Welcome to the MannKind Corporation Fourth Quarter and Year-end 2018 Earnings Call. As a reminder, this call is being recorded on February 26, 2019, and will be available for playback on the MannKind Corporation website shortly after the conclusion of this call, until March 12, 2019.

All participants will be in a listen-only mode for the duration of this conference. [Operator Instructions] Joining us today from MannKind are Chief Executive Officer, Michael Castagna; Chief Financial Officer, Steven Binder; and Rose Alinaya, Senior VP, Investor Relations. I would now like to turn the conference over to Rose Alinaya.

Please go ahead, ma'am..

Good morning and thank you for joining us on today's call. Please note that comments made during this call will include Forward-Looking Statements within the meaning of Federal Security Laws. It is possible that the actual results could differ from these stated expectations.

For factors which could cause actual results to differ from expectations, please refer to the reports filed by the Company with the Securities and Exchange Commission under the Securities and Exchange Act of 1934. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, February 26, 2019.

We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call. I will now turn the call over to our CEO, Michael Castagna. Mike..

Good morning everyone and thank you Rose. For those on East Coast, I appreciate - I will try to get this done before the earnings note Margret opens there. On the West Coast, we are still waiting for the sun to rise, but let’s go to the next slide. So let me talk about a quick overview for myself on some of the 2018 highlights.

We will then bridge over to Steve and then circle back with Medical Assembly new information coming as well as where we are heading for the rest of 2019. In Q3, we laid out four pillars on our earnings call that we believe will enhance shareholders value.

These pillars when combined will start to show you how our revenue compounds over the next few years, as Afrezza grows our Technosphere platform evolves and we don't have any more debt that we have to worry about - any major debt in the next two and half years.

We continue to solidify our institutional shareholders base and regain the confidence of Wall Street. As you now see, we have three analysts covering our Company. I will hit on many of these points under these four buckets throughout our presentation this morning.

Some of the Q4 highlights that are important, that you will start to see now in our press release as well as fee section. The Technosphere platform is now well underway with our UT collaboration and our research agreements.

These are related to [indiscernible] and in particular as well as our BluHale technology and other compound moving forward on the Technosphere platform. We also will be talking about this morning an update to our website with additional compounds on the Technosphere platform moving forward that are in MannKind's control.

On the revenue front, Q4 revenues were $16 million or 254% versus 2017. This is the first time you will see us recognize United Therapeutics revenue.

And as we go forward, this is something you can expect as part of the story of MannKind, not just for the milestones that we receive and the funds that we have been received, but also the other collaborations that we have that Steve will walk through. In addition at some point in the future that you will see royalties come out once TreT is approved.

In Q4, Afrezza net sales were $5.7 million or 28% GAAP and 86% non-GAAP versus 2017. The reasons we show the difference here is because we had a one-time catch up in 2017 in Q4 and we want to compare further underlying revenue in Q4 of 2017 to Q4 of 2018. Overall in 2018, our Afrezza net sales were $17.3 million or 88% versus 2017.

And I think you will start to see how the picture evolved over the last eight quarters in a few minutes. Our financial positions has significantly been enhanced through our receipt of $45 million with the UT collaboration agreement. Our $40 million public offering.

We also at news release this morning has amended our influence purchase commitment which reduced our 2018 and 2019 requirements by almost $11.5 million. And we ended 2018 with $72 million in cash.

While our sales in 2018 weren’t where we expected, we have made tremendous progress at advancing our Company forward with our Technosphere platform, debt reduction, COGS profitability for the first time, as well as our insulin purchase reductions. All of these now allow us to focused and invest our revenue, to grow our revenues in 2019.

We believe our capital allocation should get us to mid-2020 as previously communicated. So here is the new product pipeline slide, it should go up on our website at the front already. First, you see Afrezza in our Type I and Type II that we are already indicated for here in the U.S.

We are actively progressing pediatrics in the first part and we are almost halfway through that and we expect to then progress to Phase III hopefully by year-end. On the Treprostinil partnering with the United Therapeutics. We are moving full speed ahead with TreT, we expect and hopefully anticipate that entering patients earlier part of this year.

And there is another formulation work that we should have complete by midyear for another undisclosed compound. In addition there is two compounds related to Cannabidiol and Dronabnol partnering with Receptor Life Sciences as you will continue to hear more about that when year progresses.

And our five additional Technosphere platform products we are moving forward at MannKind in various degrees to me meetings with FDA, formulation work, as well as talk studies. So as you can see, we are progressing Technosphere rapidly.

Now that we know that the capability exists in the Company around replicating not only with the Afrezza, but also with Treprostinil with the fast going set IV like characteristics and now [indiscernible]. Now I want to bridge over to commercial.

So the Afrezza continue to grow over the past eight quarters, and when you look at our TRx growth accelerated as the year progressed in 2018. One of things that I wanted to show you was in January all the way through Q4 you could see our growth and I took how out programs we had called Vouchers.

And the reason we did those is because we ended the Voucher program in December 31st and then people like to try to compare scripts year-over-year. And that is difficult to do, because you don't know how many Voucher were in our base data. And additionally you don't get the prescriber data out there in the terminal that are available.

But we can show you here on the little box on the right, 2018 versus 2019, you could see Paid Claims, which is what we book revenue on and what we highlight in our quarterly earnings and our Voucher plus Bridge, which is our new program for 2019, you could see there are significantly reduced from 13% year-to-date to 6.2% year-to-date.

That is important as we continue to progress the year, we will continue to give you update on what percent of our prescription do we believe fall in this category. I will talk about the change and the types of programs later in the presentation.

But I just wanted to give you a perspective here of how the big underlying business looks, because sometimes Vouchers made it look like refills weren’t happening as much. And so we want to really show you that underlying business growth that we see when you take away this one month prescriptions.

Second part that we look at is how many unique prescribers do we have in the quarter and what is the depth of prescribing. This slides start to show you that we had over 700 unique writers in Q4, that continues to increase and really as we look forward, we are now focused on 10,000 prescribers roughly and off those we have 1700 writing.

So it's really important as we go forward to get not only this new prescribers getting used to Afrezza, but also getting them to right more Afrezza. So if you look on any given month, we have about 1100, 1200 prescribers and in a quarter we have about 1700 unique ones.

And this is as we look out, this is really the magic and what we are doing this year is narrowing our focus and really get depth of prescribing. And we have been in that curve from five to seven or eight and continue to grow the number of prescribers in a consistent way each and every month.

And the last part I will talk about before turning over to Steve is really Cartridges. This is something that our shareholders see and that we thought it’s important to get clarity to. Our total Cartridge growth year-over-year was 57% and our 12 unit growth was up 174% year-over-year.

The reason this is important as we have reminded you in the past, where we have a lot of new people on the phone today is our eight and 12 unit Cartridges are now linear priced to the four unit.

And as you can see from Q1, 2017 all the way to Q4, 2018, this is also a representation of our commercial efforts working and as you see 12 units grow in anticipation of the Type II strategy of getting the fixed titration scheduled working, but also getting appropriate dosing.

We know one of the fundamental challenges Afrezza had in the original launch was around 100 dosing and people saying that product is not working.

And that now we are really happy to see that the growth in eight and 12s continue to be strong and consistent as that is the good important signal of patient retention and efficacy results that we continue to see. Now, I will turn it over to Steve..

Thanks Mike and good morning.

It’s my pleasure to discuss our fourth quarter and full-year 2018 results, which showed double-digit year-over-year fourth quarter and full-year growth in Afrezza net revenue, the recognition for the first time of revenue from our United Therapeutics agreements, the achievement of our first quarterly Afrezza gross profit and we ended the year with 36% less debt and 50% more cash than when we begin the year.

I will be discussing select financial highlights and urge you to read the consolidated financial statements and MD&A contained in our 10-K, which was filed with the SEC this morning. Let's first review our sources of revenue for the fourth quarter and full-year 2018. The top half of the slide shows the components of our total net revenues.

Net revenue from Afrezza, revenue from collaboration and services and revenue other. Total net revenues for the fourth quarter of 2018 totaled $16 million versus $4.5 million for the corresponding fourth quarter of 2017.

The 254% increase comes from both the first time recognition of revenue related to the United Therapeutics license and research agreements of $10.3 million as well as growth of 28% in Afrezza net revenue to $5.7 million for the fourth quarter of 2018.

You may recall that in the fourth quarter of 2017, we recognized a change in estimate for Afrezza net revenue, which related to prior periods resulting in an increase in the fourth quarter of 2017 Afrezza net revenue by $1.4 million.

If you exclude the adjustment on a non-GAAP basis, the comparable quarterly results show an increase of 86% for Afrezza net revenue and an increase of 408% for total net revenues.

Let's keep with the fourth quarter results and move to the bottom table on the slide, which details the total value of each collaboration and services agreement as well as a revenues by partner recognized for both 2018 and 2017. The recognition of fourth quarter 2018 collaboration and services revenue is broken down as follows.

The United Therapeutics license agreement of $6.4 million, the United Therapeutics Research agreement of $3.8 million and RLS of $0.1 million. We expect to recognize revenue from the United Therapeutics license agreement through the estimated date of when our performance obligations will be substantially completed, which is December 31, 2021.

For the United Therapeutics research agreement, we expect to recognize revenue based on our performance obligations, which will be substantially complete in 2019.

Our full-year 2018 collaboration and services revenue numbers are similar to the fourth quarter due to the significant impact of the United Therapeutics revenue beginning in the fourth quarter of 2018. I'm now moving back to top table to review our full-year 2018 revenues.

We recognized $27.9 million of total net revenues for the full-year 2018, a 137% increase over 2017. Breaking down the components, we recognized $10.6 million of net collaboration and services revenue with the vast majority is coming from the United Therapeutics agreements and $17.3 million from Afrezza net revenue and 88% increase over 2017.

The next slide shows the quarterly Afrezza gross and net revenues. Looking at the gross revenues in the top graph, we increased quarterly gross revenues over six fold between the first quarter of 2017 when we launched our internal salesforce and the fourth quarter of 2018.

We adjusted the fourth quarter of 2017 of both the gross and net revenue graph for the change in estimate recorded in the fourth quarter of 2017 as is better depicts our base business. The bottom graph shows our net revenue quarterly increases finishing with $5.7 million of net Afrezza revenue in the fourth quarter of 2018.

Our 2018 growth came from expanded usage of Afrezza or increased volume and favorable cartridge mix favoring faster growth of our higher price 12 unit Cartridge as discussed earlier by Mike. At the bottom of the net sales graph, you will see our quarterly gross-to-net adjustment percentages.

Our gross and adjustments for the fourth quarter 2018 came in at 43% which also ended up being our overall 2018 gross to net deduction percentage.

The increase gross to net we saw during 2018 versus 2017 were attributable primarily to the increased commercial and government rebates rising from prior year price increases and product returns primarily associated with the discontinuance of two SKUs in the second quarter of 2018.

In December 2018, we amended our insulin purchase agreement with Amphastar, 2018 and 2019 purchase requirement was lowered by approximately $11.5 million and while the total purchase commitment did not change the contract was extended one year to 2024.

In exchange, we paid Amphastar a one-time $2 million fee in December, which is recorded in the fourth quarter cost of goods sold. In the third quarter earnings call, we stated that we expected to turn a gross profit from Afrezza net revenue for the first time in the fourth quarter.

And we did, Afrezza net revenue was $5.7 million in the fourth quarter while Afrezza cost of goods sold was $5 million, yielding a gross profit of $0.7 million. If you exclude the one-time payment of $2 million to Amphastar the non-GAAP Afrezza gross profit for the fourth quarter was $2.7 million.

As long as we continue to grow our Afrezza net sales and have a low volume of inventory write offs in 2019, I would expect to report a gross profit from Afrezza in all four quarters of 2019. Some final comments.

We are transitioning our Company from one that was dependent on Sanofi, to one that now has multiple streams of revenue as shown in the upper left hand graph. A decreasing debt load and related interest expense is shown in the two graphs on the right side of the slide and an improving loss per share, as shown in the lower left graph.

We ended 2018 with the lowest amount of debt in 12 years and with $71.7 million in cash, cash equivalents and restricted cash, the highest year-end amount since 2014, which sets us up nicely to execute our 2019 plan. Now, I will turn it back over to Mike, for medical update, and concluding comments..

Thank you, Steve. We are very excited to close out the year in December and receive an update from the ADA guidelines and Standards of Care.

These are published in January and when you look in there and you type in inhaled, there are two areas in particular that were highlighted for Afrezza based on our pilot study that we did with that STAT trial showing you that there is evidence that compared with an injectable rapid acting insulin supplemental doses of Afrezza when taken could give you improved glucose management without additional Hypoglycemia waking.

The significance of this trial is people know Afrezza works, we went head-to-head in multiple trials, but what is important is the first time you can show that you are not stacking your insulin and inducing more Hypoglycemia and we were very happy that despite the small study that ADA found this important enough to highlight in the Standards of Care as we go into 2019.

Anticipate additional meetings with other key stakeholders in the medical community and continue to share and publish our data in 2019. This will continue to refine the Standards of Care as we go forward. Additionally with three data sets published and presented or actually presented that will be published last week in Berlin, Germany.

The first three data sets as you have heard David Kendall previously speak, he is working on a gold mine here is a data set that was sitting for 10 years that was completed back in 2007 and 2008. And that is the Ultra-Rapid profile human insulin mimics the natural time-action profile of physiological absorption of glucose.

The reason this study is important is it was something we have that really articulate scientifically why Afrezza is different, and this is accepted as an oral presentation and you can read the key data here in the box in the right as well our press release.

There were two other trial that were presented, one is looking at longer term duration of effect on the lungs as people always want to know what happens if you continue to go on and this shows you to your analysis. And this is accepted as an ePoster and showing you no clinical significant effects of Afrezza.

And I can tell you in my various meetings with thought leaders around the country, now that we have been on the market, the comfort of the safety profile of Afrezza continues to improve and that overhang the history of an [indiscernible] starts to diminish.

And then there was a third trial that was sponsored to investigator-initiated trial called OneDrop. And that was an absolute improvement in A1C, when compared to injectable RAAs. I will go through each of these in quick detail here. So the first one is the first one I mentioned around postprandial excursions.

And what you see here is the two purple lines are Afrezza, and various versus doses versus Lispro. And you can see in that box the first [TR] (Ph) is just as we have demonstrated in our STAT trial, you see a significant difference in postprandial excursions.

Frankly living with diabetes, this is the first thing they notice when they inject their insulin, they are waiting to see their sugars go down. And this shows you Afrezza consistently starts to react very quickly in the first few minutes and carries on for the first two hours.

This is really important as we think about what this could mean in terms of A1C reduction just by switching your insulin and not getting additional Hypoglycemia. This particular study was in Type II. The next slide showing you the other data set we presented this year. Again, in the first two hours, you see a significant drop in postprandial.

Glucose excursions, as well as the glucose itself over the four hour time period. And again, this is 28 days of data going on every day, every meal, you see this consistent curve. And the reason this is important as you start to see the clinical effects and a real world trial.

And the next slide here with OneDrop, where people came in, if you saw in the left side, and the average baseline A1C is seven. And you can see they dropped to 6.6 on Afrezza and slightly do worse on the Standard of Care they were on.

And as you look all the way through baseline A1C is 10.5, we continue to see improvements in their A1C just by switching your insulin. And this is just the reinforcement of the two data sets I just showed you that just by switching your insulin, you probably will experience less Hypoglycemia and potentially better A1C reduction.

So we are very excited that the data sets that we set out 12 to 18 months ago started to read out in 2018 and now will start to be presented and published in 2019 in various formats. So the scientific story continues to build and it's just getting started. Now, I wanted to bridge over the potential milestones as you think about the first half of 2019.

Some of the first ones to expect will be the achievement of our first milestone United Therapeutics. We anticipate this being completed, hopefully by the end of Q1. We have multiple data publications coming out around Hypoglycemia safety and efficacy. We expect to complete pediatric cohort 2 and progress cohort 3.

We expect Brazil approval sometime during late Q1 or Q2. We had received our GMP certificate which is one of the things we were waiting on in order to receive approval and that came through in January. We have interim results of our Phil Levin study. This was a Type II trial looking at [indiscernible] with a fixed dose titration.

We are excited to present those results at upcoming conference this year. We also are getting a regulatory pathway clarity for India, for those of you who may not follow the Company closely, we have one and two ways that this can go through. One is a potential approval based on our current data.

And then potential [indiscernible] on a post marketing study with Cipla, or they would want us to do a post marketing study, and then file for approval after that. We have a meeting with the authorities there and expect to get clarity on that very shortly.

We continue to pursue additional international agreements around the country and around the world. And we are completing the formulation work for the unmade compound for United Therapeutics, in the first half. As you see now that the work we have been doing in the footprint [indiscernible] out across the U.S.

from between the R&D side of the organization, and the further side and international expansion is starting to pay off, as we continue to progress the Company, and the Technosphere platform as the base of the business continues to grow, not just in pipeline, but hopefully [be the] (Ph) opportunities as well as milestones and royalties in the future.

The second part of Afrezza, we see nothing stopping us from growing as we look out over the next five to seven years.

So you can see, as Steve showed you all the way from Q1 of 2017, to Q4 of last year, a six fold increase and people say, when you get to breakeven, or when you are going to reduce your cash burn, you could see quarter-over-quarter that has continued to grow and I do expect that as we go out.

And [indiscernible] starts to become an evolve as part of the story over this year and next year and beyond. Our pipeline and in-licensing opportunities as we look for things to bring into the Company to complement our existing sales force infrastructure important and we have seen hired a head of business development to lead our efforts in that area.

And then finally, Afrezza Pediatrics we believe will help establish Afrezza the Standard of Care as we get into the children and show people that you can have a lifetime just attached to pumps, but you can have a life free of any attachments than really just enjoy hopefully taking your insulin and controlling your sugars post meal.

This is really, really important as what we see continue to evolve every day when we look at the positive patient feedback we see on various chat rooms and forums and e-mails and complex that we get.

I want to thank everybody for what really came out to be a transformative year for the Company and we look forward to seeing you guys at our annual shareholder meeting where its tentatively scheduled to take place in New York City on May 14, 2019. That is subject to change, but this is our latest dates that we had but we expect to be proxy very soon.

So with that said, I will stop there and we will take any questions..

Thank you. [Operator instructions] We will take our first question from Brooks O’Neil from Lake Street Capital Markets. Please go ahead..

Congratulations on all the progress. I have a couple questions. I was hoping you know recognizing that you embarked on a relatively ambitious marketing program that was based on some prior testing.

Could you just comment on what you are seeing in the marketplace as it relates to what you saw in the test and how you think that might evolve as we move forward. Thanks a lot..

Thanks, Brooks. It's important topic and because this is a Q4 2018 we didn't spoke as much on Q1, but I think it's important conversation. The efforts we kicked off about four or five weeks ago with the consumer campaign as well as an entire new marketing campaign retraining our sales force in early January, hit the ground running.

And one of the delays you see in the beginning of the year was really the lack of a share of voice for about three weeks between a Christmas time period and when people came back into training at our new launch meeting that we had in January. So about three week gap and then our reps got new materials a few weeks after that.

So that promotional effort started in mid to late January, our TV campaign kicked in, and a lot of our new market initiatives filled out in February. So you will start to see the results of that probably as early this Friday.

The DTC just to give you some perspective, we are able to turn it on and off for a week just to see nationally what would happen, we still had some regional TV going on. So we can measure what happens with consist TV overtime. But the end result so far that we see significant increase in Copay Card downloads.

That is probably the earliest indicator we would look at, because patients typically see the able to download something and then look after doctor. And the problem with TV is you have to just wait until they see the doctor, they don't always run in right away. And so you got to keep TV on throughout that time period.

So we see every week or Copay Card downloads are up, what we saw in an entire year we probably had download in the first quarter so far. So that is exciting. The other part we looked at his website traffic, so hits to our website at Afrezza.com are a five-fold. And we turn TV off for the one week they dropped 50%.

So that should gives you some indication of the impact on TV and what it has. So I can tell you the feedback from our salesforce, the doctors and some of the early indicators are positive.

I don't think we have seen that shock in the scripts yet .But what I have expected during the first three to four weeks, I think this Friday scripts, hopefully we will see a little bit of a bump, but it should hopefully starts to play out as we go forward from here now..

That is great. And then just a second question I have is obviously at least in my opinion, there has been a scene change in the attitude of the FDA as it relates to trying to be open to innovation in diabetes products and management. I'm curious what you feel you are seeing from the prescribing doctors.

Is there a commensurate openness to innovation among the doctor community or are you still seeing relatively let's call it a moving attitude from doctors?.

Yes and no. So I think the challenge we see with diabetes and I have been in many different disease states, and I would say rheumatologist and endocrinologist, the two of the most conservative groups of doctors, for good reasons in to twofold. One, they have been around a long time and their diseases progress over decades, not months and years.

I worked on HIV and hepatitis, again, hepatitis goes over years, but you can finally cure it. HIV, people were dying in six and 12 months and we have transformed those diseases. In diabetes, there is just this lag effect of just, come back in the quarter I will speak in here. I have not seen that change dramatically.

We have seen some doctors pick up CGM and pumps and some of the [indiscernible] but again, it takes it takes a long time to move that inertia. That is probably our biggest factor when it comes to a Afrezza. It's not that, we are not trying really hard every single day.

It's these doctors take a little bit longer to change than we would like, but once they change they pretty stick to what they are doing and that is a good news as we have a lots of patent life left. And you have seen our prescribers grow, our prescription to grow.

We expect that trend to continue, in the long run of the market I think there will be [indiscernible] off at some point. On the flip side, I can tell you there is a lot of absent and lot of noise around technology, and for the average practitioner I would - I think it's a lot more noise than reality. I have been in some [indiscernible] CGM.

I have been in other office where they don't treat a patient with Lispro on a pump or CGM very upfront. So really varies around the country and the type of practice you are in. I think the FDA is very progressive right now around this area and we are very excited as we look integrating Bluetooth technology in our platform.

We remain excited that I think technology combined with the new tools we have today with the Afrezza and [indiscernible] and Dexcom. You will start to see a transformative approach with how you can manage your care in diabetes.

I believe your iPhone and your Android will be to the most significant medical innovations over the next decade that we couldn’t even foresee five and 10 years ago. So I'm excited about the future and it's our job to help create and lay that out with where we think it’s going and FDA I think is ahead of the curve..

Absolutely, thanks for all that. Just one last one, you mentioned David Kendall and the impact he is having in the studies bringing the light, is he having the kind of impact you hoped he would have, and do you think that will continue going forward. And thanks for taking my questions..

Thank you, Brooks, I appreciate all those good questions. David Kendall has been incredible, as I have traveled the country, as I’m meeting with [indiscernible] or ADA or probably there is Kendell continue to be invited and well respected out there in the community.

We haven’t heard much from this year, because he has been giving grand rounds in at least four different cities in last two weeks meeting with big diabetes centers and educating them on the history of insulin as well as our product profiles, some of the new data we have coming out.

So he has been incredible when you look at some of the authors on our new publications and the studies just saw, we have got some great thought leader support across these studies and all these are really with Kendall at the home driving the publications for long as a TVs go around him.

So he has been a great addition and we are thankful that he is here..

Great. Thank you very much..

Thank you..

And we will take our next question from Pasha Sarraf from SVB Leerink. Please go ahead..

Hi. Thank you. This is [indiscernible] for Pasha. Just couple of questions for you guys. First one on bookkeeping.

How much more inventory, do you think you are going have to write off from these discontinued SKUs and then I was hoping if you guys could provide a little bit more color on the actual terms of the agreements that you had with Cipla and with Biomm?.

[indiscernible] its Steve, I will take the first one, which is we don't expect there to be any more material write-offs from the SKUs that were discontinued back in April of 2018..

And then yes, so some clarity on Cipla and Biomm. So on the Cipla agreement, there is a opportunity that if we were to get accelerated review that will result in another upfront payment, as well as additional royalties, you could say, or milestones because we will make a transfer price off of that one.

So we are excited, hopefully to see if we can compare that, we think it's a long shot, given the pathway, but we think it's doable and achievable. So we are trying to get that accelerated approval, we took that risk together with them. On the Biomm agreement, you may or may not recall and not be aware of.

Because there were no financial terms relief on that one, because we wanted to make sure we understood at that how we signed this agreement the company wasn't in great shape. And so we weren't sure about the pricing environment that was going on in Brazil.

Now as we continue to get clarity and get the product profile approved and whether that is from government pricing or private sector that will start to drive some, Biomm and we are into active discussions on what that could look like in terms of lot of - our agreement brings in general revolve around who's packaging and are we shipping final goods or are we shipping over [indiscernible] packaging in local market.

So that drives some of the royalty transfer plus pricing that you will start to see come out. So hopefully as you go forward this year, so you will just hear more about Biomm and how we expect those to translate into actual revenue..

Great, thank you and then one last question just about your pipeline.

Can you give us a better understanding of how you go about choosing the molecules that you did and then what is the developmental path look like for these molecules moving beyond 2019 and early 2020?.

So, these are all subject to changes, as you know, some of them we picked because we felt they were good market opportunities based on feedback we received over last 12 to 18 months as well as assessments we had done two, three years ago, when we first got the product back from - back from MannKind we did a strategic assessment on the Company.

If you look at a couple of [triptan] (Ph) category, there has been a couple of new approval there in the nasal environment that made us look at this again, we continue to evaluate that one a little bit harder.

But we do believe with all the chronic migraine prevention and the re-focus in that market that there is an opportunity for better acute treatment and we believe we have one of the best platforms to deliver that results. And we think that there will be partners available for the triptan category. So that is kind of a little bit background on that one.

When we look at Tobramycin and DNA. Those are two of the cystic fibrosis space we think given the technology platform that we saw with Treprostinil getting lungs drugs delivered to the long in these types of conditions. Could have a nice upside in terms of efficacy and tolerability.

And we feel like those are two opportunities in the cystic fibrosis space that that market is growing, thankfully to the new treatments there. These patients are living longer and hopefully healthier lives that they still unfortunate get sick and still need help and we think we have a technology platform that can help them in a dramatic way.

That is what you see on this to Tobramycin and DNA. And then you get into the chemotherapy [indiscernible] and this one. We have been kind of moving along trying to pick which one we are going to go with.

We landed on [indiscernible] and this was one where if anyone has a primary breast cancer, you see just the chemo, you feel so sick and you don't feel like eating and hopefully we believe we can bring better symptomatic relief quickly in that area.

And the reason we bought that for is there is so much innovation happening oncology and there is so many companies that are going to have niche area products that having a second product in the bag we believe will be an opportunistic opportunity as go forward so we are taking that bet. And then epinephrine is when we had a lot of questions on.

And we decided to come out and go back to the FDA try to change the dialogue we had two years ago and see if there is a way to get that in a larger treatment paradigm shifts as an adjunct treatments in epinephrine as opposed to replacement.

And hopefully that the FDA from what I understand has changed their tune a little bit, and so we are excited to go back and have our discussion continue to provide updates. So kind of the next steps for many of these are continuing to fine tune the powders to make sure they are ready for clinical talk studies.

And some of these are getting clarity around the FDA filing pathway in the case of epinephrine, and some of the CF products. But we believe for example, the pulmozyme drug, that is a very similar pathway to Treprostinil, which would be, get the talk studies done that is already in hell. So that is pretty easy.

It's really driving a small switch study along with confirmatory bioequivalence study. So as you look out in all of these, we think we can fund them into the development phase and we have given the Phase I and then look for partners there and if we find a partner ahead of time, we will be looking for those and that is also equally important..

Great. Thank you very much..

Okay..

We will take our next question from Oren Livnat from HC Wainwright. Please go ahead..

Hey guys, congrats on crossing that magical gross margin threshold, which I guess leads me to look at the next hurdle, which is I guess overall breakeven, while obviously that is a ways off.

I wonder if you could just talk about I guess where the COGS structure is today, both with regards to the fixed and variable COGS, including that overhead and where that can look like in the quarters going forward. And I guess OpEx, which we call a nice disciplined approximately $20 million this quarter in total.

I'm just wondering with - taken in Q1, how much higher do you think that goes to maintain your ongoing ramp or should we think of breakeven clearing this current cost level?.

Hey Oren, it's Steve, I will take the first part which is on the cost of goods sold, so we have both an underutilized plant and we have under absorbed production costs which we don't run our production lines at full shift capacity at this point in time.

So as those COGS get absorbed into inventory, as we increase our production volumes, I don't anticipate a significant increase in the cost of goods sold until we have to actually add more capacity in the manufacturing plant. In addition, as we add manufacturing capacity, for Technosphere that will also absorb some of the COGS in the factory.

So we won't give any forward looking gross margin predictions, but I think that gives you a picture of where we think it's going to go in 2019..

Thanks Oren, I think as you sees from the Company, we are very cautious of the cash burn in the Company and how much how much it takes to raise that money.

And so we are really disciplined at managing that OpEx and that is why making tough choices at the end of the year to narrow our focus at our salesforce and kind of self fund some of the DTC initiative we wanted to do as well as the other programs and take a little bit more risk on our promotional efforts in terms of costs and the types of programs we are launching.

For example, switching out our Copay program and getting rid of the Vouchers will have a short term impact on scripts as you make that transition and pivot that requires your reps to be retrained, it requires a new learning from the doctors after two years of doing something and all those things just take pivot, right.

So we have been very conscious of our cash burn and how we manage that OpEx and so we don't - it's in our control to fund that growth, meaning do we choose to burn more cash to grow faster, or do we hold that cash forward and to get to a breakeven.

I think what you see us right now is running a disciplined approach to show that we continue to accelerate sales and will continue to make efforts that are in the best interest to shareholders if we think we can grow faster than will make those trade-offs.

But at this point in the first half, we are looking at just execution, execution, execution on everything that we are doing across the Company. And that is our main focus is being tight on expenses.

And Steve and I, really manage the budget very tightly, as our employees will tell you and I think that is important as we go forward we making every dollar counts in the best way we can to make an impact..

Okay, thanks. I know a lot of personal adjusting to this IQVIA methodology shift, which has been reduced scripts for everybody across the board. And so we might need a little more help from you guys with regards to I guess, indicators of actual demand, especially you have launched this new Copay programs.

And I guess this direct purchase program which you can offer, maybe help us understand a little better.

So do you have any other data that you have internally that you can show us or describe to us qualitatively that gives you an indicator of the leading demand trend?.

Yes.

No Oren, when we use symphonies, so all the data you see were not impacted by what we do with the IQVIA switch, I think we should go back and compare you know what we see in IMS trends historically, because they were always have a 5% to 8% higher on a weekly basis, but our SYMPHONY data is what we look at and I can tell you that is pretty consistent with our factory data.

We look at two things, we look at shipments from the wholesalers to the pharmacies every week and we look at shipments from our factory into the wholesalers and that SYMPHONY. And so all three of those are pretty correlated pretty tightly. They may be off by one or two weeks in one direction or another.

But in general, when we look at the trends for example, we saw a reduction in overall wholesaler inventory this year but our demand stay strong, and the reason we told us, because we reduced the number of SKUs we were shipping and that inventory had to burn off and then ultimately some of those returns.

So we continue to manage that tightly and knowing some of the things there we will try to be as transparent as we can on some of the early indicators. And I can think about if we could share maybe [indiscernible] sales in the future, given some of those market dynamics.

But today, I can tell you our SYMPHONY sales and what we showed you and what you have seen, weekly in SYMPHONY is directionally correlated with what we see in our shipments to pharmacies. They are off high a little bit, but I will call it within a 5% variance.

So nothing major, and it may vary by one or two weeks, one way or another, but in general, there are in sync. The other two things I think you mentioned, which are important is the direct purchase program that cash program we launched back in January.

I didn't talk about that, mainly because it's not a high margin program, it's really meant to see, could we help those 65,000 patients paying cash for their injectable insulin. Unfortunately it took a little bit longer to get that up on the ADA and [indiscernible] websites and get that notification out.

It probably just happened in the last week, and so that is why we had extended the program. We are still marketing that to some of the news media and expect to see continued progress on that. It will evolve probably next week into a more sustainable program. That is not introduction anymore.

But we expect that all - basically it can move through three month, it will still be a very low cash program for the rest of this year. Our goal is to get about 1000 consumers a sign up, because of the fixed costs of running the program. And if we are going to maintain that type of program, we don't want to lose money.

So we need to get a certain number of people signed up. So it's on track, but those scripts do not show up on the weekly data and so when we look at numbers that is not there. We also have a drug program through a reimbursement hub to help some patients may be stuck in the reimbursement.

Those scripts do not show up in the reimbursement landscape either. So what you see is as technically as close you are going to get to our demand. And like I said, this year with our Voucher program going away.

We have something called a Bridge program and we won't count that as revenue either, but we will try to bring clarity each quarter and so you can start to adjust your models..

Okay. And lastly, if I may. Just big picture, we have all seen that insulin makers are being dragged in front of Congress to explain themselves and their historical pricing practices.

And I think I'm less concerned about sticker prices and maybe more about middleman and your ability to sort of penetrate the market given your blood or competitors have you know 75% rebates in some cases.

And I'm wondering if your consultants are indicating to you that anything is going to change with regards to the overall dynamics of insulin formulary access and market access such that in your planning horizon, you think you are going have a thorough shock at access to patients?.

Yes. I mean the good news is, I think three, four years ago, the payers and the competition were unfortunately very negative that impacting Afrezza's initial launch. There were very restrictive covenants, there was most rebate agreements that really damaged patient's ability to get access to the drug or doctors ability to prescribe it.

So, I guess hats off to them, they were successful in protecting the monopoly, which is why you are seeing them ultimately get called into Congress.

But as we look forward to today, we know that some of the noise has actually resulted in those unfavorable terms getting removed from those contracts, because all that stuff will be [indiscernible] and discoverable, and people will start to be able to see the true activity of PBM in the competition on protecting some of those market shares.

Remember to players makeup 95% of the market and two BBMs make up 70% of the market, so very high concentration and you seem like state of Minnesota sue the companies for protecting that and trying to get some more discovery and I think the judges and letting that discovery continue.

So we see it as opportunity, I can tell you one or two payer cases where they basically said, you know your competition is no longer restricting you then it's really about our net cost and then and I think you can see we are able to secure a position within Kaiser and it’s just evidence where there aren't those types of incentives we are able to gain formulary access and be very disciplined about our contracting strategy.

We are not trying to be the lowest net cost provider like injectable insulin, we are really focused on outcomes and places like Kaiser and health systems that care about outcomes which 80% of the majority of the systems are volume based and not outcomes based and we think that evolves.

So when you ask me what is going to change, nothing is going to change dramatically this year, you might see if you will make one or two moves that like Amgen did with lowering a skew on our path.

I think you will continue to see certain moves of net cost focus, but you are also seeing the transparency come out that PBM need rebates, where United Healthcare recently said just because you lower your whack it doesn't mean you can't - we still maybe get rebates for seven quarters.

I mean these types of activities are showing you it's not just rebates are being passed through their business models depend on them and so we ripped out I think I saw Sanofi gave $12 billion in rebates last year.

When you pull that much money out of the health care system someone has got to pay for it one way or another and I think that system cannot be fixed overnight.

But we continue to see opportunities of growth where I can tell you we are growing faster in some of the contracted - I'm sorry the non-contracted business where we are restricted versus the open access business. So the PBMs don't seem to be impacting growth of Afrezza dramatically, it's really changing doctors behavior and habits more than anything.

So we continues to see much positive environment in the near-term around this stuff..

Okay. Thanks for the clarity..

Thank you..

Our next question comes from Brian Mark, from Zack Investment Research..

Good morning, guys and congrats on the quarter. Mike regarding the updated ADA guidelines.

How influential, do you think that that may be in terms of prescribers decision making, in terms of prescribing?.

Yes, I think that by itself is not much, because the doctors probably reading this, but where it does help us, I think back when I did my doctorate degree in pharmacy, they trained us on the guidelines, right.

And so starting to continue to guidelines evolve to train future doctors and highlight inhaled insulin in general as well as hopefully, as we continue to evolve the data set is even more differentiation within the guidelines around the inhaled versus injective.

But in near-term I don’t expect much, but I think when you take the ADA Standards of Care updates plus our recent publications, plus other things happening throughout this year, I think the time that drug is on the market, along with the long-term safety, along with the new data starts to give doctors a lot more confidence.

If I had to explain or articulate one feedback I'm getting from doctors is confidence, meaning you know when I asked them what evidence based medicine made them adopt CGM, they all said the same thing. It's my experience and I go, that is exactly the point, you have to get your experience with Afrezza.

And once they get that experience, they are very happy with it.

But they are still apprehensive to change what they have been doing for 97 years that is our main focus here is how do we get them to change and get that clinical experience because they are naive and they say things like, oh, its fixed dosing, it's not precise enough, but because they just don't understand the drug.

And so whenever we hear those comments, we maybe get out there and take care of that, but as doctors get that experience as they see their patient success, the rest is history.

And so I think it's not just ADA by itself, but it's a combination of all the stuff that our medical team is doing that starts to bring that confidence in the doctors and that is a big shift from where I was three years ago people said no need for inhales, no need [indiscernible].

When I go out to speak now, a lot of people sit for four hours over dinner and have an intimate discussion around how I now learn how to prescribe that is a very big difference for two years ago when people would barely show up to dinner, now they actually - they want to learn and so we are excited about where that is in scientific data around it..

In terms of seasonality.

Is there much seasonality in Afrezza demand, particularly from Q4 to Q1?.

Yes. We have seen three years in a row now that January's kind of takes a dip and then February picks back up and then March is hit or miss in terms of growth versus flatness. But, this year we saw a little bit more of dip because of the Voucher removal, that is why I try to bring some clarity to what people are seeing.

Because the only book revenue on paid script so the Vouchers don't make any difference to the Company. But the Q1 generally is flat to slightly up or slightly down and really it varies on whether you are looking at scripts or revenue, but well roughly flat is a good way to think about Q1 and then Q2 through the end of the year continue to grow.

And that is kind of what you see now we look over eight quarters and if you go back to you know 2014 and 2016 when Sanofi ended up back, you saw two quarter decline, and we have been building backup since we got it back in July 2016.

We expect Q1 to be flat or slightly down, but it really depends the next four or five weeks and how that DTC and some of the other salesforce efforts kicks in. So we will continue to watch, right now we are optimistic of what we are seeing, but we still need to press the quarter to finish up..

Okay. Thank you..

One final question from Bert Hazlett from BTIG. Please go ahead..

Thanks. Congrats on the progress in 2018. It was meaningful, as you said, and I appreciate some of the comments on the TV campaign, with the thoughts on increased traffic and the lowering by 50%. Do you have a sense - and you said it's early days Mike.

But do you have a sense of how that is influencing scripts? Is it influencing scripts just any kind of anecdotal evidence would be helpful..

And I can tell you because the way TV is running is it’s a national campaign along with a sub-regional campaign, meaning there is about 10 markets where we are adding a little bit more value to kind of measure. If you do TV nationally, does that impact in the white space because remember, we pulled out of 14 states this year.

So we can see what is happening in states where we don't have salesforce versus where we do have salesforce, and then we can also look at it where we have a little bit more TV in certain markets and look at prescribers. So we will have a good analysis when we wrap up in Q1 for where to continue to focus that effort.

I can tell you anecdotally, it's really opened up a couple doors in certain markets, where reps couldn't get in and all of a sudden, people are asking for the drug and the reps want to come in or be invited to come in. So that is part of why you do TV and I think that is important. I think also remember our customers are consumers of TV.

So it also reinforces their confidence when they see it on TV for whatever reason that gives them confidence to prescribe and continue to prescribe. So I think all of those anecdotal things we have heard, whether it's from our salesforce, it's the patient, you just click on that the Facebook chat room.

I get notified whenever I see interesting posts of some of our patients - to copy me. But that traffic is up significantly and you can see all the chatter.

And it's great to see a self-help community when patients are learning from each other they post a comment, within 10 minutes, they got 20 comments back and that continued community and self-help is amazing. And as it grows, we just expect to continue to see that kind of helping the noise spread. So I think it's all starting to work.

We are just early days and I think the next five, six weeks will be important when we look at TV..

Great. You made some comments on cost of goods earlier. And I like to try to maybe put a finer point on it. So as we think about things, you have the direct purchase program, you have Brazil potentially coming on board.

How do we think about the you don't expecting more write-off, but how do we think about cost of goods sold as we move through 2019 and maybe into 2020 as well..

So Bert, its Steve again. So because of the under absorption underutilized plant, I wouldn't anticipate there being material change in our cost of goods. I mean as our volumes go up, there you will see the cost from the product rolling through our cost of goods throughout the year.

But until we reach a point where we are absorbing our costs, I don't see a significant change in our cost to goods. The Brazil and a direct purchase program are going to have a minimal impact in terms of volumes in 2019..

Okay, thank you for that.

And then just one final one on the unnamed compound with the United Therapeutics, you listed that as a milestone, could you just remind us of the terms of the development or the interaction with United Therapeutic format? And how should that development proceed if it proceeds according to plan, just general terms?.

Yes. We don't want to speak for UT and I think that is important, because they have a different perspective of what they share and when they share it. Obviously, we are smaller, so these things are more important to our shareholders, we try to bring some clarity to you within the comp lines of the agreement.

But the first step here is making sure that we can make a inhaled version of a molecule they want us to look at. And then once that is done, we have an option to license that in.

And that would result in additional milestones and royalties already predefined in our agreements, so that is not a new negotiation, it’s an opt-in opportunity and we would expect that discussion to happen if we complete part one, which is a formulation work.

You know just remind you, the UT agreement has exclusivity four pulmonary hypertension products. So as you saw they license an arena, product, and there is a particular agreement in that.

So we are looking on just the strong partners, as we go forward we think there is a lot of synergies within the companies and what they are doing in the lungs and the types of products are looking at. I can tell you collaboration is one of the best I have ever had.

And I have been through all the big companies in this industry, so I can tell you which ones are good, which ones aren't good. I’m very, very happy and proud to be working with them.

I think they are phenomenal group of people and culturally, we are just aligned when it’s a mission driven culture like we are, and they are to help support those patients suffering from PH, they are an amazing company and just an amazing partnership.

So we look forward to continue the dialogue with them and as Steve mentioned earlier, we are in the process of building out a permanent high potency manufacturing facility, which will bring a new capabilities to the Company to think about products like epinephrine. We will then be able to continue to bring other products forward.

Because now we built in clinical development, a lot of high potency capability, you need to build clinical supplies, et cetera. So people underestimate what that takes, but it does take a lot of work in a company to build and have that capability.

So we are excited UT - they come to inspection, they looked at everything we do, our quality systems and have met all the requirements that they look for in a partner in order to produce the manufacturer and be a good quality partner. So that is all positive and I think, you will continue to see clarity with our UT lines throughout this year.

So they have a various stages of readouts to looking at and I think as those things continue to evolve, then we will continue to bring transparency to the market..

Terrific. Thank you..

Thank you Bert..

Thank you..

That does conclude today’s conference. Thank you for your participation, you may now disconnect..