Memorandum

MannKind 4Q16 – Afrezza posts $1.3 million in sales; Company regains NASDAQ compliance and approves 1-for-5 reverse stock split – March 23, 2017

Executive Highlights

  • MannKind recently provided its 4Q16 and year-end update, emphasizing a more stable financial position – with a 1-for-5 reverse stock split and $22.9 million in cash (not including $30.6 million subsequently received from Sanofi and $16.7 million subsequently received from sale of the Valencia, CA facility), the company has regained NASDAQ compliance and has runway out through 2017.
  • Afrezza (inhaled mealtime insulin) posted $1.3 million in sales in 4Q16, down 41% year-over-year (YOY) from Sanofi’s 4Q15 Afrezza revenue of $2.2 million. Full year 2016 MannKind Afrezza revenue totaled $1.9 million, down 75% YOY from $7.7 million in full year 2015 Sanofi revenue (the product was only relaunched on July 25).
  • MannKind awaits an FDA decision on an “ultra-fast-acting” designation for Afrezza (expected September 30), and aims to pursue a pediatric study as well as real-world effectiveness studies in type 1 and type 2 diabetes.

MannKind provided its 4Q16 and year-end financial update in a call led by CEO Mr. Matthew Pfeffer last week. This report details our top takeaways from the webcast.

Top Five Highlights

1. As of December 31, 2016, the company had $22.9 million in cash remaining, down from $35.5 million at the close of 3Q16. Earlier this month, the board of directors approved a 1-for-5 reverse stock split. Mr. Pfeffer shared that just moments before the call, he received a letter determining that the company has regained NASDAQ compliance – for 10 consecutive business days between March 3 and March 16, the closing bid price of MannKind’s common stock was ≥$1.00.

2. Afrezza (inhaled mealtime insulin) posted $1.3 million in sales in 4Q16, down 41% year-over-year (YOY) from Sanofi’s 4Q15 Afrezza revenue of $2.2 million. Full year 2016 MannKind Afrezza revenue totaled $1.9 million, down 75% YOY from $7.7 million in full year 2015 Sanofi revenue. Notably, MannKind only relaunched Afrezza (following termination of the Sanofi partnership) on July 25, more than halfway through 3Q16. The product was continuously available following Sanofi’s partnership termination in January 2016, but MannKind assumed direct responsibility for MannKind-branded Afrezza distribution with the July relaunch.

3. Management announced that an FDA decision on the ultra-rapid-acting designation for Afrezza (MannKind filed for a label change in 3Q16) is expected on September 30. That would be incredibly positive for MannKind in our view if this arose.

4. Revamping the pediatric program will be a major priority for clinical development surrounding Afrezza in the year ahead. Management also announced new “real-world effectiveness” studies in both type 1 and type 2 diabetes, to be operationalized in 2Q17 and to report data late this year or early next.

5. Management highlighted several efforts on the marketing front, including social media promotions, a reality TV show, point of care outreach in doctor’s offices, and the expanded titration pack launched in February. We’d love to see more “blocking and tackling” on these fronts – potential is good, but a lot of things have to go right!

Top Five Highlights

1. Financial Position: $22.9M in Cash Remaining with Runway Out Through 2017; NASDAQ Issue “Put to Bed”

As of December 31, 2016, the company had $22.9 million in cash remaining, down from $35.5 million at the close of 3Q16. Earlier this month, the board of directors approved a 1-for-5 reverse stock split, which also reduces the number of authorized shares from 700 million down to 140 million. Management emphasized that this cash position doesn’t include the $30.6 million subsequently received from Sanofi ($10.2 million came from the sale of surplus insulin to Sanofi), or the $16.7 million later received from the sale of the company’s surplus facility in Valencia, CA. Through an agreement first-announced during MannKind’s 3Q16 earnings call, Sanofi has forgiven $72 million worth of debt. Moreover, the company still has $30.1 million available for borrowing from The Mann Group. Management explained that all of this, combined with the strategic reverse stock split, will provide MannKind a runway through the end of 2017. This is reassuring news for now, given that last August the company was aiming to extend as far into 2017 as possible.

  • Moments before the call, Mr. Pfeffer received a letter determining that MannKind has regained NASDAQ compliance, finally bringing to a close a the ongoing concerns over MannKind’s status since last September. At the time, MannKind received a letter saying that the company risked NASDAQ delisting since it had failed to maintain a closing bid price ≥$1.00/share of common stock for 30 consecutive days. Between March 3 and March 16, the closing bid price of MannKind’s common stock was ≥$1.00 for 10 consecutive business days – in Mr. Pfeffer’s words, “the issue was put to bed.”
  • Net income for the full year 2016 was $1.37/share (accounting for the reduced number of shares post-reverse stock split). For comparison, MannKind shareholders saw a net loss of $4.54/share in 2015.

2. Slow Rise in Afrezza Sales; Revenue Totals $1.3M in 4Q16

Sales of inhaled insulin Afrezza amounted to $1.3 million in 4Q16, the first full quarter of revenue since Afrezza’s relaunch, and to $1.9 million in full year 2016. Notably, MannKind only relaunched Afrezza (following termination of the Sanofi partnership) on July 25, more than halfway through 3Q16. The product thus posted only $600,000 in sales for 3Q16. A major theme of management’s commentary has been emphasizing MannKind’s transition from a dedicated manufacturing company to a full-scale commercialization company, and the recent earnings call was no exception. Building an infrastructure to market and sell Afrezza has, understandably, taken some time. As Mr. Pfeffer announced at JPM 2017, MannKind has now terminated its contract with an external sales organization and will expand the size and scope of its internal sales force. According to management, having more sales reps in the field will solve one of the foremost commercial challenges Afrezza has experienced to-date – a suboptimal percentage of providers request a re-fill, and when surveyed, they suggest that it’s because they aren’t seeing a sales rep often enough (which is especially pertinent in a competitive area like mealtime insulin).

3. FDA Decision on “Ultra-Rapid-Acting” Label Expected September 30

MannKind shared the positive news that an FDA decision on the pending “ultra-rapid-acting” label designation is expected September 30. An “ultra-rapid-acting” designation for Afrezza would help distinguish the product from existing prandial insulins, and could boost uptake. We thought it was a very smart move for MannKind to file with the FDA for an “ultra-rapid-acting” label claim in 3Q16, and during the recent 4Q16 earnings call management announced than an FDA decision is expected on September 30 (though there’s still hope that it may come even sooner). This follows the timing of a standard 10-12 month FDA review process. An “ultra-rapid-acting” designation would fit well with the company’s strategy to focus promotional efforts on the “fast-acting” aspect of Afrezza rather than the “inhaled” aspect – another smart decision, in our view. For one, we can’t forget the challenges that led to discontinuation of Pfizer’s Exubera inhaled insulin – and some healthcare professionals continue to express concerns about the long-term impact of inhaling insulin despite the reassuring clinical data to date. Second, “real-world” feedback on Afrezza shows that a range patients really like its speed as well as the lack of hypoglycemia, but until the FDA approves this designation MannKind is severely limited in its ability to market the product as “ultra-fast.” And lastly, since no “ultra-rapid-acting” insulins are currently on the market, Afrezza could technically become a first-in-class therapy.

4. Clinical Development to Focus on Pediatric Patients and Real-World Effectiveness Data

Turning to clinical development projects for Afrezza, management suggested that revamping the pediatric program will be a major priority in the year ahead. A pediatric study was suspended around the time of the transition of Afrezza from Sanofi back to MannKind. Investigators have since amended the trial protocol and have resubmitted this to the FDA. Management expects to re-open enrollment for this JDRF-sponsored pediatric study in 1Q17, which follows previous timing. Management also underscored that the company is mapping out a strategy to reduce time to filing for a pediatric indication, which will involve ongoing discussion with the FDA. We’ll be curious to see an expedited review process for a pediatric label claim, which would be a big step for the Afrezza franchise clinically and commercially.

  • Management also announced new “real-world effectiveness” studies in both type 1 and type 2 diabetes, initiating in 2Q17 and expected to report data late this year or early next. This is slightly delayed from the 1Q17 start for a study in type 1 patients announced during MannKind’s 3Q16 update. On the other hand, a 2Q17 start for the study in type 2 patients is the most specific timing we’ve heard yet. The goal of these trials, according to management, is to demonstrate that Afrezza can resolve postprandial hyperglycemia and can improve time-in-range. At JPM 2017, Mr. Pfeffer suggested that these real-world trials were next-in-line after the pediatric study, and hinted that the investigation in type 1 patients might use CGM (likely from Dexcom) while the one in type 2 patients might use Abbott Libre (flash glucose monitoring was the terminology used).  This was music to our ears, as we’re always glad to see these technologies used in clinical trials to show time-in-range as well as hyper and hypoglycemia (as opposed to an overreliance on A1c) – however, this hasn’t been confirmed and we’ll have to wait to hear more specific details on trial design.
  • Though not mentioned on the call, MannKind will also conduct an FDA-required post-marketing safety study of Afrezza. During the 3Q16 financial update, management suggested that this safety study would begin in 2H17.

5. Commercial Development Spans Social Media, Reality TV, Point of Care Outreach, and New Titration Pack

Management highlighted several efforts on the marketing front, including social media promotions, a reality TV show, point of care outreach in doctor’s offices, and the expanded titration pack launched in February. New Twitter hashtags – #AfrezzaPatient and #AfrezzaHCP – aim to harness the “overwhelmingly positive” feedback that Afrezza gets from patients who try it. Management hopes to extend this community of Afrezza users to Instagram, Tumblr, and Pinterest as well. Mr. Pfeffer discussed the possibility of a reality TV show about diabetes (centered around Afrezza) in his remarks at JPM – the MannKind-sponsored series “Reversed” will air this summer on the Discovery Life Channel (we’ll know more after tuning in – not sure what the appetite from the American public will be on this though if they can actually get this show funded, that would be huge). Showing an ad for Afrezza during “Reversed” will get the word about this inhaled insulin out to a key target population, management explained. Point of care outreach involves placing ads in doctor’s officers, or wherever healthcare is delivered to the patient – management emphasized that this approach to advertising is much more fruitful than direct-to-consumer television ads, which take three-six months to show any impact on prescription volume vs. a 30-90 day impact with point of care outreach. Management also briefly reviewed the newly-available expanded titration pack (60 4u, 60 80u, and 60 12u cartridges), which affords greater dosing flexibility. With more options, MannKind hopes to see fewer dosing/titration mistakes with Afrezza, and the flip side of this coin is more patient success with the product.

 

-- by Payal Marathe, Helen Gao, and Kelly Close