Welcome to the MannKind Corporation Fourth Quarter and Year-End 2019 Earnings Call. As a reminder, this call is being recorded on February 25, 2020, and will be available for playback on the MannKind Corporation website, shortly after the conclusion of this call until March 10, 2020.

All participants will be in a listen-only mode for the duration of this conference. [Operator Instructions] 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, the earnings release and the slides prepared for this presentation. Joining us today from MannKind are Chief Executive Officer; Michael Castagna; and Chief Financial Officer, Steven Binder.

I would now like to turn the conference over to Mr. Castagna. Please go ahead, sir..

Thank you. Good morning, everybody. Thank you for dialing this early. As many of you may have seen, we recently rebranded our company, along with our mission and our strategy and I'm here to share a few of those highlights today.

One of the things unique about our mission is, our product technology and our focus of our pipeline is really to give people control of their health and the freedom to live their life. This is one of the number one things we hear around AFREZZA and we hear the early results coming out of the brief study for Treprostinil.

We continue to be excited about the feedback we hear directly from our patients and our key stakeholders. Along with that comes a new strategy.

And what that strategy is, as you'll hear today is, we'll move to a therapeutic focus in two distinct disease areas, endocrinology which encompasses where we are today with AFREZZA and continue to build out other areas. It could be a metabolic diseases, diabetes and any symptoms around endocrinology disorders and orphan lung diseases.

These are the two areas that we believe we either have existing infrastructure or could build future infrastructure and make a difference in unmet needs. We will exploit our current proprietary technology, but will not be limited by them. So if we find outside innovation. That's okay.

Now, everything will be on Technosphere as we look at out there for BD opportunities. We ultimately out license or terminate pipeline products which are not in either of our two foal areas, as we'll talk about later today. And we will focus, execute and deliver on these priorities as we go forward.

Before I begin our Q4 and 2019 highlights, I want to address the serious threat that many companies and people are dealing with when it comes to coronavirus.

We look at our current supply chain and given the majority of our manufacturing is here in the U.S., we don't anticipate any impact or disruption for patients or third-party suppliers of our products. I want to put that question to rest, because I know there's a lot of question on a lot of the earnings calls these days.

Now, let me jump back into 2019 achievements. A couple of key areas. First, I want to highlight AFREZZA. We recorded annual net revenue of $25.3 million and Q4 net revenue of $7.8 million, which was 22% growth over Q3. We are excited to finally get Brazil pricing and approval and launch here in Q1. We're only a few weeks in, so not much of the share.

However, we have received the second order and you can anticipate some of this will ship in Q1 and the majority will ship in Q2. With our United Therapeutics alliance we expect to receive -- we received two milestones of $25 million in 2019. We expect an additional $25 million in 2020.

We also completed building out our high potency manufacturing suite, as we will become the manufacturer for Treprostinil version of inhaled when it launches. We expect FDA filing within the next 12 months.

And as many of you may have seen, the results released yesterday by United Therapeutics around the increased trial, we really -- we expect that to be in the label as we get ready for launch and these results will really expand the potential population. If you look at what they've said, they expect this to go up to 30,000 patients are in WHO Groups 3.

We're very excited to continue to work with United Therapeutics to bring this incredible product to market. On our pipeline, we progressed two products through formulation on PK studies, one of which I'll share with you today on the sumatriptan data.

In terms of cash flow, as many of you realize, we recapitalized the balance sheet and ended 2019 with $50 million. We have access to $60 million in 2020 between our milestones from UT, as well as our mid-cap plan.

Additionally, we're excited to have new research coverage going from 1 to 5 and we had a good shareholder return of 22%, which ranked up in the top three amongst our peer group that we compare ourselves to.

One of the unique things that we like about AFREZZA as you'll see here is, as our TRx growth happens, you continue to see a compound in revenue growth. So when you look back to Q1 of 2017 when we put our MannKind commercial infrastructure in, our prescriptions have grown 3x since our 2017 launch.

Additionally, we've had major changes in our packaging and a number of cartridges per prescription, continue to go in the right direction, which ultimately leads to retention of patients and build the refills.

We continue to work through as you can see on the right-hand side here, $18 million in gross sales for the quarter, with a net of $7.8 million. The reason for that gap is related to gross to net, as well as our free goods program and we're continuing to work on ways to change for our free goods into paid prescriptions.

As you look at AFREZZA, net quarterly revenue is up 6x since Q1 of 2017 and this just goes to show you the compound effect, as I just described. As we grow prescriptions, you will see an exponential growth in revenue due to the unique nature of 4, 8 and 12 being uniquely priced to the 4-unit cartridge.

So what that means is, people talk about an 8-unit double the revenue of a 4-unit cartridge and a 12 as triple revenue as insulin is unit-based pricing. I'm going to stop there and turn it over to Steve..

Thanks Mike and good morning. Very pleased to review our fourth quarter and full year 2019 financial results which show record revenues, accelerating AFREZZA gross margin and improving cash burn.

I'll be discussing select financial highlights and urge you to read the consolidated financial statements and MD&A contained in our 10-K and additional quarterly information contained in our press release both of which were filed with the SEC this morning.

Let's start out with looking at revenues for the fourth quarter which appears in the middle box in the table. AFREZZA net revenue for the fourth quarter was a record $7.8 million, versus $5.7 million for the corresponding fourth quarter of 2018.

The increase was generated by volume growth from underlying AFREZZA prescriptions up 13% from having an extra week shipments in the fourth quarter of 2019 with about $0.5 million in price. There was no AFREZZA international revenue in the fourth quarter.

Gross to nets were 44% for the quarter reflecting a 1% uptick in the fourth quarter 2018, as well as the third quarter 2019 mainly due to increased commercial and Medicaid rebates associated with the price increase taken October 1, 2019.

The price protection from one of our two significant commercial contracts reset as of the first of the year which will deliver a lower rebate rate for 2020 versus the fourth quarter of 2019. We expect gross to net to be in the 42% to 44% range for 2020.

Keeping in the middle box, revenue from collaboration services was $8.2 million for the fourth quarter of 2019 versus $10.3 million for the corresponding fourth quarter of 2018.

The reduction in revenue was mainly due to recognition of the $10 million United Therapeutics research agreement over the period fourth quarter 2018 to the second quarter 2019 and our performance obligations were substantially completed.

Moving to the box on the right, for the full year 2019, AFREZZA net revenue increased 46% versus 2018 which includes $0.7 million of sales for the Brazil market in the third quarter of 2019. Gross to net for 2019 came in at 42%, a 1% decrease from the prior year which mainly resulted from the sales for Brazil which have no gross to net deductions.

Collaborations and services revenues increased 257% to $37.7 million in 2019 mainly related to the United Therapeutics collaboration agreement which started in the fourth quarter of 2018. Inception to-date we have recognized $37.6 million from the United Therapeutics license agreement and $9.8 million from the United Therapeutics research agreement.

Let's take a look at how our favorable product mix supported our 2019 growth. On the left-hand side of the slide, it shows our cartridge growth and mix favorability versus 2018. We grew our 12 new cartridges at the fastest rate of 36% followed by the 8-unit cartridges at 21%.

The faster rates of growth in the 12-units and the 8-units have a favorable impact on revenue growth is at pricing that Mike just mentioned. The 12-unit being 3x the 4U and the 8U being priced 2x the 4U. The right side of this slide shows the same data for the 4-unit cartridge equivalents.

The growth rates are still the same, but it showed visually have a sale of 12U and 8U cartridges are more impactful to our Afrezza revenue growth.

Moving to AFREZZA gross margin, in the green box on the table you will see that the gross margin for the fourth quarter of 2019 was 40.3% which has been accelerating throughout 2019 from 20.8% in the first quarter.

Our cost of goods has remained relatively flat in 2019 versus 2018, due to production volumes remaining lower than our production capacity which resulted in a majority of manufacturing expenses being recognized as cost of goods sold as incurred.

As we increase AFREZZA revenue, we anticipate growth in gross profit and gross margin as we expect sales increases to continue to outpace cost of goods increases in the near term. The next slide shows how we use cash and operating activities in 2019. The gray bars represent the non-GAAP, net cash used in operating activities.

You can see a steady reduction in cash outflows quarter-on-quarter, as we carefully managed our cash spending, while we steadily increased the sales of AFREZZA as illustrated in the magenta bars on the top of the graph.

Our employees understand the value of using our cash resources carefully which has resulted in improved cash flow this past year and we intend to continue this approach and spend our cash in a purposeful manner in 2020. Thank you and I'll turn it back over to Mike for additional comments..

Great. I'd like to highlight a few other things that have happened either towards the end of 2019 early this year and where things are going. The first is our new preliminary data we just got in on the sumatriptan PK results, showing an ultra fast onset using sumatriptan on our platform.

The graph on the left highlights the PK curves as you look at the different formulations available today between nasal spray, powder, oral tablet and subcu injection. The thing you should note the most is the delay in absorption of an oral tablet showed you insulin peak versus the subcu injection.

These are the current formulations of sumatriptan on the market. We weren't sure how this would look in our rep PK study, but this is any indication of the human data we expect. You can see first on the scale please note it goes from 100 to 700 versus zero to 120 on the left.

And that results in a two times higher peak concentration just off the first rep PK dosing we see here relative to subcu. As we think speed of onset is important to migraine, this is something we look forward to continuing to explore as we progress this program forward.

As an IV-like response, just like we see in Afrezza and the other products, we put on our platform. We're very excited about this preliminary data albeit animal. Usually for us, this is indicative of the direction we go as we go through dosing and toxicity studies. This program ultimately licensed out to a partner or spun out of the company.

And if we can't find a partner for some reason and at that point, we wouldn't invest any more MannKind resources in it. However, we think it's prudent to get us to a certain age, so that a partner can see the data and understand the value that this will bring in a unique market. And many people will say that sumatriptan is crowded generics.

I'll just highlight that Lilly and I believe Allergan has recently launched two new sumatriptan in that marketplace. So a lot happening in the migraine space and chronic prevention. We believe there's still a need for an acute treatment as we look forward. Next, I want to talk about the six new scientific presentations.

As we look out, we see Afrezza to be the fastest insulin in the world. We're very excited as we look about the continued change in CGM as it took almost 10 years to go from zero to over $1 billion to change the standard. We are just scratching the surface. There's only 3% of our targets here in the U.S.

have ever written their first prescription for Afrezza. These are doctors who write rapid-acting prescriptions every single month, and only 3% have written the first one. So we have a long ways to go to continue to penetrate this market, but we believe we continue to see progress on new writers and depth of prescribing year-over-year.

When we think about how we're going to get there. Number one is, our safety and PK in pediatric patients. This allows us to explore how to get the Phase 3 as the pediatric market is about 10% of the rapid-acting market and represents over $1 billion opportunity for Afrezza.

As we think about getting standards of care change and adoption that's around building prescriber confidence and educator confidence.

And I'm proud to say, these next two bullets around Afrezza, BluHale were data sets that demonstrated last year that using a training device with BluHale to show proper inhalation will build someone's confidence and reduced teaching time, which ultimately reduces the administrative burden in these offices, who are overwhelmed with paperwork these days.

BluHale Pro will be the name of our health care professional addition that we will launch here in Q2. Additionally, we were able to show new data from the Philip Levin study that we showed last year at ADA shown almost a 1.6% reduction by adding Afrezza on top of orals regardless of the background therapy as long as they were on mealtime insulin.

This is unbelievable results that we've seen with a very simple fixed-dose titration. As we want to see continued progress in helping change type 2 diabetes we realize it's a very crowded space which is one of the reasons we've refocused our energy this year into the type 1 market to drive faster adoption of Afrezza.

However, we do believe long-term, we need to be here to help people living the type 2 as well as type 1. And the last bullet here was I'll call it a pilot study done out of [indiscernible] showing reducing early glycemic excursions during a hybrid closed-loop treatment.

This explored use of low and high-dose Afrezza – I think in the study when you look at the results you can still see we got to optimize how Afrezza is used within these hybrid closed loops. But it is an interesting phenomenon as we go forward thinking about pumps and inform together.

We're really excited to continue to get BluHale out the door with move pediatric forward and continue to support new data opportunities in type 1 and type 2 space. As we talked about recently in our Q3 earnings call, 2020 is really focused on placing key best to drive wider adoption of Afrezza.

One of the areas we want to go here is really around the type one focus. So you think about this year our sales targeting. our marketing efforts, our advocacy relations, our data generation and publications are all going to be really focused around T1D and starting to build our footprint into this market.

On the right side, we launched a specialty network in January that will help with reimbursement support pharmacy fulfillment and starting to new patient persistency tactics around text e-mails and increase in compliance. On the bottom left is really around patient training. We did a patient training pilot. That continues to go well.

We'll scale it up as we go across the country. And finally, launch of BluHale Pro which will be training our sales reps at the end of March on this device and how to get this out to customers as quickly as possible. What we expect over the next 12 months and I'll try to break this out for you in four buckets. Number one, Afrezza.

The only thing stopping Afrezza's growth has continued to increase the sales force and best of prescribing and breadth of prescribing. We expect to pass 1,000 TRxs a week. It's been a long time coming and we're ready to hit this milestone and continue to grow from here.

We're going to complete a deep dive on the pediatric landscape assessment before we initiate the Phase 3 trial and we're very confident in the opportunity that exists here as we think it's a large opportunity that will start to change the standard of care for the next 100 years.

On the pipeline side on the right, we will progress two pipeline compounds in orphan lung disease. Those you can see in our website as DNA alpha as well as cystic fibrosis with tobramycin.

We plan to initiate new partnerships as we continue to explore opportunities to use Technosphere in our device platform, with other molecules in the marketplace outside of MannKind and the things we listed already. We had animal PK readout in the sumatriptan and tadalafil just came in. We have not seen it yet, but we'll share that at an upcoming call.

We will spin out the non-strategic assets in the pipeline – there's four of them – or terminate them, if we can't find a partner. We believe each of these assets serves its unique marketplace and we'll solve the unmet need.

However, we can't continue to build infrastructure or dedicate resources beyond getting them the Phase 1 which are not very expensive and really leveraging the fixed costs that we already have within the infrastructure of MannKind.

Our alliance partners with United Therapeutics to Tyvaso with interstitial lung disease expands our population at WHO Group 3, which I'll remind you again at 30,000 patients today. Current patients on all forms of Treprostinil are around 7500.

This is a large expansion opportunity and we're very excited and happy for United Therapeutics that they were going to get this positive outcome and get this filed with the FDA. We will complete our clinical trials with TreT. We're almost 50% complete in brief [ph].

It's going forward as we expected and very excited to continue – to complete that program and file that within the next 12 months. And we are on track to achieve our Q2 and Q4 12-unit milestone – $12-unit million milestone respectively each quarter. One of the questions we get is around funding sources.

We continue to reduce our cash burn as Steve showed you quarter-over-quarter. Q1 generally is a little bit higher than Q4 but we continue to have enough cash on hand will reduce our cash burn when you look at United Therapeutics milestones as well as the mid-cap debt tranches.

We feel very good about our current funding sources and don't anticipate a need to do an equity raise. We continue to watch marketplace as we look at the elections, the political environment and the threat to the world currently around coronavirus. But at this point, we remain very excited. We have enough cash to do what we need to do.

And our main focus is growing Afrezza faster and continuing to manage our cash on the balance sheet. With that I think we'll stop here and take questions. Thank you..

Thank you. [Operator Instructions] We'll go ahead and take the first question from Brandon Folkes with Cantor Fitzgerald..

Hi, thanks for taking my questions and congratulations on all the progress this year.

Firstly, can you provide any detail on the persistency of patients on Afrezza? And then secondly, could you elaborate on the feedback you're getting from physicians in practice regarding the dosing conversion work you did with insulin? Was this a tailwind in 2019? Or should we think of that as a tailwind for 2020? Thank you..

Brandon, great. Thank you for the two questions. The first one on persistency is we just finished up an analysis as we prepare for the board meeting.

And in that we can definitely see a big difference in compliance and persistency through our co-pay card program on patients who are Type 2 versus Type 1 and prescribers for that matter that are Type 2 versus Type 1. So the data has – obviously data gaps that come along with it. However, there is a distinct difference.

And as we look forward to expanding into the Type 1 market, we expect that persistency to increase. I don't want to share exact numbers. But I think in the upcoming meeting once we go through the day a little further we can go through that. But in general, half our patients on Afrezza today are Type 2 and half are Type 1.

And then within the Type 1 segment, they're generally fall into three buckets. They use it exclusively full time. I'll call that a third of the market. They use it third of the time on top of a pump. And the third 3 of the time they just use it in case of emergency for highs. So that's probably what you see in our refills.

They're not always 1:1 and a month-by-month basis, because of how people are using Afrezza. It gives them the flexibility to control their disease. Obviously, we're moving towards more patients using it full time and really thinking about pumps bearing opportunities exist in the market.

On the Type 2 side, we see well over in general Type 2 patients about 50% drop out by month one or two. So that's a market that you see much higher dropouts in general just due to the nature of the patient population and the belief in treating the disease.

I hope that helps a little bit on persistency and that explains why you see some chunkiness in the refills. And then on the new prescriptions, remember every NRx is a new patient. It's probably about 25% of that on a weekly basis when we look at new member or access to the brand. And just to close on that last one.

We're getting – we're starting to now build enough patients week-to-week, where we'll start to look at longitudinal basis and get better data here. But a year ago the scripts are so infrequent it's really hard to make any conclusions. I think as we go forward it's getting a little bit easier to start to look at in trends.

The feedback on clinical practice and say why is Afrezza not growing faster? The number one thing we hear is just top of mind. The second part is around dosing. And the third part I call managed care. So I'll break that out into three buckets.

Top of mind, we are reducing our target, focus from over 100 doctors per territory to well below that in order to make sure the reps have higher reach and frequency amongst the key rapid-acting insulin prescribers, that's number one and we'll continue to fine-tune that list as we go forward.

On dosing I think when you look at the David Kendall presentation last week at ATTD that was probably the number one topic there which is how do I dose Afrezza and really trying to make it simple say it's 1.5 to 2x. And we look at the [indiscernible] market for example, vaccines is 3 milligrams and the injections of 1 milligram.

There's just no correlation between an inhaled product and an injectable product. And we're really just trying to tell doctors unique – you treat them with uniqueness but there seems to be a lot of confusion on a four, eight and 12 versus fine-tune one unit increments.

And so I think as people get that clinical experience the dosing question goes away but it's the first apprehension of avoiding their first prescription. And I think that's really what we're focused on is the onboarding of those physicians.

The Phil Levin is a great example where we just did a very simple seven-day titration that they take four units for three days, eight units for three days and then 12 units for titrate from there. That's how easy we're trying to make the dosing of Afrezza.

Those data sets are just coming out and starting to get published and that will help penetrate and overcome the dosing objection. And the third one is payers. And on the payer front, I was looking at the data last night. We have almost 80% coverage on commercial. That's our main focus. That's a lot of words to Type 1 with this.

And we think about the Type 2 market a lot more, Medicare, higher cost share, higher dropouts. So we feel decent about the managed care coverage and our execution of our commercial strategy in Type 1. Most of our plans are label.

If there is a prior off and we continue to remove and reduce those restrictions and we're in several discussions with payers to continue to increase formulary access for 2020 and beyond. So we feel decent, really strong that the managed care situation will continue to improve and buyers will continue to be reduced for Afrezza.

And really that comes with time and experience and demand. So doctors continue to grow prescriptions. The payers are more likely to continue to add it to formularies and remove some of those barriers. So those are the top three reasons for doctors.

And if you look at clinically, we beat the standard of care on 11 out of 13 drivers of mealtime control and why they choose one rapid-acting over another. The two we fall short on are two of the ones that I just mentioned managed care coverage perception, and dosing. So those are the two that we're really working to clean up this year..

Great. Thank you very much..

Thank you..

And our next question comes from Oren Livnat with H.C. Wainwright..

Thanks. Just a couple of questions. You really surprised me to the upside on the results this quarter, which is great. I just want to make sure I understand what's going on the underlying, I guess economics of Afrezza or launch some pipeline stuff.

So it looks like sales were up, net sales excluding Brazil almost 36%, 37% quarter-over-quarter on like a 5% volume increase and plus some price.

So I'm just wondering, if you could give us some sense of what the I guess IQVIA or Symphony normalized value per script we should think of going forward if you're capable of doing that? Because I don't want to carry forward this value and then be surprised to the downside in Q1.

So any help you can give us there would be great, and then I have a Treprostinil question. Thanks..

Things to look at, one, in the fourth quarter, we did have an extra week of shipments. To compare back to the third quarter, it's about $0.5 million. So that is something you should take into formulation. I don't have the average price per script with me at this point. We can follow-up on that..

And I think you're right Oren, you did see 37% growth just on the net U.S. from Q3 to Q4. From our perspective, we continue to see volume mix look positive. We're trying to reduce the number of free scripts out there and trying to put programs in place to convert those to paid prescriptions.

And I think this year you'll see a big push there because almost 20% of our revenue or 15% of our prescriptions fall in that free goods program. And as we increase managed care coverage there's no reason those don't turn into paid scripts. And so today they reduce probably average script cost but that's something we continue to focus on..

Okay.

In the Q1 with normal seasonality, should we expect or should we conservatively assume that it's a slog on that realized value per script early in the year?.

I don't yet see that. I mean, we're looking at our copay data or out-of-pocket data coming in every week. Our script trends are holding up decently. Our outflows and the wholesales are holding up pretty well. So usually I see a big out-of-pocket costs and big slowdown in prescriptions, but the year started off pretty strong.

So I think we were just -- we can gross to net to make sure that looks good for the quarter. But at this point we're optimistic for 2020..

All right, great. Thanks. And on Tretti, I look back at Martin's commentary from January, JPMorgan and issue was specifically about finishing the study I think by April hopefully. And I got the impression that maybe stability is the only gating factor.

I know it's not really our product to add commentary on that, but can you just maybe help us understand as far as you know, is that the only gating factor or stability beyond the PK study? And do you see like any risk around this PK study based on the data you've seen to date? Or is this just a bioequivalent spot check exercise? Or is this a higher dosing and switch studies stuff also important in any filing decision?.

Yeah. I mean, I think as time goes by the risk in this program dramatically decreases. And I say that mainly due to the stability. We believe the product will work fine. We've done the SAD study. We've got some initial data out of the -- pre-study in terms of PK. We know the patient experienced so far in the pre-study.

We hear people are rolling over into the extension phase. So there they were able to change into the higher dosing. So it's a pretty straightforward program. We don't – there's always risk in any development. But when you think about -- our technology is already FDA approved, Treprostinil is already FDA approved.

It's already confirmed the dosing and we know it works in the inhaled routes. So from a risk perspective relative to other programs we would do like I'll call it implement of time, we believe this risk is low in terms of anything going wrong from here to approval. That said it is a development program and we always have to be cautious.

But in terms of rate limit and effects, PK, we feel very good. About that we ran some sample PKs as we're getting into pre-study to confirm before we went to the major PK study. On a health factor study, we feel very good. We've learned plenty of those. We've learned the pros and cons on that one.

And then the final, just stability and that just takes time. And so far that continues to progress nicely. The plant is up and running. We continue to make batches. So we don't anticipate anything going wrong.

And we feel pretty confident that when we think about our cash on balance sheet and cash expectation we are betting $25 million on Treprostinil this year and we feel good about that opportunity.

If anything we got to really think about factory built with this new WHO Class III is like you have to scale even again from scale we just built and we'll continue to increase our conversations with UT. We meet with them quarterly and usually monthly we talk. So, everything is on track there. Teams are working great. We're just very excited.

I know they're very excited and couldn't ask for a better partner..

All right. And can you comment on the competitive landscape there? Do you think based on what you know about I think Liquidia has a filing there imminent or maybe just happened.

Can you remind us of maybe the differentiation there?.

Yes, I think there's a couple of things. Number one, their first time filing a drug-device combo or an NDA, for that matter, that's a pretty huge task. As you know many companies don't always get in the file accepted or get for approval. I can't anticipate where they are. They've not received FDA acceptance of their file yet.

When you think about the supply chain that comes along with such a complex drug-device combo that's a hard hurdle for the FDA to get through. And so we feel good about our capabilities that our technology and our partner in terms of everything we're doing. So, I think that's just a big gap.

I think then when you think about the clinical aspects of the product, they're very different when it comes to dosing and conversion of dosing. Those two attributes of the product are very different. When you think about the technology behind the product, looks like they had a hiccup somewhere in their development around consistency and inhalation.

They have to reduce some of their data if I recall in our case, we feel very good about the ease of our device to consistency dosing and the amount of power that gets into the lungs to deliver the therapeutic benefit we expect. So, I think from a consistency and quality and scalability, we feel very good about our platform.

And then finally, I think we've got a great partner. So, when you think about UT's experience with these 7,500 patients in the marketplace, some of which are invasive, one of the other two formulations they have working with the market leader in those relationships. We think we're close enough in an approval sequence that shouldn't be a big impact.

And I think there are some other things working on that will continue to differentiate the molecule. I don't want to go into for competitive reasons, but we feel our overall strategy will be very strong in the marketplace to help continue these patients that don't have, so -- and expand the market even further..

Great. I appreciate the color..

And our next question comes from Thomas Smith with SVB Leerink..

Hi, this is Dylan Dupuis in for Tom. Congratulations on strong quarter guys. Just a couple of questions. First how are you guys thinking about expanding the number of reps and expanding territories and how this might impact your ramp in SG&A? And then I have another question after that..

Sure Brian -- Dylan. I wouldn't expect a major impact on our SG&A. We've been able to manage our overall headcount in the company, continue to reduce our expense base through other cost savings. So, when we look at the net-net reps in the increase, you'll probably see surely will be taken down probably 5% of the positions we've already filled a couple.

Some of them we just haven't seen the right talent join us and then apply. So, we're not going to continue to be distracted by those particular markets. And some of them you'll see some new ones pop up in markets that we're looking to increase our penetration. So, net-net you can anticipate a five to 10 FTE increase.

And if you think about the next three quarters you're talking roughly $1 million $1.5 million. I don't think that's a significant amount given our current structure. And my guess is we can offset that through continued sales growth or a reduction in our expense base if we need to. So, we don't anticipate any major or material impact on SG&A..

Great. Thank you. And then kind of a broader question. When you guys were initially describing the plans to develop the Phase III trial in India, you talked about how you want to design a trial that was going to be differentiated and give you guys new insight to Afrezza that you hadn't really looked at before.

Just wondering if you guys had any color that could give us at this time on how the trial might be designed and what is you're looking for that might be new?.

Yes. So, the Phil Levin just got presented this week showed you roughly the full cohort of patients. And that dosing regimen that we're using in the Indian trail is based on the Phil Levin data. So, we're excited to see a trial that goes from I'll call it 25 patients in Type-2 to now over 100 patients -- I don't know the exact number sorry.

It will be a Phase III trial head-to-head placebo-controlled. So, we're very excited about having that data in a different -- it'll be a safety trial with an efficacy assessment. The trial kicks off in April-May timeframe and it's a three-month primary endpoint if I recall.

And so that'll be going forward and we're excited to kind of get dosing data and a head-to-head placebo as we go forward. So, we just finished up filling the placebos. Those will be shipped over to India very shortly and the kickoff for the trail is roughly the first week of April if I recall.

So, India is progressing as expected and it just takes a little longer to get through all the regulatory hurdles there. But otherwise everything is on track and we'll look forward to that data set.

There's probably some minor things like we're debating liberate or not and I think we're not going to get there because it's not approved in India at the time; we're looking to finalize the protocol. So -- but it'll show us pretty good data in Type-2s in a market that has a very high unmet need with really high A1cs.

So, we're excited as we saw 1.6 A1c drop. In Levin study, hopefully, we'll see a comparable or more greater drop as the trial goes beyond the 12-week time period..

Great. Thank you very much..

And next will be Bert Hazlett with BTIG..

Great. I've got four questions.

Could you please let us know specific deliverables for TreT to get that product to a NDA?.

Bert we haven't disclosed exactly what they're tied to in the milestones, but there are things in our control and we've stated publicly in the past, it's around the stability, it's around making sure we prep the files, because we have to write a lot of the NDA as well as United.

So when you think about all the manufacturing, all the CMC, the supply chain that's all on MannKind. So these are the types of things that are in the -- in our control that our responsibility as part of that filing. So hopefully that answers on a high level what you're looking for..

Okay.

And that's within the next 12 months, correct?.

Yes. That would be within the next 12 months..

Okay.

Second question then is, does the scale for manufacturing that you've contemplated with United Therapeutics, does that include at this point the increased study results? And if not are is there an option to potentially include that in your manufacturing effort?.

The factory scalability that was built was primarily focused on existing market of Tyvaso with some additional capacity i.e. we can run the plant nonstop for 24 hours a day.

But I think if we are looking at an expansion of double or triple the current Tyvaso revenue, obviously, we would have to expand the infrastructure we built around the factory today. And we have that space in Danbury. So that's not something that keeps us up. We built the factory as it exists very quickly.

And if we had to build up another scaled factory we have enough time to do that appropriately with UT as part of that..

Okay. And just remind us how the NDA is going to progressed assuming expansion or assuming an inclusion of the increased data for Tyvaso.

How would that progress with regard to any filings with TreT?.

I don't know what UT want to say publicly on that Bert. So I'm going to not answer that one yet, because I don't want to say something they're not supportive of. I've done this in the past with the types of products and a 505(b) strategy.

So maybe one-on-one I can talk a lot, but I don't want to tip off anything related to United that they're not comfortable with sharing..

Okay. And then last I think you mentioned something early in the call about a second order from Brazil. Is that accurate? And did you say Q1 shipment there'll be some revenue in Q1 and some revenue in Q2. Or did I hear something else? Thanks..

No, you heard correctly. We’ve received the second order for Brazil, just given the long lead times and the initial shipment shipped back in September if you recall. So we anticipate shipping a part of that out in Q1 with the rest of it in Q2. So we haven't yet given a value or a breakdown.

But I just want to give people a heads up that we expect another order and you'll see some of that in Q1..

Perfect. Thanks..

Thank you, Bert..

And our next question comes from Steven Lichtman with Oppenheimer..

Thank you. Hi guys.

Mike, can you talk a little bit more about how you're evaluating the pediatric opportunity as you mentioned? Just curious on your areas of focus and the milestones ahead on that?.

So on the pediatric, I mean, we were very excited to get alignment with FDA directionally on finalization of the part one of the two parts for approval. Part one was just confirming that our PK results meet the criteria for the FDA for the 8 to 17 year-olds.

And then the second part of that alignment with FDA was that we're going to forgo a 4-to-7 year old label indication and they've aligned directionally to those two requests. The next part is getting – getting in Phase III study protocol approved. That will happen over the next three to six months.

And then in that timeframe, we'll be meeting with many thought leaders within the pediatric space, confirming the endpoints that we're looking at, as well as starting to build the poly relationship, but also really confirming what we believe is an unmet medical need, especially as it pertains to hypoglycemia and nocturnal hypoglycemia, timing range all the things that parents are looking for in their kids.

We think will provide a unique benefit for AFREZZA. We'll also get some quality life data later this year out of our kipmus [ph] study. I think will be important as we think about [indiscernible] an area that obviously we think we can make a difference and that'll be important.

And then the final is just the whole market assessment means that we really believe that -- my personal bias is that, the way you change the standard of care for the next 100 years is really through pediatrics and Type 1 and getting these patients started in early age, getting them to get great outcomes, proper dosing will grow up on the product, they'll transition to a build endos and there's teenagers into college, some more kids growing up, may not have experience in injectable mealtime insulin or a pump for that matter.

So we think that's the big opportunity to start to layout that foundation and we'll confirm that through our market assessments that we're doing or conduct as we speak.

Looking to higher dedicated marketer to lead that up as well as pre academic knowledge, so we're really going to start to focus our efforts to make sure we do a great job in the pediatric segment. And we think it's a big opportunity, but we'll confirm that through additional research..

Got it. Thanks. And then just secondly, Steve your product gross margin was ahead of our thinking and up again sequentially.

I know you don't provide guidance, but can you talk qualitatively about what could drive product gross margin further looking forward?.

Sure. Our cost of goods sold because we've got the overcapacity is going to remain fairly flat in the near term. So as we drive our topline sales that'll drive both gross profit and gross margin in the near term. So we see that increasing. We're not going to give specific guidance on it, but I think you can do a pretty good job modeling that out..

Great. Thanks guys..

You’re welcome..

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks..

I want to thank everybody, all of our employees, our stakeholders, our investors. 2019 was a great transition year for the company. We were happy to finish up the recapitalization we began over two years ago. We finally have the right balance sheet. We have the right team and we have the right mentality in order to take this company forward.

Very excited and optimistic about 2020, this is really our pivotal year as we think about TreT progressing to filing. Having that approval we'll bring in additional revenue into the company as we get double-digit royalties. Today Tyvaso does almost $500 million with the state of readout yesterday. We're very excited about that.

We'll continue to reduce hopefully the cash burn quarter-over-quarter as we go forward. And really just our focus right now is helping as many patients as we can and getting many of the new prescribers onboard as we can in 2020 and launching some of the key initiatives we have.

I think that will really start to build confidence and increased prescriptions for AFREZZA beyond the trends we've had historically. Thank you everybody for your time and patience. We look forward to talking to you soon. We'll be at investor conference later this week. Hope to seeing you there. Thank you..

Well thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day..