as increasing online engagement with patients. That’s the goal behind the upcoming telehealth launch. We need to find patients online, encourage them to engage with our ads, and connect them with telehealth options. We need to raise awareness among patient advocates and other third-party websites, where we haven’t had a strong presence previously. However, we are steadily increasing the number of patients coming to our product daily. We must ensure that we broadcast our news to them, and that’s why we’re enabling our team accordingly. That sums up what you’ll see from us in 2021. On the medical side, we will look to analyze some of our data to produce new research publications and presentations next year, plus potentially running small studies to answer various questions we have regarding our pipeline opportunities with Afrezza and others in development. Regarding capital allocation, there are minimal expenses associated with moving some pipeline assets forward. We can offset those costs simply by managing our cash balance effectively. As TreT is launched and our pipeline progresses, they’ll coincide neatly with each other. When the pipeline advances from Phase 1 to Phase 2, those Phase 2 studies should take place shortly after TreT launches and start generating cash for the Company. So, we are striving to manage everything in tandem to create shareholder value.

Operator, Operator

We’ll move next to Thomas Smith with SVB Leerink.

Thomas Smith, Analyst

Just a couple on my end. First, TreT—can you discuss the manufacturing work being done in preparation for potential approval and commercialization? It sounds like it could happen in 2021 or early 2022. Also, could you elaborate on United's strategy to extend the TreT label beyond the initial PAH indication?

Michael Castagna, CEO

Sure. On the manufacturing side, we completed the factory build-out late last year. This was a multimillion-dollar investment and a six-month project that has now concluded. We have begun producing commercial supplies within that batch. We’re finalizing the last piece of equipment needed as well as the NDA package. So, everything is in place — we should be making scalable commercial supplies beginning in January. Regarding BREEZE and United Therapeutics leading the filing, we are aligned on their approach and perspective concerning label expansion. Remember, we’re filing TreT as an NDA, not a 505(b)(2), which provides us slightly more flexibility around references in terms of United Therapeutics, who owns ILD data as well as PAH indications. There’s a small chance we might need BREEZE-2 to secure ILD inclusion and a chance the FDA will let us file with the ILD indication embedded in our label. We are waiting on FDA feedback regarding this. Overall, it makes sense for our plans to move forward in collaboration with FDA and United Therapeutics in early Q1 to clarify our filing strategy. From my point of view, Tyvaso appears promising for ILD, and TreT shows a favorable comparison with Tyvaso. Thus, there should not be much additional work required to achieve ILD indication approval. Lastly, we are incorporating various PAH subgroups within our human factors study, which should deliver valuable data for the FDA regarding ILD. That’s how we’re preparing to ensure we’re ready for the market.

Operator, Operator

We’ll move on next to Robert Hazlett with BTIG.

Robert Hazlett, Analyst

Thanks for the insights. Following up on your previous discussion, what would the BREEZE-2 design look like? Do you have any structure or plan for that in place?

Michael Castagna, CEO

I don’t have a definitive answer for that right now. I think it would likely be a small study similar to our BREEZE-1 study. My guess is it would involve more naïve patients than switches. That said, this is contingent upon FDA feedback. I think the crucial point for now is whether we need to pursue BREEZE-2. We stand ready to act if the need arises to ensure we keep making progress and don’t waste any time in securing ILD in the TreT label. If we determine we don’t need it, our plan is to file with ILD included in the label, ideally for a 2021 launch.

Robert Hazlett, Analyst

Sounds good, thank you. Another aspect of the United Therapeutics agreement talks about other research programs you haven’t disclosed. Is there any chance we might see visibility on those initiatives soon?

Michael Castagna, CEO

Yes, we are entirely focused on ensuring TreT hits its timelines and gets patients treated as soon as possible. We’ve engaged in many discussions with the team regarding additional ideas and assets. I’d prefer to wait before discussing those specifics, as our current priority is to launch TreT efficiently and maximize its potential. We expect our platform to be considered exclusively for PAH, with anticipations of discovering more opportunities in treating outpatients with this and other products down the line. Thus, our immediate goal is to launch TreT successfully, and we’ll address any further development as we go.

Operator, Operator

We’ll move next to Steven Lichtman with Oppenheimer and Company.

Steven Lichtman, Analyst

Mike, you mentioned the Afrezza process. Could you explain the mechanics and benefits related to the P&L and the access advantages you observe?

Michael Castagna, CEO

Yes, and Steve, I apologize. We’re experiencing some phone issues, so I apologize to our shareholders and analysts on the line if I broke up a bit. I believe you were asking about the mechanics of Afrezza and the benefits from our process. The mechanics are akin to something like CoverMyMeds — it’s quite streamlined. So, when a doctor e-prescribes to a central pharmacy, the system automatically fills the prescription if it goes through without needing prior authorization (PA). If a PA is required, an electronic request goes to the doctor, who can easily fill it out. Most approvals occur within a day or two, maxing out at 72 hours. If a decision isn’t reached within that timeframe, we provide a free drug code to get the patient started immediately while we await the decision. If the request is denied, we’ll file an appeal. Historically, about 80% of patients either receive automatic approval or their PA is granted within a couple of days. This means, 8 out of 10 patients should automatically be processed through this new system directly with a pharmacy. On the backend, pharmacies have better inventory management when they see a present prescription, making it straightforward to fulfill accurately and quickly. Looking ahead, considering our telehealth model, patients will prefer having their prescriptions mailed directly to their houses, rather than picking them up at a Walgreens or CVS. We’re streamlining the entire process for patients by removing unnecessary barriers that doctors have cited as issues for prescribing. This effort is crucial to improve access and ease of use for patients, enabling greater participation in Afrezza usage. Importantly, we’ve hired exceptional team members from competing diabetes companies who are helping us run this program, and I’m eager to see it progress.

Operator, Operator

We’ll take other questions now.

Unidentified Analyst, Analyst

I meant to ask a question about gross margin. Congratulations on the progress you’ve achieved there over the past couple of quarters. Is there more room for leverage in that area, especially as you consider the additional capacities from TreT and other programs?

Steven Binder, CFO

Yes. There’s certainly room. When I examine our costs and consider what we are trending for Afrezza, assume roughly around $4 million per quarter and $2 million for collaboration services. That will adjust slightly if we add resources for commercial manufacturing. However, generally, that won’t shift in the short term. So, if you take a model and assess where our revenues go, you can see projections for our future costs.

Michael Castagna, CEO

So, there’s potential for margins to improve and elevate into the 70% to 80% range moving forward, driven by efficiencies as well as synergies from TreT. We’ll remain committed to decreasing those costs and improving our overall bottom line.

Unidentified Analyst, Analyst

Thank you.

Michael Castagna, CEO

I don’t see any more questions here. I want to thank everyone for their participation. I appreciate your undertaking here. We will wrap up the call, and we’re available for any follow-up questions from analysts and shareholders; feel free to email us. We will do our best to get back to you and answer all inquiries you might have. We’re looking ahead to wrapping up Q4 and moving past 2020 to an exciting 2021 as we anticipate leveraging our TreT program as well as our Afrezza and international market opportunities. Thank you again everyone. Please stay safe, and I look forward to speaking with you all in the early New Year.

Operator, Operator

Everyone, that concludes our conference call for today. Thank you all for your participation and you may now disconnect.