MannKind Corporation (NASDAQ:MNKD) Q4 2020 Earnings Conference Call February 25, 2020 9:00 AM ET

Company Participants

Michael Castagna - CEO
Steven Binder - CFO

Conference Call Participants

Brandon Folkes - Cantor Fitzgerald
Oren Livnat - HC Wainwright
Steven Lichtman - Oppenheimer
Robert Hazlett - BTIG

Operator

Good morning and welcome to MannKind Corporation Fourth Quarter and Full Year 2020 Earnings Call. As a reminder, this call is being recorded on February 25, 2021, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call until March 11, 2021.

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-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.

Michael Castagna

Good morning and thank, everyone for joining us today. We've never been busier and more excited about our future transformation. Let me start by acknowledging our Founder, Al Mann, who passed five years ago today. It's also today that I was excited to join MannKind and take our journey forward.

We would not be here today without his generosity of him as well as the trustee, who will forward support us through the transformation over the last five years. I want to thank everyone again and look forward to sharing you strategic direction relating out for 2021 and beyond.

I want to go back to what we laid out in January of 2020 and that is our strategy around the focus of endocrine disease and orphan lung. Today you'll start to see how that starts to shape out and what we did in 2020 to set us up for that direction in the future. Additionally, you can see with our acquisition of QrumPharma will not be limited by our current proprietary technology but we'll look for the best opportunity to bring shareholder value and therefore [indiscernible] example of stake and nebulized product and hopefully we can apply our technology, but even if we can, we believe will be a great asset for patients in the future and we'll focus, execute and deliver to generate shareholder returns as we go forward.

The last thing I'd also add as we being 2021, I think you quickly see our technology is becoming a platform for our support with another one pharmaceutical companies, a capability that we'll be looking forward towards exploiting as we go forward. I'll discuss this at the end of our presentation this morning.

Now let's reflect from 2020 where we had to deal with an unprecedented challenge of COVID. MannKind made tremendous sacrifices to ensure we came out stronger than when we entered. We took extreme measures in terms of pay reduction, cost cutting. We developed ability to work from home and also revamped our commercialization model. All this proved that we could make it through one of the worst pandemics in the country's history and also come out stronger and have a great Q4 here as we exited 2020.

Additionally, when you look at our open lung strategy, United Therapeutics and MannKind delivered on all the key Tyvaso stability studies and clinical studies despite many COVID trials being shut down. United also purchased a prior new vessel [ph] for $105 million, which means we have to accelerate everything on our end by four months to get ready for launch at the end of 2021. And additionally, we were able to secure an opportunity to acquire QrumPharma or clofazimine in December.

On the endocrine disease space, Afrezza had record quarterly net revenue of $10.1 million, 30% versus Q4 '19 a sequential order growth more importantly of 38%. During the timeframe that we told our full sales force should be out there but was not out there in full force due to the COVID shutdowns. Despite the decline in new patients in 2020 we were able to grow net revenue of 28% versus 2019. This is mainly due to the fact that we gained our commercial model to ensure the patient experience was stronger and we retain more of our patient and ensure proper ability in training. That work paid off as you can start to see in 2020 and will transition versus 2019 in patient build and retention on refills. We were also able to engage with the FDA on the clinical protocol with our Phase 3 pediatric study. I look forward to sharing a little more insights shortly with you on that one as well.

Then finally, we ended the year and entered into co-promotion with Thyquidity which we're excited to be launching this week throughout our sales force. Now we had the first time here CEO but we have a full staff and all key leadership functions, Chief Scientific Officer and Regulatory Medical as well reimbursement and access. We're very excited about the talent that's joining the company and the direction we're going throughout all functions.

On the Tyvaso DPI timeline here, you can see we completed all key opportunity here in Q4. It's just really the top line for even PK study results, which I'll talk about in a second and the submission will be ready pretty much by the end of Q1 here. We expect hopefully that UT will get an IoT indication for their Tyvaso and nebulized product here in April and we'll be filing the NDA file with UT of possibly the MF part of it here in early Q2 2021 and we expect the FDA to accept the NDA admission in the same quarter.

In Q3 we'll be developing the manufacturing preclinical batches as well start to scale up our manufacturing facility as we expect the future indications will put the strength from demand and therefore we have to start expanding this sector now to hit those expectations. And the finally will be a Q4 approval with the FDA.

Let me talk about the topline results in case our shareholders have not seen them yet. First, the primary objective was achieved of safety and tolerability, which was a switch study from Tyvaso to Tyvaso DPI. Two things you notice is 96% of people completed this treatment phase, no serious adverse events and also we at the end of the trial. That's just great as we've had patients going on for a year, given us great long-term data on dosing as well as safety and outcomes.

The secondary objectives are really around some of the efficacy and quality of life measurements around 6-minute walk test, overall satisfaction and PROs and all three of these parameters, we improved over Tyvaso nebulized formulation, which really points to the fact that we get deep lung penetration, less variability, and consistent dose to dose impact when you inhale with our technology.

The optional extension phase of 49 and 51 patients continue to go on that phase and that has provided us great insight into what we think will happen in the real world when it comes to dosing and titration.

On the PK study, we didn't expect any changes there. But we have to confirm that the new manufacturing process on the scale up versus clinical match to each other and our primary objective was achieved and look forward to get an update out there with UT in future date.

You do see patient variability, continue to be less for Tyvaso DPI over Tyvaso nebulized formulation. On the safety side, there is no significant findings and these were all consistent prostacyclin effects as well as Tyvaso and DPI we just now starting to see that some of the analysts are now looking to add the future Tyvaso DPI with the new data coming out into the models and we recently did 2 upgrades in terms of price targets on our stock by Oppenheimer, as well as BTIG. I just want to say thank you for that.

And one of these now--analysts, we saw that they increased the United Therapeutics forecast for Tyvaso revenue in the blue here, and you can give us the future glimpse coinciding with that, the majority of the sales, we expect to be the Tyvaso DPI formulation versus nebulized.

We think it provides a great patient experience, help improve patient retention and also drive a great opportunity to scale up new indications and new populations. The acquisition of QrumPharma and inhaled clofazimine was a milestone for our company. We purchased Qrum in December 2020 for $12.75 million in cash and stock and you could see how those accrued for new accounting here in Q4.

The inhaled clofazimine is a development pre IND, the initial indication we're looking for is Nontuberculous Mycobacterial or NTM. The significant unmet medical need with no effective medications NTM. This product and the team there has worked to obtain FDA orphan designation as well as QIDP designations, which really helps put this on hopefully on fast track at some point, as we go forward.

We expect in the Phase 1 here in late 2021 and the NIH is currently funding the development in TB, and we just got an early read out and data which looks very positive. I'm also excited about Thomas Hofmann the founder of Qrum joining us as a Chief Scientific Officer. Dr. Hofmann is a pediatric pulmonologist and an extensive experience with inhaled drug discovery and development and has been extremely helpful, especially if you went with the FDA on our inhaled therapeutic products that have a pulmonology staff, is great opportunity.

So why do we want to be excited about Qrum? I think it's really important to understand why we, one of the questions I get is why do we buy such an early asset. Number one, we could see it's highly potent in the minimum inhibitory concentrations activity versus NTM and both and MAC types of NTM infections. There's a really efficient lung penetration with their nebulized formulation over the oral tablet formulation, and it has a long half-life. And the penetration long and up 2.5 fold oral clofazimine.

The low dose and non-continuous dosing maybe possible providing a nice treatment opportunity for these patients who are going to have chronic administration for an antibody for a while and they probably will come in and out of treatment, as this is a really difficult part of the treatment. The positive animal efficacy data in mouse models, with MAC continue to be positive and the GLP is ongoing and on schedule. And its potential for DPI formulation that the team currently working on and we'll keep you posted on how that proceeds in our pipeline.

Let me walk you through some of the early data that the team generated there at Qrum. So we are now going to refer to this product as MNKB101 going forward just - so everybody is clear if you look at the pipeline. But this product was superior to oral clofazimine after 28 days of dosing.

So these animal rodents with 14 treatments every other day and what you saw was oral clofazimine had a minimal reduction versus saline which is what you use in these studies and this is consistent with previous studies. Likely no effect due the short duration of the trial and it takes a while for the bodies to build up lung concentrations in the oral tablet formulation.

However, you can see at 99.99% reduction and MNKD 101 versus saline control. So significant reduction in the oral delivery in terms of the lung in a nebulized formulation. We would expect this to be maintained if we would have to get this to a DPI formulation. We know from our research that the population will be happy with a nebulized formulation and we'll be even happier with the DPI, so we don't think it's critical to good to DPI, but if we can do it will be really nice for patients and experience.

Now let me talk a little bit about Afrezza, now that we've finished off the orphan lung area. Number one, we really established Afrezza and should continue to expand sales in 2021 and beyond. When you take a look back over the last 3 or 4 years, we've been able to generate a significant amount of publications and presentations on efficacy, safety, and dosing.

The underlying dosing parameters of Afrezza have been one of the biggest hurdles that the market didn't really understand as well as the packaging and all those things have now been fixed or now established and we can communicate out appropriate dosing, safety, and efficacy information and references and publications that have all of our data out there.

There is a base of prescribers of almost 3,000 doctors that we can now build upon and grow year-over-year for years to come. Our commercial medical teams and are now stable and the talent base joining the company is expanding rapidly.

The safety profile now will be on the market is well established which is always one of the questions with an influence and we can now see if the thousands of patients over the last 5 years, no surprise safety signals have arised in overhead, surveillance, and monitoring. We are looking to move toward expansion now with indications in pediatrics and are also evaluating an investigative collaborative study for gestational diabetes here in 2021.

Now let me flip over and talk about the pediatric design. We just recently received FDA feedback as well as - I guess a Zoom meeting these days, with the FDA and we were really happy and pleased with the interaction, the insights and discussion of how we take a Afrezza forward with them, especially that pertains to dosing and conversion, which we think is one of the bigger hurdles that as the patients and doctors have had out there in the marketplace.

We are looking to do usual care in with the switchover randomization to a further plus stable versus multiple daily injections, what's really important to us is that very first dose in the office and showing that patients can tolerate and not have any concerns on a higher dose right at the start. This will be the first time, we're running the study this way and we think based on all the data we generated, this is warranted at this time.

Well then at the end of 26 weeks everybody who are in the in the study will be able to fall over to Afrezza and we'll go on and collect safety data from the 52 weeks on approximately 260 patients. Then they will be discontinued and there will be 4 weeks follow up FEV1 at the end of this trial. We're really happy with that design. The FDA appears to agree with this design and we are just finalizing the protocol based on the FDA feedback. We expect to start this trial in late 2021.

Now what do we do in here to drive performance for Afrezza tomorrow. Number one, increase awareness. There are several opportunities this year that we've already taken advantage of and sponsoring take control of your diabetes, college diabetes network as well as same way to educate the marketplace out there as four team event of the place in Q1 and Q2.

Additionally, we've been in many discussions with CMS on thinking about how far we can have a better position on the Medicare population, including 35 a month power program that CMS was running and presenting all of our clinical data to the payers and making them aware of all the new data we generated has been critically important over the last 3 months.

We're also looking to meet with the FDA and have a meeting set up for Blue Hill for the consumer launch edition to make sure we are - go forward in a safe and effective manner for consumers. Digital management of diabetes is here to stay and integration with the CGM is going to be critical. We believe that we're taking a long time to see that they are right in diabetes but do you have dose detection and proper inhalation are all going to go very well and you can see you've CGM live and it's a product that's on its way to success here in 2021.

We also launched the new reimbursement model in Q4 called Afrezza Assist. It was piloted in Q4 and launched in Q1. And you can see, to the right here, and the first - pretty much quarter and now in January, we estimated we would see in February-March, a pretty significant jump in moving our free goods from the marketplace, which was out there in the specialty pharmacies and retail, into a centralized pharmacy at a much lower cost, which is why you've seen a decline in prescriptions here in January, and you didn't know this is as much in the several new patients last year. But starting January 1, all patients had to move to a close pharmacy, which is not reported in Tiffany and you can now see our cash pay and our free goods significantly jump in Q4 and Q1.

We now have this new Afrezza Assist, we expect to be able of churn these patients into paying patients and we'll provide them free drug if necessary and if they can't get approved some point we will move into a cash paid program, went through a strong start. We've had a lot of our reps have at least one patient come in, almost 150 doctors in the first 6 weeks here in the New Year have come into new programs. We're excited about what we see in early days here.

We also want to strengthen advocacy for inhaled insulin, this is across patient advocacy organizations, the payers as well as the doctors. We think it's time we thought we just start getting on board and sharing information and educating our peers around Afrezza as well the organizations to start lobbying for access to inhaled insulin with the payers.

And of course that our endocrine focus here on the co-promotion of Thyquidity. This is indicative for hyperthyroidism. It's really meant to help the people that are struggling with dosing and precision of dosing. And this liquid formulation being really important in the pediatric segment.

We believe that's where the biggest opportunity is and this allowed us to expand our sales force footprint into the pediatric endocrinology years ahead of our launch for Afrezza. Let me remind you we are only focused on Thyquidity in the pediatric segment only and when Afrezza is approved. We will now have infrastructure and relationships to successfully launch Afrezza in a couple of years.

On the financial impact, one of the questions we get is what does it mean to MannKind? We receive quarterly payments for our promotional activity as well as royalties on gross profit. This launch this week and that I can tell you I talked to a few providers, they are very excited to identifying patients and I love to see their reps and managers are going to do, but the first script. So at this point we look forward to watch that launch and seeing the impact on sales force that have to help patients suffering from thyroid disorders.

I'm going to turn it over to Steve to take you through our 2020 financials.

Steven Binder

Thank you, Mike and good morning.

Very pleased to review our 4th quarter and full year 2020 financial results, which show record quarterly Afrezza net revenue, continued Afrezza gross margin expansion and our continued focus on efficiently managing our cash resources. We will also discuss some details of the non-binding Letter of Intent we have entered into for sale leaseback of our Danbury manufacturing facility.

During this morning's call starting select financial highlights and as we supplement this call by reading the consolidated financial statements and MD&A contained in our 10-K which was filed with the FTC this morning. Let's start up by looking at revenues for the 4th quarter and full year 2020. Starting with the table on the left, which is our 4th quarter results, Afrezza net revenue was $10.1 million versus $7.8 million in 2019, a growth rate of 30%.

The increase was driven by volume growth from underlying of Afrezza prescription demand, which was up 5% year-over-year, a more favorable growth to net percentage, 38% versus 44% in 2019. The continuation of a favorable mix of higher insulin unique cartridges and a $1.1 million accrual reversal related to the termination of our prior year free goods program as of December 31, 2020. The termination of the program is anticipated to negatively impact of TRx by approximately 15% in 2021 versus 2020.

Well, remember, these were free prescriptions and not generating revenue in 2020, so our net revenue will be positively impacted as a portion of these patients were paying insurance coverage with the help of our Afrezza Assist patient hub or purchase Afrezza through our cash program.

Please note that an increase in wholesale inventories in the 4th quarter of 2020, this levels are anticipated to reduce in the first quarter of 2021 contributed approximately $0.5 million of Afrezza net revenue in the 4th quarter. Additionally, the COVID-19 pandemic continue to impact our sales and marketing efforts in the 4th quarter. Physician access including both face-to-face and digital interactions continue to be constrained to varying degrees across different geographies, which impacted the effectiveness of our sales and marketing efforts.

Looking at full-year 2020 comparisons for Afrezza on the table to the right, during the pandemic year Afrezza net revenue grew 28% versus 2019, driven by volume, favorable cartridge mix, price, decreased gross to net and the reversal of the free good program that I just mentioned.

Moving to revenue from collaborations and services, which for the 4th quarter was $8.4 million versus $8.2 million for 2019, our full-year 2020, revenue was $32.8 million versus $37.7 million for 2019. The reduction in the 2020 revenue year-over-year was expected and was mainly due to the recognition of the $10 million United Therapeutics research agreement over the period of the fourth quarter of 2018 through the second quarter of 2019 and our performance obligations were substantially completed.

This slide shows the success of our efforts to lower our gross to net. The gross to net deductions were 38% of Afrezza gross revenue for the 4th quarter of 2020. Normalizing the 4th quarter of Afrezza gross revenue and net revenue for the exclusion of the free goods program termination accrual reversal, the non-GAAP gross to net percentage is 41%, consistent with the 3rd quarter, but favorable to the first and second quarters.

The favorable trend in gross to net percentage primarily resulted from our strategy of shifting business through specialty pharmacies as opposed to wholesale with higher fees, a decrease in the Medicare rebate accrual and the downward trend of our core payment assistance program as patients face lower deductibles in the second half of the year.

As Afrezza revenues have been increasing, so our gross margins. This table shows gross margin for the first quarter 2019 to the fourth quarter of 2020 where our gross margin reached 64%. If we adjusted for the $1.1 million accrual reversal due to the termination of free goods program in the fourth quarter of 2020, the non-GAAP gross margin for the fourth quarter would have been 59%, still a healthy increase in the third quarter, gross margin of 51%.

Moving on to operating cash efficiency, the next slide, we compare the full year of 2020 versus 2019 and 2018. The top of each vertical bar is a Afrezza net revenue, which is almost doubled in two years, the $32.3 million and the bottom is non-GAAP net cash used in operating activities, which is decreased by almost half in two years.

The increase in present net revenue helps drive down the cash burn, but to a large extent, we will focus on managing our operating spend and it shows in the reduction to $53.1 million for the full year 2020. The bottom of the slide, we show our average quarterly non-GAAP net cash used in operating activities. We have been running fairly steady without large fluctuations on a quarter-by-quarter basis in 2020, resulting in a quarterly average of $13.3 million.

And lastly, end of 2020 with $57 million in unrestricted cash on the balance sheet posted in the fourth quarter by $12.5 million milestone payment, the United Therapeutics and $10 million related to the funding of the 22 and the cap credit facility.

And the third quarter earnings call, we discussed the we considering a sale leaseback of our manufacturing and R&D facility. We have now entered into a non-binding letter of intent to sell building one, which is our manufacturing facility. Please note that we are not selling the manufacturing segment continuing the building just the improved structure and layout.

We are currently in the due diligence phase, which is expected to be completed by the end of the first quarter, resulting in a signing of a definitive agreement expected sales prices between $95 - $105 million the 20-year lease term. 4, 5-year extension options. And in annual rent at the start of release of between $10 and $11 million annually.

We plan to use the proceeds for general corporate purposes and they partially pay down the [indiscernible] senior secured debt. There is no assurances that we'll be able to sign a definitive agreement on the terms described and finalization is also subject to satisfactory completion of due diligence by the buyer. Before handing the presentation back to Mike.

Let me summarize the financial products first, we had record quarterly of credit net revenue even we continue to experience the headwinds in the COVID-19 pandemic. Second, we continue to see improving the product gross margin and gross to net. We remain extremely diligent in managing our cash while supporting commercial efforts to grow further manufactured therapeutics of DPI for United Therapeutics and move our pipeline forward which Mike will discuss in a moment. And lastly we are progressing on approximately $100 million non-dilutive financing using a previously secured asset.

Thank you. Let me turn it back over to Mike for some additional comments.

Michael Castagna

Thank you, Steve. For those of you who don't know, we've invested over $250 million in Danbury building out the infrastructure to scale for further, and as well as of DPI. We built the right time to maximize the value of this asset as the market is ideal for these types of transaction given the COVID has impeded experience in office and traditional retail real estate.

This is a long-term commitment now on our part, but the part of investors to look out twenty years and believe that this will be a technology here to stay with multiple revenue expansion opportunities in order to pay back the terms that we're signing up for.

This does not change our day-to-day operations, we will still be investing with new T to expand the facility for Tyvaso DPI. This provides us the capital, so if we run the company towards cash flow breakeven.

Now let me talk about the pipeline and collaborations. First, the endocrine you see a new view here if we laid out versus traditional, this should be updated in our website today, if not already. Number one, is Afrezza approved in the new U.S. and Brazil and continue to progress there in those markets and grow.

Number two, we expanded with Thyquidity, to give ourselves more opportunity with our current sales force infrastructure that we invested in. The third part is around indication expansion. We're currently focused on the pediatric setting and excited to get this off and worked with some very reputable third parties to get this successfully launched, hopefully in pediatrics in the coming years. I can tell you the early feedback from sites, the CROs that we reviewed is very exciting to get this product in the pediatric as soon as possible. And then the international expansion with India and Cipla where they started a Phase 3 trial this year that should wrap up pretty quickly given the population size in India.

And we're trying, we're experimenting there, we are executing I'll say with the new dosing protocol that we did here in the U.S. of the pilot study and that dosing protocol be Type 2 patients in the larger study. And we look forward to getting that data out there in the public domain, as I think it will really show the aggressive titration drives dramatic impact of Afrezza and inhaled. And then we expect our partner in Australia and Brazil and I hope we file Afrezza there this year in the first half of 2021 if we can.

And the automotive space, you see five opportunity here. Number one, we've talked about Tyvaso DPI with United Therapeutics and hope for not only PH but PHILD and future indications that we're working on. And then KV101, which is also known as the CorPath plus Qrum and NTM, we rapidly progress the Phase 1 in Q4 of this year.

There are three other programs that we have now prioritize focused on MannKind 201 in idiopathic pulmonary fibrosis, which we are not disclosing for competitive reasons. MannKind 301, which was previously disclosed as DNase alpha for cystic fibrosis and MNKD 701, which again will not be disclosed for competitive reasons. So you can now see that we have five short term goals with orphan lung disease --that really bolstered up over the last couple of years as we focused on building up programs.

The other thing I want to highlight, we don't talk about in a while is the Cannabidiol space and Receptor Life Sciences partnership. And this agreement, we will receive milestones and royalty payments as it moves forward towards progress and we expect to be the CMC -- for as they move forward.

In their amount of but they've recently have a new CEO Name Mark who joins us with tremendous pharmaceutical industry knowledge, we've already have our first committed with them and are excited about the direction and the feedback we received with FDA to bring a Cannabidiol take us through product forward to the market through the FDA regulated pathway.

That the first focus is on the panic attack and is a proof of concept study and we look forward to working with the team there to move this product forward. The second program, you may not realize with something that we still in the first few years ago and MannKind is eligible for royalty payments.

It is a small molecule enzyme inhibitor for oncology, for solid tumors in particular, which was fast-tracked by the FDA. We will get mid single digits in royalties if that continues to progress and get approved ultimately by the FDA. So we see multiple short term revenue expansion opportunities over the coming years between our current marketed products, our orphan lung pipeline as well as third-party program that partnering out over time.

While the early indicators of the future for us is how many formulations we're working on. So we don't, we don't really disclose exactly who or what we're working with. We should know in 2020 we work on five different formulations several which were COVID related that we never announced, but we do know that we work in several therapeutic opportunities there and already in 2021 we have about 10 formulations on goal that we're working towards.

Some of those have been completed. Some of those are in the process and many of these programs are partnered with external partners that we hope will turn into future business development deals that we'll announce later in 2021 and beyond. Additionally, there are four assets that you buy this on our pipeline slide before around epinephrine, Palo, sumatriptan that we would look to license out to a partner, our partners over the next few months if all goes well.

The other part of this we start to see is our Dreamboat family here on the left and our Single-use Cricket family on the right. We believe Cricket provides a real nice opportunity for some of these pipeline compounds as well as the formulations we are currently working on with other companies. So I think you'll continue to see more on the Cricket side and we think this is a great opportunity for Q use products, plus we like to OS opportunities.

As we look at 2021, I highlight, many of these milestones we look here and see, we have a busy year ahead of us and its only February. We continue to progress very rapidly on many fronts in terms of the pipeline. We will end the end market product as well as just corporate priorities , so I think I didn't talk about as new data coming out at ADA in ATTD which we have data coming out in the June late Q2 or June timeframe. We're very excited about the state to look at that time and range in Afrezza as well as the pediatric data in terms of the PK studies generated so far.

I'll just remind people that we also have a $25 million debt available upon Tyvaso DPI approval. So I hope what you see is the company is in a solid financial position. Take us a while to get to where we are and we're really proud of the work that the team has done here across the company and all functions and I just want to next year it will be in a fantastic partner and his team as it really transform mankind from struggling company to major growth company as we go forward for years to come.

Thank you for your time today and we look forward to taking questions .

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Brandon Folkes with Cantor Fitzgerald.

Brandon Folkes

Thanks for taking my question and congratulations on the progress. And maybe just three from me. Firstly, just on Afrezza, probably gross to net. How should we think about this in 2021 and beyond and maybe often upfront at Danbury, you talked about general corporate and did pay down. Can you provide some color in terms of how much you expect to reinvest in the business on that should it go through.

And then lastly on business development is a party in Boston being at the versus our licensing and with that pipeline. I know in the past, you talked about in that some of the programs to proof of concept and then looking to partner, has that changed. Now, just given all the progress you have made over the last many 12 to 18 months. Thank you.

Michael Castagna

But make sure I heard your question. I got one is not, which Steve will answer. Another one is use of proceeds and how we think about that and then the third one is around the pipeline and how we previous communication, and business, did I capture all three?

Brandon Folkes

That's it. Thank you.

Steven Binder

So let me take the first one on gross to net so our expectation for 2021 is that we have growth to net between 40% and 42%. So we continue to work on strategies to drive down our gross to net, if sometimes in the marketplace there may be transactions that happen that help us in sometimes when they go against us, let's will estimate between 40% and 42% for 2021 . Turning to Danbury reinvestment. Mike I know do you want to.

Michael Castagna

So I think on this we will seems to be prudent with cash management and just because we have more cash doesn't mean we want to spend a lot more money. I think we got to make sure the company is in a secure cash position for the long term and that it provides us opportunities we see to grow the business faster or redeploy capital to the end pipeline faster, we're in a position to do that.

So, back to your question on the BD side, we want to take something now, the Phase 2, Phase 3, we believe we have adequate capital resources to do that between the cash on hand, plus the royalties coming in the future.

So we haven't changed our strategy, we continue to want to fund the pipeline where you see the narrow focus on orphan lung disease is we do expect to continue to bring those products forward and probably build out commercial infrastructure down the road for clofazimine as well as the other ones we're working on.

I recommended outlicensing, we are still debating internally, do we go ahead and fund the trip in the Phase 1 and do we have a partner lined up, that will take that on. And partner that out. So that's under discussion right now, so I won't speculate what happens, but I'll just say those programs,

we believe we can partner with somebody at this point, but then funded the Phase 1 and collect the upside and the share and the success on those products but the orphan one that we announced today, most of those, we would look to bring forward in one or two of those will go into the partnership, but we probably keep one or two for ourselves.

So that's how we're thinking about it, but will it be opportunistic and open minded, but right now, things are looking pretty good for the company to be able to fund our innovation and our does make sure we deploy capital efficiently and effectively to grow shareholder value. So that's our main focus right now.

Operator

And next we'll go to Oren Livnat with HC Wainwright.

Oren Livnat

You've got a lot going on all of a sudden or at least it seems all of a sudden to us. Let just follow-up real quickly first on Afrezza and follow-up on Brandon's question about gross to net. I guess I just want to clarify separate from the actual gross to net, just in terms of realized value per script in terms of the scripts we see given you're fully transitioning now, what started already it looks like in 4Q, now fully into Q1 the switch of free drug into these specialty pharmacy, we should expect to see an additional incremental increase in Q1 and then you going forward the realized net value reported revenue first like IQ script correct?

Michael Castagna

Thankfully we're not worrying about much Q4 but starting here in Q1 the environment and stations were refilled not new patient and starting in Q1 January they shifted either out of the market in the longer given for retail or you'll find out when you be there. There are a lot of patient and there are many, so once they run out of that supply, we'll hopefully come in back into our reimbursement. We'll now make sure one of the number one things we found was PAs were not being done. So we're providing free drugs that would have been reimbursed by insurance. So we changed that process to ensure that PAs are now gone and that we see transparently why the patient is getting rejected and what we need to do to help get their insurance coverage because when you talked insurance companies, they want to see the demand.

So we want to assure here in 2021 majority of the scripts of 98% will be paid prescription since you have a revenue prescript in your models. The free goods and cash do not show up in.

Oren Livnat

Okay. So volume went down 15% all else equal in Q1 versus Q4 your revenue would be flattish, correct?

Michael Castagna

Correct. There is some equal percent of it, but maybe different.

Oren Livnat

Okay. And then on to more exciting things, Tyvaso DPI, I know you're limited in what you can say given that you're a partner here, but just it seems like a crucial part of this exciting revenue story is both in the expansion of the indications in the April timeframe for Tyvaso and also user's ability to file the DPI formulation with both indications included PH and the PH ILD. Can you just remind us why users are so confident in the ability to immediately after the PDUFA include both indications in the DPI? Did you not need or did they not to study the DPI and the PH ILD population at all? Is it just a bioequivalent pathway or did they in fact included in the most patient in network and breathe or other places, thanks?

Michael Castagna

On that one there is two things I think, number one is we actually went through that meaning we also did and they went to the FDA and asked them the pre-NDA filing and we expect to get the ILD if it was approved for Tyvaso would be extrapolated to Tyvaso DPI and yet they came back in that respond and said yes. So that gives us the confidence of why. The second part is to your question is we did include ILD patients in our human factor studies, so that we know they can handle the device and inhale properly. So that was something that was proximately to make sure we were able to file that study back in Q3.

So there are two things we did to make sure and when you think about the products for their Tyvaso being equivalent for PH or ILD it's the same molecule that we delivered consistently and the dosing is roughly correlated and I think that you can expect with other indications we will continue and hopefully file those for the Tyvaso DPI formulation of the expectation. So yes and I've done this in another biologics in previous lives where we can extrapolate these situations or NDAs.

Oren Livnat

Okay. So the fact that there is an increased study based on higher dosing let's say higher micrograms per day in this population versus PH, that's fine because your product essentially -- the DPI is essentially bioequivalent. So if they dose higher in Tyvaso and they dose higher in years that's still apples-to-apples and all good from the dose proportionality of your products.

Michael Castagna

Correct and remember we proved that we could dose much higher in Tyvaso and nebulized up to 150 micrograms with no safety concerns. So I think we'll see even as patients dose higher, you're probably going to see better tolerability and we can see that already with UT [ph] and I think we'll publish that data -- present that extension phase how high did patients go and how probably it and it's really good to have that.

Now we have patients and how powerful was it? And it's really good to have that, now we have patients going on over a year in the extension phase. So we're excited, our team is very excited, they're a great partner, and we look forward to continue to work with them.

Oren Livnat

All right, and I won't hog any more time, I’ll jump back into queue. Thanks.

Michael Castagna

Thank you.

Operator

Next, we'll go to Thomas Smith with SVB Leerink.

Unidentified Analyst

Hi, good morning. This is John [indiscernible] being for Tom. Just couple of questions real quick, first on the United Therapeutics partnership, can you give us a little bit of a sense of the differences in tolerability profiles between Tyvaso and Tyvaso DPI and how much expense do you see based on patient's well being, being suitable for the DPI formulation? And then as a follow-up question on the pediatric study, can you give us an idea of how large of a study you're considering and whether what the titration plan is with patients, whether you're going to be incorporating from [indiscernible]?

Michael Castagna

The question there on?

Unidentified Analyst

On the pediatric study, how large are you anticipating this being and whether what the titration strategies for the program and whether you're incorporating the findings from doctor study that was presented at ADA couple of years ago?

Michael Castagna

Perfect. Okay, so on the tolerability, I would say you can see that, the majority of patients on switching from Tyvaso to Tyvaso DPI, I think it was 49 out of 51 we’re able to complete the three week switch. So that that shows you the majority of patients will tolerate dry powder, who already taken a nebulized formulation. So that's pretty well established at this point. And not only that, you can see the percent of people, you will see very shortly that the large majority of patients can tolerate the Tyvaso DPI or going on over a year.

So we don't expect the eligible patient population that cannot tolerate Tyvaso DPI, we think will be very low. And that is a separate question here that we don't have data on with UT, which is how does a naive patient who's titrating up feel in terms of tolerability versus Tyvaso nebulizer versus Tyvaso DPI and I think that'll be work that UT works on over the coming years. But in general, we haven't seen any signals or concerns between the two formulations, people get cough on nebulizers, they get cough on DPI, they get flushing and things like that, that can't happen.

So we do think the less variability is important. And we do believe hopefully, better lung activity will result in great outcomes. And I think that's what you saw in the early release of UT. So that is good lung penetration, we think will be great. And if we can have less systemic absorption, that's even better. So that that we think is really important. The next part of this is ped. And so on that one it's roughly 260 persons study, we expect about 20% dropout rate.

So that tell you, we got to get to about 210, 220 in the final numbers. We’re down to two finalist in terms of the CRO's, which will be selected very surely, we're waiting on FDA feedback to make sure, we didn't have any other major protocol changes, I can tell you the FDA has been very collaborative on this study and the titration protocol is probably the most important discussion we had with the FDA, as we basically reinforced that we don't want patients to under dose.

We've seen that consistently in some of the trials, we've run either historically as MannKind or even in the PK dosing, as well as the study we did on integrated within Informed Logarithms, the under dosing of Afrezza really does not cause a strong reduction in post-premium controls. So we really want to show that the first two hours post-inhalation get really strong post premium control, we think that first dose in the office is really critical.

And I believe we have a path forward with the FDA. We literally just got comments back there might have not gone through all of them. But the high level feedback from my team has been we got a great path forward. We have some work to do on the titration. But we believe we'll get to a good solution with FDA. And it's really starting out the trial, right. So as long as we can start off, right, we believe we'll have really fantastic results.

If we continue on their builds, we're not going to be as happy and we're not going to let that happen. So hopefully, that answers the question on Ped, but we're excited, we've done enough small pilot studies in the last three years to show what the dosing should be. And we've done a lot of retrospective analysis.

And we believe the study and really the first head to head, large trial type ones with new dosing will really show significant improvements in outcomes versus what we've seen historically.

Unidentified Analyst

Great, thank you very much.

Michael Castagna

And we’re aware of that, so we got to make sure we do great to kids for the future, the franchise that's where you're going to transform the standard of care over the next 10 to 20 years.

Operator

All right and next we’ll go to Steven Lichtman with Oppenheimer.

Steven Lichtman

Thank you. Hi, guys. Mike, you've been putting pieces in place around Afrezza with Afrezza to Blue Hill, wondering if you could just update on the commercial side. Any perspective on the changes or hundreds of making and impact you're seeing on the ground?

Michael Castagna

Yes, I think number one thing I'll address and bring it as a call them, you call them muscle reflex, really starting to get everyone into and across all territories, all geographies, all managers moving in the same direction to the same sheet of music, I think that's one of the big things that we were always consistent across the field that we really spent a lot of time on the New Year, we just had our sales meeting, which was like, a couple hours each week or many weeks. And so I think bringing that discipline and bringing the business acumen down to each manager and helping them understand this is our business to run has been a very nice shift that I've seen.

I think the second part of this is, having the ability to invest when we see opportunities, we now always had an opportunity back, it's always been a cost reduction mode, whether it was last year because the COVID or the year before because we didn't see DTC.

So I think right now, what we're telling the team is, hey, show us what's working, you have your budget, but we have capital to deploy, if we could start to see things work. And I think that's really what we’re trying to show is, hey, this works really good. For example, we got telemedicine, we launched, how do we show that that works. As that works, we can scale it up. But if it's not working, we're not going to continue to push money there. But we think these are good opportunities now.

For example, we just scaled up to more than half the country on a pretty large digital campaign, pilot in five states in Q4, it looks great and the team just scaled it up last week. So I think you'll see a lot more opportunities of what's working and what's not working, and how do we disproportion and invest there. So I think that's where you're going to run the business. I think the second part of this would be the overall reimbursement process. So having a smooth process, giving the insights out of the Afrezza’s program, and being able to share that back with payers, gentlemen who just joined us on the payer side, she is a great asset and a pretty great leader. And I think, just having somebody full-time dedicated to building those relationships with the payers, and taking all the data in place and showing them how their PAs aren't helping patient care.

And streamlining those will really go forward there. So I think you'll see quite a few not everything's going to happen in Q1. So we're not trying to over project, an immediate bump here. But I think what you're seeing is that transition from Alejandro in the second half of last year, getting his grounding to now start to implement its plans here in Q1 and we should see growth.

Number one thing we're all dealing with this COVID. And I think just seeing that our reps can get out there and make impact isn't wanting to leading on is, they're out there, but there's still restrictions across the country. So I think just as we get out there, and as we scale up, we have exponential growth opportunity expansions. And we’re looking at it.

Steven Lichtman

Got it. And then Mike, you mentioned ADA, I wasn’t sure you mentioned some of the areas of focus that we could see in terms of paper presentation. What should we be looking for generally?

Michael Castagna

Yes, I think the two things, it's interesting because one of the things we learned with our interaction with the program with FDA is they are not there on timing range. And using CGM to measure some of these, I'll call them new ways of looking at diabetes control, the FDA does not feel like these metrics have been validated. And therefore they're still at the traditional A1C reduction mindset, finger sticks for hyperglycemia. which is unfortunate because we designed the study to really show significant advantages with CGM.

But that is not what FDA is. So we're happy to revert back. We still think we're in a good spot. We will still have CGM data and they also agree that next two, three years is likely to shift their position to collect the data, we'll deal with what's the statistical plan is before submission.

But at this point, they're not correlating time and range to outcomes, or time less than 70, for example, and how we measure that. So that's a big surprise in terms of where they are but they'll catch up to the market. They just need to see more and more data surrogates to correlate it to. Well, I think what you'll start to see is we're headed this one, we started doing CGM studies with Afrezza over the last three years. We've had three studies presented and almost published now.

And I think you'll see here at ADA, one of the interesting insights we've added around nocturnal hypoglycemia, and we think that's going to be critical for children but we did see some opportunity there to improve reduce nocturnal hypoglycemia with Afrezza. And that's one of the data sets that we generate it as well as improvement in data, time and range. So those will be the two areas that you'll start to see the headlines here at conferences.

Steven Lichtman

Great. Thanks, Mike. And just lastly, Steve, of course, margin continues to push-up higher here obviously, could you share the runway here. Anything we should be thinking about in terms of, a step-up in cost of goods required over the next several quarters? Or should we continue to see a nice pay?

Steven Binder

From the Afrezza perspective, we expect cost of goods to remain within the same range, as we saw in 2020, we will be scaling-up manufacturing for Tyvaso DPI. So there will be some shifting of costs within the manufacturing operations. So I'll put that question out there, we haven't totally calculated what that will be. But it should be more absorption going to Tyvaso DPI. But we'll see that the year, so I would select 2021 to be year similar to 2020 for Afrezza.

Michael Castagna

And the way to think about that Steve is the majority of the first three quarters of the Afrezza sales in terms of production. And in Q4, we'll start ramping-up, so there won't be a significant shift from where we’re. But we're working on the commercial supply agreements up with UT and that will once we get all that finalized, that'll bring some clarity that we'll share with you. But no significant, you see a little bit year-over-year on the employee costs, but nothing after the scale-up of Salesforce last year. So you'll start to see that flow through this year, but nothing significant this year, we continue to look at managing the cost very prudently. So we’ll watch that closely.

Steven Lichtman

Got it. Thanks, guys.

Michael Castagna

Welcome.

Operator

Next, we'll go to Bert Hazlett with BTIG.

Robert Hazlett

Thanks, just couple of quick ones in terms of timing. If everything goes well, with regard to the sale leaseback, at what point do should we actually start modeling the impact of that? And then with regard to RLS, when should we get the data? Again, I was cut out. So apologies if you've addressed these already, and I have one or two more.

Michael Castagna

Okay. On the sale leaseback, pretty much everything is announced you could start amortizing the monthly payment pretty sure with our rates, once you do that finalized, then you can start and complete.

Robert Hazlett

That 2Q, any sense of the timing?

Michael Castagna

Yes, roughly Q2, mid-Q2 I say, early to mid-Q2.

Robert Hazlett

Then RLS?

Michael Castagna

On RLS, I don’t want to speak too much for them, because I know they’re going to have a lot to come out. But we'll be a partner here, we talked about what CMC could look like, what devices look like, and how's MannKind continue to play strong support role in them as they go forward? So I think you're just going to see a lot of renewed positive information coming out of them. And I think that'll be great. So not much to share at this point. But I think you'll see more from them.

Robert Hazlett

Okay, just one or two more in partnerships and liquidity, obviously a nice deal. Could you just discuss whether or not you have an appetite for more of that type of deal in the near-term and then with regard to UT? And there are other elements, discovery as well as research elements to that deal. Do you expect any visibility on either of those components in 2021?

Michael Castagna

On liquidity, I think this is our first time leveraging our infrastructure with the second product. There are other products I've looked at and companies that talked with that we could bring in another product, and maybe even hire more reps to get more coverage of Afrezza. I'd like to make sure we handle this one appropriately, we do a good job on launching and our team executes well, and that they can walk and chew gum by selling Afrezza as well as liquidity with two products.

So assuming we see some nice continued focus here in Q1 and Q2, yes, we'll have a bigger appetite to take on more and later this year, early next year. So that's something that we’ll continue to look for, having single product companies is very hard, as you know. And so we think diversifying our revenue base and bringing in more products and leveraging the infrastructure is a good thing. And I think we want to just show that, this opportunity we can take advantage of, I'm pretty happy. I mean, honestly, we went through this pretty quickly with the partner here, they know we have the infrastructure and expertise in this particular segment.

They're actually focused on just so primary care, they're going to have another Salesforce out there covering a larger audience than ours and as well as all the other not going to expect. So we're really just focused on endocrinology, as they're responsible for starting a lot of patients but they don't always maintain patients. And so that's exciting there and I just want to show that we can make impact in another product outside of part of a physician.

So that to me is critically important. On UT, I think the main thing there with our conversation with Martine and the company is, there is additional opportunity to work on. Her and I've talked about many ideas, as well as her team. So we feel like there are I think number one, two and three is we don't want to mess up on to possible. So nothing's more important than both sides of the equation here, making sure Tyvaso DPI is filed at early April, and that this is moving forward, that's critical to their future.

It's obviously a large impact to our future. And so once all that's off the ground, I think you'll start to see some opportunity to work with them on the research side that we've previously disclosed an agreement there. But we do have discussions and we expect that there'll be more partnership opportunities beyond just possible.

Robert Hazlett

Okay, thank you.

Operator

And that does conclude today's question-and-answer session. I'll now turn the call back over to Michael Castagna for any additional or closing remarks.

Michael Castagna

Thank you to all the analysts for your coverage, your comments and questions, I appreciate it. And the team here does appreciate your reports and the insights you provide, which kind of gives us the guidance that we're looking at and make sure we're all aligned in the right direction here. I want to say thank you to everybody, it's been a long journey to get to where we’re. We know we were always placed in the right decisions and the right bets.

And there's some twists and turns in that road over the last couple of years. But I think we can see the foundation we laid out, which is really commercial infrastructure and endocrinology and orphan lung focused pipeline, and leveraging Technosphere is going to provide multiple revenue streams for the company over the coming years. And now we have a capital to deploy to grow the company faster. And so that's really our focus is making sure we're prudent. We execute successfully. And we now take a measured approach on how we take the company from here to the next level. So thank you, everyone. Thank you to all our employees. I know 2020 was a tough year on everybody.

But we got through it, we came out with flying colors. And everyone here made huge sacrifices on behalf of shareholders. And I just want to say thank you to everybody that all worked. And we came out stronger as a company, and hopefully for society safe, things calm down and COVID gets behind us and we can march back to a normal world in the second half of 2021. As it goes faster, we'll be ready to go faster here in 2021. So thank you again and everyone have a great day.

Operator

And that does conclude today’s conference. We thank you for your participation. You may now disconnect.