MannKind Corporation (MNKD) Q3 2017 Earnings Report, Transcript and Summary

Welcome ladies and gentlemen and thank you for standing by. Welcome to the MannKind Corporation 2017 Third Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this call is being recorded on November 07, 2017 and will be available for playback on MannKind's website shortly after the conclusion until November 21st. Joining today from MannKind our Chief Executive Officer Michael Castagna; Chief Financial Officer, Steven Binder; Chief Commercial Officer, Patrick McCauley; and Rose Alinaya, SVP of Investor Relations. I would now like to turn the call over to Ms. Rose Alinaya. Please go ahead.

Good afternoon 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, November 7, 2017. We undertake no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Today our Chief Executive Officer, Michael Castagna will lead the call followed by our Chief Financial Officer, Steven Binder who will review our financial results for the third quarter. Our Chief Commercial Officer, Pat McCauley will provide our commercial review ending with Mike providing additional medical and regulatory and other highlights. I will now turn the call over to Mike. Mike?

Thank you Rose. Before our call begins, I would like to look back to where the company was the day I assumed the CEO role and later where we are today some five months later. On May 30th we had roughly $19 million in cash, a $10 million interest payments due in 45 days, $50 million of inventory principal payments in 2018, a significant warrant overhang with restrictions that prevented us from doing many parts of our recapitalization, and approximately 250 scripts a week, a U.S. only focused business with no CFO or CCO and a stock price hovering around $1.50. Today we have over $60 million in cash, only $20 million in payments due in 2018, no warrants restricting our recapitalization process, a world class CFO and new CCO who replaced me, a new label under which we can effectively market our product, we followed in Brazil kind of late stage discussions with other ex-U.S. distribution relationships and we're having a little over 450 scripts a week or an increase of 50% over the last five months. And a stock price right around $3.30. Clearly the financing constraints that we faced were both numerous and complex. Sales would go up over the last decade and couldn’t all be resolved in my first five months. Most of my time has been spent on building out the leadership team and recapitalization process. Steven and I spent a considerable amount of time getting our balance sheet in better shape to ensure MannKind has sufficient capital to execute our plan. While our work is not yet complete, I feel that we're on a clear path to a simplified capital structure and financial stability as we will describe in greater detail on this call. This is the first time since I've been here that we've had this much cash on hand where we can discuss investment opportunities versus conserving cash. Undoubtedly there is never a straight path to any turnaround but it is our goal to provide you with the strategic direction we're heading as many decisions we are making now and over the last six months was because apparent in the sales numbers until you look in the rearview mirror a few quarters from now. I believe now more than ever that Afrezza is a highly differentiated product that will earn its rightful place in the insulin market and we are at least growing in a market that is struggling to find growth. I truly look forward to turning my focus and attention to working with our internal team to align our organizational focus as well as become more externally focused with our customers, payers, and partners outside United States to continue to drive the success of Afrezza. My first slide are some of the key highlights since the second quarter. When Afrezza's marketing commercial, Afrezza sales continued to grow within our expectations and we are reaffirming our second half 2017 sales forecast to the lower end of our guidance. We launched several new marketing initiatives over the last few months that continue to progress forward. Additionally we launched two new packaging choices of 90 count 8 units and 90 count 12 unit packages which we believe are critical for our Type II patient focus that allows them to simplify their dosing. Additionally we phased out one SKU with our label change a few weeks ago and expect to phase out two more over the next three to six months. This is important when it comes to our discussion during PAT section under retail rates. Under the financial section Steve will address this momentarily but our recap efforts were significant as I just recently mentioned and are not yet complete. We would like to let the dust settle and see the impact of our new label change as well as our strategic investments we have made recently around our clinical trials, our TV commercial, and the impact our sales team has as long as they are on this field. In the medical and regulatory side we've had some changes as you all know. We are in search of a new Chief Medical Officer and despite that departure we continue to increase our filings as we look to ex-U.S. around Brazil. We invent three clinical trials during the third quarter and our Treprostinil IND work has started. I am going to stop there and turn over to Steve and Patrick.

Thanks Mike and good afternoon. We've been very busy both during and after the third quarter addressing our two top priorities, recapitalizing our balance sheet and growing Afrezza sales. Let me start with our recapitalization progress with much of the activity occurring after the quarter end. On September 29th we exchanged 1.3 million shares of common stock for the outstanding Series A and B warrants which freed up 8.4 million shares of common stock for use in our recapitalization plan. Next on October 10th we sold 10.2 million shares of common stock in a registered direct offering at $6 per share and raised net of issuance expenses $57.7 million. Then on October 23rd we completed two more transactions. First we exchanged the $27.7 million senior convertible notes through August 2018 for senior convertible notes in the amount of 23.7 million through October 2021 and exchange 973,000 shares of common stock to reduce $4 million from the senior convertible notes principal. The new senior convertible notes of $23.7 million have the conversion price of $5.15 a share. Second, we extend the maturity of the $10 million of senior secured debt to deal from October 31, 2017 to January 15, 2018 and reserved 4 million shares of common stock for conversion of this debt as well as applying any remaining shares after conversion of the $10 million to senior secured debt to Deerfield in 2019. So we take a step back and realize what was accomplished in a very short period of time. We freed up 8.4 million shares that had previous reserve for warrant conversion, we added $57.7 million to our September 30th cash balance of 20.1 million. We reduced debt by 4 million, we cleared out a near-term debt maturity by issuing a new four year note with a conversion price much closer to the market price, and we extended a near-term debt maturity to January 2018 with the ability of the holder to convert debt to equity. In short we have officially, I'm sorry, we efficiently use our available authorized shares to raise money and restructure debt leaving 4 million authorized shares available for deployment. These are all very positive developments in our ongoing recapitalization plan, however, we are still working on additional actions to recapitalize the company. The actions just summarized do not represent the end to our plans to restructure our debt and secure additional funding. Please let me move on to the Q3 financial results. I will be discussing selective financial highlights and urge you to read the condensed consolidated financial statements contained in our 10-Q which was filed this afternoon. Please note that I will make comparisons to both Q2 2017 which shows our quarter-on-quarter results and the Q3 2016, the first quarter that MannKind conducted commercial activities post Sanofi. Afrezza net revenue for the third quarter of 2017 was $2 million, a 28% increase over the second quarter of 2017 and a 246% increase over Q3 of 2016. Afrezza gross revenue increased 8% versus Q2 2017 and 236% versus Q3 2016. Our gross to net adjustments for Q3 2017 was 30% compared to 41% in Q2 2017. As you may recall from our Q2 earnings call we had a onetime unfavorable growth to net adjustment for [indiscernible] in Q2 up $0.3 million. A reconciliation of gross net revenues contained in the MD&A section of our third quarter 10-Q. Moving quickly to the balance sheet at the bottom of the slide, at September 30, 2017 we had $3 million in net deferred revenue for product that had been shipped to the wholesale and retail channels but was not yet dispensed to patients and recognizes revenue. In addition, I'm sorry, an increase of $0.4 million from Q2 2017 will continue to recognize Afrezza revenue based on patient usage through Q4 and with changes to the new revenue recognition standard beginning January 1, 2018 which will change our current sell through model to a sell to model where we will recognize salesmanship to direct customers like wholesalers. Moving back up to the top to the P&L, the cost of goods sold for the quarter-ended September 30, 2017 was 4.6 million compared to 4.4 million for the same period ended 2016. Cost of goods sold is greater than Afrezza sales for the quarter ended September 30th due to under absorbed labor and overhead and under utilization of our manufacturing facility. R&D cost increased to 4.4 million from 3.1 million in Q2 2017 due to the increased activity in clinical trials including the start of the time and range where the Stat study and the pediatric trial. Selling and marketing expenses were 9.2 million in the third quarter of 2017, a decrease of 21% over Q2 2017 due to higher selling and marketing spend in Q2 to prepare our newly integrated commercial organization for the second half of the year. This included the production of our TV commercial and the investment and training of our new sales force. Selling and marketing expenses were 2.2 million higher than third quarter of 2016 which represents lower spending last year just after the commercialization effort began subsequent to the Sanofi handover. G&A expenses were 8.5 million in third quarter of 2017, a 23% increase from Q2 2017 due to the accrual of non-sales force bonuses as we made substantial progress towards attaining the objectives linked to bonus payouts. Interest expense increased by 0.4 million to 3.5 million in the quarter ended September 30, 2017 as compared to Q2 2017 due to the increased loan balance to the Mann Group effective late June and a decrease of 1.4 million compared to the third quarter of 2016 or 29% reduction primarily due to remediation of Sanofi debt. We incurred a net loss of 32.9 million or a net loss per share of $0.31 for the third quarter ended September 30, 2017 as compared to net income of 126.5 million or net income per share on a fully diluted basis of a $1.31 in Q3 2016. The net income for Q3 2016 was primarily driven by the net revenue collaboration of $161.8 million related to determination of the Sanofi agreement. Moving down to the balance sheet cash and cash equivalents at September 30, 2017 were 20.1 million compared to 43.4 million at June 30, 2017 and 22.9 million at December 31, 2016. During the third quarter we had an operating cash burn of 23.3 million within our guidance for the second half of 2017. There have been some questions coming in from investors recently asking about the recognized loss on purchase commitments, you know what is it. So let me explain, this amount represents the loss recorded in 2015 and 2016 on the total informed purchase commitment from Amphastar, a contracted supplier of insulin. The purchase price for the contract is stated in Euros. The recognized loss and purchase commitments change from June 30, 2017 and December 31, 2016 due to the change in the U.S. dollar Euro exchange rate. The balance is also subject to reductions for insulin purchases. We expect to purchase approximately$3.2 million of insulin in Q4 2017 with half being paid in Q4 and the other half being paid in Q1 2018. I thought it would be prudent to spend a little bit of time describing our revenue recognition model as it is different from most other pharma companies at this time. We are on a sell through model which means that we recognize revenue for most of ourselves when the patient buys Afrezza from a pharmacy not when we ship to wholesalers. Before the patient buys Afrezza there is a right of return that exists for the wholesale and retail channels. Once the patient gets a prescription filled, the right of return ceases to exist. Current GAAP says that if we can't reliably estimate expected returns at the time shipment we must defer revenue until such time as that rate ceases to exist. So if you're following along the slide, MannKind sells Afrezza to wholesalers who sell on to retailers before dispensing to patients. Revenue is deferred until patient buys Afrezza. We recognize revenue based on simply prescription data which is an estimate of prescriptions filled in the marketplace. We enhance this data by trying to understand how much Afrezza is sitting in the wholesale and retail channels which is what should be deferred. Please note that we don't have complete visibility into the retail channel at this time. In addition there are other factors which impact the revenue recognized for shipments to the wholesale and retail channels such as price increases and vouchers for free product. Once we determine the gross revenue to recognize and defer, we adjust the revenue and deferred revenue for our gross to net which represents fees, discounts, and rebates such as wholesaler fees, patient co-pays, and managed care and government rebates. So as you can see this is extremely complicated and subject to estimates and showed us what estimates and actual don't match. I hope that we have laid this out in sufficient detail for you to understand our revenue recognition model that will be used through quarter four of 2017. Addressing the guidance we issued in August, we expect Afrezza revenue for the second half of 2017 to be at the lower end of our previously issued guidance of $6 million to $10 million for net revenue and $9 million to $14 million for gross revenue. And we will maintain an applicable gross to -- growth in net reduction in the 30% to 35% range. We are increasing our operating cash burn for the Q4 2017 to between $30 million and $32 million due to our decision to accelerate commercial support for Afrezza that was previously planned for Q1 2018 related to direct to consumer TV advertising and digital marketing. Mike, Pat and I are confident in reaching a low end of our revenue guidance for the second half of 2017, let me tell you why. First, Afrezza is promotionally responsive. Our sales reps now have another quarter of interactions with physicians behind them and we're further supporting this by moving marketing spend from Q1 2018 to Q4 2017 for direct to consumer TV advertising and digital marketing. Second, we expect a positive commercial impact from our label change. Third, we expect favorable pricing in mix versus Q3 of 2017. Fourth, we expect that visibility to the amount of inventory in the retail channel that will help us to further refine our recognized and deferred revenue. And lastly, our average daily shipments to wholesalers grew 26% from September to October which is reflective of increased demand being pulled through the wholesale and retail channels. Collectively these reasons enable us to feel comfortable in achieving the lower end of our revenue guidance for the second half of 2017. To provide further insights into our commercial activities and successes, I will now turn the call over to our Chief Commercial Officer, Pat McCauley. Pat.

Thanks Steve for the detailed review of our financials and good afternoon. I am very excited to share with you today our third quarter commercial efforts and successes and I tell you it has been a very productive quarter for the team and I know we've been working extremely hard. When you look back over the past few months there has been a lot of commercial progress in many different areas and it really is exciting to see the continued evolution of our commercial organization and its overall impact. So let's take a look at our third quarter commercial highlights. I think one of the most important places to start is with our Afrezza sales and they continue to grow in the third quarter and we're seeing this across multiple metrics including wholesaler shipments, prescriptions, total cartridges, and new riders. So we're going to look at these a little more closely in detail in just a minute. We're also going to update you on our progress from last quarter on the transition of the NDC portfolio. As Mike mentioned we've launched two new SKUs and continue phasing out another. We're going to continue to review some of the details in this transition. Clearly the positive FDA label update is a significant event for us that has generated a lot of discussion from our healthcare professionals. We definitely believe that the revised label truly strengthens and clarifies the Afrezza clinical value offering so we're going to get a chance today to hear some of the feedback from the field and some of the observation that we've had in the past few weeks since that update. And finally another milestone event for MannKind, we're very excited to launch our first TV commercial campaign. We know we have one of the key opportunities and that's driving awareness of Afrezza and its clinical benefits for patients living with diabetes. So this regional pilot TV campaign more truly compliment our field promotional efforts with HCPs again to increase the overall Afrezza awareness. So let's take a look at some of the key performance metrics and I want to start today with something we look at here every single week as we assess the health of our business really in its purest form and that is the wholesaler shipments of the Afrezza. It's one of our key metrics and it's directly tied to our cash flow. Now the graph if you're able to see represents wholesale shipments going all the way back to the third quarter of 2016 which was the initial stocking of Afrezza and what you can see is a steady quarter-over-quarter increase in wholesaler shipments. Now this does not include any gross to net discounts or other reductions such as vouchers and I think what's interesting is that if you look at the far right hand bar and the current quarter that we are in, if you take the first five weeks of actual shipments that have been made in the fourth quarter of 2017 estimate the quarter based on this amount and then annualize it with no growth factored in it equates to approximately 24 million in annualized wholesaler shipments of Afrezza. And as you can also see at the note at the bottom of the slide, wholesaler days on hand has been stable to declining since the third quarter of 2016. So this is something that we will continue to watch very closely as we assess our performance but it certainly is an encouraging trend and as Steve shared earlier we will be implementing a new revenue recognition model in the first quarter of 2018. So let's take a look at our third quarter TRx and NRx performance and I think without a doubt as we all know this is a key indicator of our MannKind promotional efforts and we are very excited to see the continued strong quarter-over-quarter growth. So let's start with NRx prescriptions. For the third quarter NRx prescriptions grew 37% versus the second quarter of 2017. We also launched a voucher program towards the end of the second quarter for more patients to experience the clinical benefits of Afrezza. Now for the third quarter TRx prescriptions grew at 29% versus the second quarter of 2017 and if you look at both of these growth rates they are higher than the second quarter consecutive growth rates that we shared earlier. Another thing I wanted to talk about if you look at the gray colored line on the slide, that is the refill line and we do get questions on refills. So I wanted to take a moment to walk through some of the things, some of the thoughts and insights around that. This is something as I said we do watch on a regular basis but first and foremost whenever you're growing a brand it is essential and very critical to have the NRx line exceed the refill rate to accelerate your growth. That's exactly what's happening and we expect to see this continue in the future. Now in July we also made a committed effort to shift from the old SKUs to the new SKUs, a proportion of our Afrezza business. We removed one SKU with the label update and plan to phase out two more SKUs in the next three to six months. This is an effort to streamline and simplify our NDC portfolio for both patients as well as providers. And next we know that not every prescription is for a 30 day supply of insulin. For example some patients use Afrezza in addition to their comp, others use mail order that may have larger quantities, and some patients simply are not compliant and don't follow the suggested dosing regimen. And we know that these do have some impact to the refill rates. So let's take a little closer look at the trending of some of the newer versus older SKUs that I referenced before. And what you can see in the graph is a representation of these two groups of SKUs, the ones that were phasing out as well as the new ones over the time period of May to September of 2017. So let's first look at the SKUs that we're facing now, and those are represented by the blue bar and you can see from May through September there's been about a 31% reduction in TRx volume. Over that same period the group of new Afrezza SKUs which is represented by the grey bars have experienced significant growth in TRx volume. Once again when you have a transition like this going on we do believe that it has some impact on the refill rate. Another thing I wanted to share with you and that we are looking at very closely is some of the significant growth of our 8 unit and 12 unit cartridges. So when you look at this, as you can see in the graph both the 8 and 12 unit cartridges had higher growth rates than the 4 units in comparing the third quarter versus the second quarter. And just to reference again on the graph, if you just look at the middle purple bars I walk through a couple of examples there. The 8 unit cartridges grew 28% in the third quarter versus the second quarter and the 12 unit cartridges grew 82% in the third quarter versus the second quarter. If you go on to look at the grey bars which represent a third quarter versus the first, the trend is very, very similar and we see the 8 and the 12 growth rates outpacing the 4 units. So why is this important? At first it represents that our successful field execution is occurring on our SKU transition. We believe that the 8 and 12 unit growth represents more effective titration as patients seek to achieve glycemic control. Secondly, cash flow of the company is based on the type of cartridge and the number of cartridges and Afrezza is now linear priced. So with all of these things that are going on with the transition of the NDCs, some of the growth rates of the 8 unit and 12 unit, I think it's important to take a look at what I believe is the most important performance slide that we're going to review today and manage the growth of our cartridges. So this chart represents a rolling four week average of Afrezza cartridge quantities and if you look at the third quarter, total cartridges grew at 31% in the third quarter versus the second quarter. Now this growth rate represents an increase compared to our second quarter consecutive growth rate. But I think it's just as important to know where we were trending towards the end of the quarter. So if you look at the September 29th data week, the full week average of cartridges which was just under 80,000 was not only the highest since Afrezza was originally launched but also 5% higher than any previous four week average for Afrezza. In addition to this strong cartridge growth we're also seeing about a 24% increase in new writers in third quarter versus second quarter. So we believe that these are key indicators of our continued momentum and our growth with Afrezza. So let's shift now to the recent FDA label update and talk about not just the update itself but certainly some of the key insights that have come in from our field sales team. As I said earlier we were very, very excited to receive the FDA Afrezza level update that includes new data. And a couple of things that we've been doing first and foremost, we made sure that we trained our entire sales organization at live meetings in October to ensure that we not only clearly understood the label update information but that we were fully confident and aligned in our messaging. And some of the early field feedback that we've had from our representatives as well as healthcare professionals has been very encouraging. Overall we're hearing a high level of interest from our HCPs without the label update especially as it relates to the time to first measurable effect and the time for effect to return to baseline. We believe this data provides more clarity and specifics on the time action co-file of Afrezza and how this can ultimately help patients. We also believe that the new label favorably addresses some of the questions that we have had regarding the previous label such as Afrezza gets into the body fast but does not work any faster. And since we've been out there over the past few weeks, some of the interest on the new label it has created a few things that are favorable for us. First, we've had a lot more new appointments from HPCs that are willing to listen, sit down, and learn some of the specifics about the update. And secondly some of the current dialogue and details that we're having watch extending that time. So prioritizing the label moving forward in our discussions and interactions is going to continue to be a top priority for us. So finally, let's review another significant milestone for MannKind as it relates to our first ever TV commercial campaign. And before we walk through it, I think it's important to put into perspective some of the work and thoughts that went into this. Through our own research we confirmed that about 98% of people in treatment were not aware that inhaled insulin was a treatment option. We also conducted research and tested the Afrezza TV commercial to make sure that we would get a favorable response and it was interesting that in our research after viewing the commercial we noticed that there was a high patient intent to ask their doctors about Afrezza. Now that we have secured capital we were comfortable accelerating our originally planned first quarter 2018 TV campaign into the remaining months of the fourth quarter and we're excited to announce that yesterday we launched a multi-million dollar TV campaign in nine test markets that will guide us as we decide our strategic investment directions in 2018. And just to give you a sense if you can see on the slide some of the TV shows that we will be airing on there is certainly familiar household names such as CNN, Fox News, 60 Minutes, and Ellen among others. Now one of the reasons this TV campaign is important is that the average patient spends very little time with their doctor. As a matter of fact it's sometimes less than 40 minutes a year. Now that we're in the financial position to do so, we're very excited that we can inform more patients that Afrezza is a treatment option. And again the TV campaign is going to be an excellent complement to our current sales team that's promoting directly to our healthcare professionals and a combination we think is going to increase our overall awareness of Afrezza. So in closing I can tell you we had a very, very productive third quarter and accomplished many things. We believe that we're well positioned for future growth with the FDA label update, the continued transition of our Afrezza SKUs, and our TV commercial campaign to increase patient awareness and drive engagement. Finally we have completed our second full quarter of promotion by our MannKind sales team and we're excited about their level of engagement and high quality interactions with healthcare professionals. I am really proud of all the efforts by the commercial team as we continue to drive momentum and success with Afrezza. And with that I will turn the call back over to Mike.

Thank you Pat. One of the big things as we progress into Q4 is the stability of the organization, raising the financing, getting everything organized that we've been working on for the last year and executing against that plan has been critical. I now want to talk a little bit about our Afrezza clinical program progress. So, tell me you've seen the slide before. We have cleaned up the colors a little bit to make it a little clearer for you. And at the top three bars our post marketing commitments we originally had five and now we're down to three with the label change we eliminated two of them. In the third quarter we started our pediatric PK study. This is enrolled in three sites, we've had four patients enroll already. We have seven more sites coming in the next 30 to 60 days. There are two other trials that we expect to kickoff in 2018. The Phase 3 part of the pediatric program as well as late 2018 a long-term safety study. The next two bars are the grey bars. These are company initiated trials. The first one is an Afrezza dynamic dosing study. This is done with some well known -- really looking at how do you dose Afrezza based on certain meals and we get those algorithms and are able to think about ways to integrated into some of the technology that we see going down the road. The next trial is called the APEC Study this is a Type I patient experience trial that we expect to start enrolling in early 2018. This trial as well as the pediatric Phase 3 trial will be influenced by the outcomes of the STAT study. The STAT study for those of you who don't know was a time and range trial looking at using Afrezza with CGM head to head against mealtime influence. This is a pilot study that was started in July and completed in the month of November. We will present these results in 2018 and hopefully we will understand them shortly. So there was also this trial that will really help influence how we think about the design and execution of other larger Type I study that we are looking to execute. The next trial here, the bottom four and the blue bars are initiated by investigators. So the next blue bar here is an Afrezza One Drop study that is focused on the Type II market. That trial has started screening and has had several patients go through the screening process and I believe one or two have enrolled. We don't have as much transparency in some of these just because they are independent. Another trial that is the first time we are announcing here that you may have seen in clinical trials that is called Levin study. This is an investigator in the Maryland area and he's initiating mealtime Afrezza in uncontrolled Type II patients and that will start enrolling next week. And the final trial that we are interested in watching is the Yale study that is the closed loop system looking at the artificial pancreas. We've heard from several investigators that the best way for artificial pancreas to function and have a tight range of control is by adding Afrezza which speaks to our speed of action. This trial we expect to start in the next few weeks. I just want to turn it over and mention some corporate housekeeping that you may have seen in conjunction with our earnings call announcement today. We have issued a special meeting of stockholders announcing a meeting on December 13, 2017. We are asking stockholders to vote on increasing authorized shares by 140 million. This is important as it will provide a strategic optionality as well as flexibility on our capital structure in the years to come. We have been and will continue to be prudent with the shares that we have as well as the dollars we have on the balance sheet. And finally in closing, the foundation for long-term growth has been set. It's been a very long year in terms of, I'm really sorry guys, I missed the slide here. I want to remind people that sources of capital as we look out for Afrezza. I get a lot of questions that the recent raise was not sufficient enough. That's important because it wasn't our intent that this would be a sufficient rate to get us through 2018. We have several other items that we've been working on that I will also talk about in a second. Number one is used on Pat's slide, we are looking at cash flows based on wholesaler increases on sales that we sell each week but we have a product revenue reporting based on GAAP that's based on prescriptions reported. So we wanted to see which way Afrezza's product revenue is increasing as we exit 2017, going into 2018. The current run rate puts us somewhere in the neighborhood of 24 million with flat to no growth in Q4. So we want to kind of watch that as we go out. The other items to keep in mind are ATM, co-promote opportunities which could represent us finding a primary care co-promote partner but also bringing in another product to put into our sales force bag. We have debt options, equity, international licensing, as well as partnerships for pipeline assets. Now in closing, the foundation for long-term growth has been set. We worked really hard over the last year to transform an asset from a large pharmaceutical company into a company that really does not have or previously have commercial expertise or infrastructure. We fixed our packaging, we fixed our pricing, and we fixed our balance sheet and capital as we move forward. In order to sustain ourselves for long-term growth we just have to balance investing in the pipeline, investing in new clinical data such as the trials I just talked versus just purely investing in the commercial trajectory of Afrezza. We have not -- our original study is designed for Afrezza or non-inferiority and not meant to highlight what is possible when it comes to proper dosing as well as integrating new technology for Afrezza. The STAT study is the first study we've done that's really looking at using technology in Afrezza and dosing real time. We believe this is critical to showcase what can possibly happen when you Afrezza and dosing appropriately. Our strategic choices to us are readily apparent but because we are on a revenue recognition model and run a script model, the choices that we've been impacting in the marketplace around phasing out SKUs, bringing in new SKUs, as well as our pricing and our managed care contracting they just won't become apparent to you when you look back in quarters to come. We continue to expect success but at the end of the day go back and look at Pat's section to really understand the nature and health of our business. We really continue to watch what we see in 8 unit cartridges versus 12 unit cartridges as well wholesaler outflows. These are the biggest near-term indicators that we look at every week to guide the direction that we're taking the company. This slide here I've presented pretty much an identical version at the Cantor Conference back in September. This was previous any FDA label change or quarterly results been presented for Afrezza. As you can see the growth trajectory for Afrezza has continued through Q3 and continues in Q4. Our FDA label change is as positive as we expected and slightly better as we got a very clear table looking at it by dosing which we think has been helpful and the feedback from customers has been very positive. On the recapitalization process this is ongoing and not yet complete, however, we have made significant progress around the warrant exchange to equity rates as well as restructuring reducing near-term debt. At the end of the day as we decrease our debt, this decreases our interest expense and increases our ability to invest in the business and grow. Currently our interest expense accumulates roughly $1 million a month when you look at the annualized. We continue to think and expect international expansion will come to fruition and bring more transparency to the market. Receptor Life Sciences is something we haven't talked about much in 18 months but we hope to bring you some clarity soon. With One Drop collaboration we've been working really hard to look at Afrezza addition of the app as well the potential cash market membership model. We continue to expect an increase in payer coverage as we go into 2018 and beyond. The completion of the STAT trial would give us very clear direction as we think about the next set of investments we make, the IND filing for Treprostinil is on track for early Q1 of 2018. And we continue to seek co-promote opportunities within our current infrastructure as well as finding a way to scale up into the primary care space. I'm going to stop there and open it up for questions. Rose.

I am going to turn it over to our operator.

[Operator Instructions]. And our first question comes from Jason McCarthy from Maxim. Please go ahead.

Hi guys, I have a question about the commercial strategy that you are implementing, can you give us a sense of the timing of those commercials, meaning will they be on specific time slots like on Sunday afternoons or Saturday afternoons or at night and how do you expect that impacts sales and how do you project the cost of those commercials going forward?

Hi Jason, this is Mike. Thank you for the question. We expect it to be a mix of morning, evening, prime time, and throughout the day commercials seven days a week. So this isn't expecting, there are some options where you can just look at impressions and buy last minute advertising. These are buys on the channels that we've shown and we expect to see them throughout all hours of the day. And one thing I'll add is that these are -- we went deep in this particular market that we believe are over indexed and ready for continued success. We want to really show the tri-effect of a good sales rep with good physician support, TV and digital all going into a market. So if you just think about scale up and optionality in 2018 we can get a pretty quick read on what we need to do.

And just a follow-up to that because we've been covering this space for a while and the last company that we covered, that did this was Dendreon and for them it was kind of the last step before the company ran into significant difficulties with their debt. I'm just curious if that's something that you guys are thinking about?

No, we have always had in our capital plan a Q1 increase in TV advertising. Given that we raised the $61 million, this was really a pull forward from 2018 because there was no reason to sit on cash and not invest it to grow. We tested this commercial extensively, really looking at the patient feedback, patient recall, patient intent, how fast it was for doctor, and in over 500 patients studied whether you are Type I, Type II, on insulin or orals there is a very high intent and desire to try our presence. So to me there is a very big difference than Dendreon which is treating in immunotherapy in cancer and prostate with a very complex system and a drug that's wide scale use and a product like Afrezza that impacts one out ten Americans. These are very different scenarios and we're just very excited to get the information out there for patients because you may or may not know the average patients spend less than 10 minutes a quarter with a doctor. That doctor is worried about running A1C test, checking their eye sight, and getting them out the door. We need patients to really be informed of healthcare choices and we saw 98% were not aware that Afrezza exist. We know we had to make this investment, it was just a matter of when and not if.

Okay, thank you guys.

And our next question comes from Oren Livnat from H.C. Wainwright. Please go ahead.

Hi, can you hear me.

Yes Oren.

Great, sorry, had headset problems today. Thanks. There's a whole lot packed in to that call so I have several questions and if you want to cut me off I can get back in a short line. Firstly, on the new label, can you just talk about to what extent your newly trained field force within the rules that exist in the law you can help physicians understand the side-by-side advantages of your new PK data represents versus overlog or hemalog [ph]?

Why don’t I just let Pat comment on this, the field feedback. He has been in the field in some of the rep back in the field. And I will comment on the side-by-side comparison part and some of the FDA changes.

Yeah, I think the heavy focus for us when we look at our field training and some of the early time in the field promotion has been obviously the clarity of our tables which really refers to the two points I referenced in my comments. And I think even having been out in the field myself I think it's really providing clarity of the time action profile and I think what that means is it's really helping in the eyes of the physicians and patients plan their day more accordingly and I think it's giving them more flexibility around the prandial insulin dosing. So I think that's where for the most part the clarity that we've had and some of the specifics that we haven't had in our previous label has been one of the areas that we focused on. And again as you know we promote obviously from our own prescribing information. So that's what we've been focused on from the field perspective and that's what the doctors have been I would say most interested in.

And then just two comments. I think it's a good question as many of you may have noticed, the FDA pulled out an overlog comparison and one thing you should just understand that they're doing that for all new insulins, they are only showing the PKPD curves of that particular insulin label. So you can go back and look at Ciaz [ph], Toujeo, Tarceva, they all went head-to-head in market comparisons and the FDA pulled out the competitive arm in all those labels. So this isn’t anything special for us. However what I will add is we've had numerous trials competing ourselves head-to-head against various mealtime influence and we have a good robust data package that we expect to be able to use that looks at the hypo rate, that looks at weight gain, weight loss, and weight neutrality and as well as lung function we know is important. So we -- remember one of the restrictions that were in the label was we get in the body fast but we don't work as fast. And so that really limited how and when and where we would use some of that data. But as you've seen with a lot of the FDA also lawsuits that have been out there around using fact based data, pivotal data, and we have a lot of pivotal data on this trial. We have done a lot of good Phase 3 work and we intend to make sure the market is aware of that. So just to give you one example, some of our pivotal trials have been published that really highlight the various aspects by A1C reduction, rates of severe hypo, and as well as hyper rates. But not only that we have a lot of trials we've done that have not been published. A lot of our lung data has not been published. So we want to really work to get our clinical information out there. And then the only other thing I will add is the dosing and in titration section was updated in the label. That was a really critical moment for us to be able to go out and really articulate what a 4 unit cartridges does versus the 12 as well starting and then titrating up very quickly. I can tell you just some of the feedback from the doctors has been, you know I used the product and it didn't work and now that I feel using 4 and 4 works so quickly I probably do need to increase 8 and 12s. And so that's consistent with the trends we're seeing in the business and I think that's just the overall health of the business. So the more we see 8s and 12s get adopted we feel that really means we're getting better and better titration in the local market which should result in outcomes. Does that answer your question.

Yeah, I guess it sounds like are we still in the -- I mean we are still in the very early innings but I guess is it clear that your average physician does recognize that your data is faster and faster?

I can tell you the feedback we get in little weekly has been very positive on this topic. It is nice to see the curves. Just managed care companies we've had several discussions over the last three weeks since the label change. Those discussions have been very positive inviting us back in. So I feel really good about the label change. I think it articulates exactly what we're looking for and I think so for the market reaction has been very positive.

So you segued right into my follow-up which was on managed care and what impact the label could have there. I mean obviously you have some pretty onerous restrictions on certain plans that require patients to be I guess suffering on therapy they're not compliant on before they can even try yours. And I guess how is that changing, when will that change so that patients can have the right to try something that might work better for them?

I mean I think you have seen two lawsuits, one Pfizer versus J&J and one Shire versus Allergen looking at the some of the market behaviors around access to care on different product profiles. This is something we're watching closely and studying. We've had many good discussions with the payers and we have a lot of good support out there with thought leaders as well as patient advocates. And so we know we have a slightly higher dropout rate because of the actions between the competition as well as the payer. But we also have a lot of success given our limited contracted lives. Remember we only contract for roughly 20% of all the prescriptions. And so as we go out there we get 70% to 80% coverage when we do the prior authorization works. So the doctors play for the patient, those get approved many times even though we don't contract for that business. So it makes sense for payer now with this new data to really revaluate some of those previous decisions honestly that were made three years ago under the regime of Sanofi and so very few categories reviews have happened in the last two years as there hasn't been much innovation on mealtime influence. With this label change I can tell you a few of payers are reviewing the category in Q1 and we do expect to continue that good progress there. But it's always been about these payers but we feel good about to the direction and the discussions that were going on.

So when do you think we should start thinking about expecting a positive momentum reflected in scripts as a result of payer adjustments, is that a half 2018 or even later?

No, I mean I think we -- we look at plans or we contract and remove PAs and see if we're trending above national and we do see that. So that gives us the feedback on where we should put our dollars next. And so we're just really balancing, giving money away versus growing share faster. And so we want to remove those restrictions and I think our number one focus is removing prior authorizations. We want to streamline how it helps the doctors prescribe, how it minimizes impact to the patient, and that's our main focus. And so before you will be reducing the prior off now we believe with this new label change we should be removing the prior off. Maybe it won't be a preferred brand but we're happy being tier three or tier four and just being covered. And so those discussions, I mean payers don't make moves in 30 to 60 days but as we go in there and lot of those discussions have started over the last month or next month we'll give you updates. But it's only going to get better, it's not going to get worse.

Okay, well I don't want to hog time, I will jump back in unless there is no one else waiting, and you will hear from me again soon.

Okay.

And your next question comes from Andrew D'Silva from B. Riley. Please go ahead.

Hey guys, thanks for taking my call. You have answered most of the questions I had but maybe we can just dive a little bit into sales and advertising. First off, just on the side of the sales team, do you feel right now that you are appropriately sized for your endeavors as you go into 2018 or do you think that you might need to add some more sales staff as you've recently gotten the label change and are you seeing some traction there?

We are working on a couple different plans so one is do we add more reps or do we add more to TV. So we started the TV campaign. We're also working on a sales force expansion, we just have to weigh do we put more money in reps, more money on TV or both, and if there might be synergy between both then we would do that. But we are sufficiently staffed to hit the targets that we're looking to hit but we believe we can expand the sales force and grow even faster. That could happen for example doubling down in certain markets like New York City and California where we see a lot of success. Putting another 5-10 reps in those markets will only drive grow faster. So I would say we add reps because we believe it's promotion responsive and the more reps we have the faster it's going to grow. So that's important as we go forward. So, yeah we are looking to add and I can tell you we've already started interviewing prospective candidates to supplement out where we are.

Okay, great and then on the advertising side you noted that 98% of potential candidates didn't even know that Afrezza existed. Could you -- did you ask any question related to 2% as far as if they were using it or why they weren't and then after you show them the advertisement do you know what percent it went up to that was actually interested?

Yeah, so on the 2%, I mean just picture that out of 500 people we are talking 10 people. I couldn't tell you maybe they were already on the product or they could have tried the product in the past. I wouldn’t have looked at the numbers in that level of detail for those particular 10 or they're just more educated consumers but that's good. The percent ask, I mean what I would tell you is the commercial recall of the Afrezza name was very high, the recall of inhaler one was significant, we are the only option out there. So as long as they remember that from the commercial we are in good shape where if they remembered like a cholesterol commercial there's a bunch of choices there. And then the intent was over indexed to what you would expect to see in general commercial. So we think we have a higher proportion of patients interested and we believe the name recall as well as the category recall is very, very high and all over indexed to benchmarks that we've seen and that I've done in my career. So I won't go on the specific numbers just because you want to run it and see and measure and compare interest but we've obviously discounted the results and try to make the impact we expect. And some of this is reaching frequency of the commercial and the duration. So, sometimes consumer campaigns take four weeks, sometimes it takes six weeks, we will watch them closely but we didn't launch it yesterday and that's what the market should be aware of.

Go ahead, I don’t want to interrupt you.

No, go ahead.

Okay, yeah, what metrics should we be looking at in the interim between now and maybe when you report next time to see if this is actually grabbing a toehold or not?

So, I think as Pat and I were trying to communicate is as we phase out the old SKU that have been in the market you've got to continue to look at cartridges and that's not readily available to everybody but that is the metric we look at as normalizing the cartridges per prescription. Because in many cases people were getting two scripts and now they're getting one and in some cases they were getting one script with two boxes and now they're getting one new titration box. So you've got to look at the cartridges, the normalized behavior and not get as distracted week-to-week by refills and NRx because that's what I think people are trying to say, oh, growth isn't there. Well we are looking at cartridges. We think that's the only way to normalize the shift in SKUs that we've been making across companies and packaging. The second one that we will be watching obviously is the number of doctors who prescribe each week and the breadth of that prescribing and growth of new prescribers. And we personally will be looking at the investment in those nine pilot markets to see how those look and then we'll be waiting for the STAT study results to give us a lot of information as we close out 2017 and 2018. So for me it's number of prescribers, breadth of prescribing, depth of prescribing, and the number of cartridges each week. The refills are going to bounce for the next three months as we continue work on the packaging side. And we expect TRx to continue grow. So that's all in there. I'll just close out with one more question because I know it's a question I've seen multiple places and I just want to put it to bed. I hear a lot of questions on where's UAE. There was originally at the end of the table with one partner for just one country with the CEO switch. We are looking for strategic partners around sections of the world so for example signing 20 partners off to run 20 different countries in the Middle East would create 20 different confusing points of contact for our company versus finding one strategic partner for making up the Middle East plus India. So our main focus is finding the right partners to move Afrezza around the world, who are going to make the investments to make sure it's successful and we're going to make a difference in those countries where it does not exist or they are undertreated because of cost or other reasons. So I just want to put that one to bed as I continue to get that coming in. But otherwise we will run down the way of working on everything we've communicated on my last slide that we originally presented in September and you can see we will continue to make progress on the checklist as we go down. I want to thank all of you for your patience and appreciate your support and I wish everyone a Happy Thanksgiving.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.