3 Things to Look for in MannKind's Partnership

Merck would be a perfect partner for MannKind; Novo Nordisk and Eli Lilly are likely out.

Jul 4, 2014 at 5:00PM

It's been a week since MannKind (NASDAQ:MNKD) gained Food and Drug Administration approval for its inhaled insulin Afrezza, and the biotech still hasn't announced a marketing partner. What's taking so long?

I jest. But I'm allowed to. MannKind has been talking about a partnership since before the FDA first rejected the drug four years ago.

Without a doubt, a partnership is the next big catalyst for the stock now that Afrezza is approved. Here are three things to look for when the partnership is announced.

1. Is there a partnership?
Don't get me wrong -- MannKind can find a partner. Some company is surely willing to market Afrezza. If you believe CEO Alfred Mann -- and that can be dangerous -- multiple companies have already expressed interest.

The question is whether the terms are acceptable to MannKind. That's presumably why MannKind didn't sign a deal before the approval, despite all the "discussions" it has had with potential partners. While it's possible no company wanted to license the drug before approval, my guess is MannKind felt the terms being offered weren't good enough to justify commencing an agreement.

As it turns out, rejecting any lowball offers was likely a good move. With the risk of an FDA rejection removed, the up-front payment MannKind can collect is presumably higher than it could have fetched before the approval.

It remains to be seen whether the terms, which will likely include an up-front payment, royalties, and possibly payments linked to sales milestones, will be substantial enough to justify signing on the dotted line.

If MannKind turns down the deal(s) it's offered and launches on its own, the company's value should shrink substantially. Diabetes is too big a market for a small company to launch a product on its own. Afrezza's potential is substantially greater in the hands of a large partner.

A good example here is Amarin (NASDAQ:AMRN), which launched its triglyceride-lowering drug Vascepa with its own sales force despite saying that it was interested in finding a partner. It hasn't worked out so well: Amarin booked just $11 million in Vascepa sales in the first quarter. Even if you assume a large partner couldn't do any better, Amarin likely would have been better off handing over the marketing and accepting a royalty given that it spent over $19 million on selling, general, and administrative expenses.

2. Who is the partner?
The partner doesn't have to be a diabetes powerhouse. In fact, that's somewhat unlikely. It's hard to see Novo Nordisk (NYSE:NVO) or Eli Lilly (NYSE:LLY) partnering with MannKind, since Afrezza will compete directly with Novo Nordisk's Novolog and Eli Lilly's Homolog.


Source: MannKind.

But I'd be wary if MannKind licenses Afrezza to a partner with no diabetes drugs. There's something to be said for experience. And a drugmaker that has a diabetes sales force can presumably offer a higher royalty because it doesn't have to set up a new team.

The best-case scenario would be a company that markets to type 2 diabetics, because that seems to be the population most likely to take Afrezza, at least initially. Merck (NYSE:MRK), with its Januvia franchise, would be an ideal candidate. And Merck is clearly interested in expanding its diabetes repertoire after licensing Pfizer's diabetes drug candidate ertugliflozin last year.

3. The terms?
There are a lot of moving parts with licensing deals, including up-front payments, royalties, and one-time sales milestones. It can be difficult to determine how good a deal is, especially since the thresholds for milestone payments -- lovingly referred to as biobucks -- usually aren't disclosed and royalty rates are often given in vague terms such as "high teens" or the ever-elusive "double digit."

The one number investors should keep their eye on is the guaranteed up-front money. The more MannKind is given straightaway, the more confidence the partner has with Afrezza's potential. While it doesn't guarantee success, a large up-front payment should boost MannKind's value because it will show investors that at least one industry player thinks doctors will prescribe Afrezza.

Arena Pharmaceuticals and Orexigen both received a $50 million up-front payment from their respective partners for obesity drugs that had not yet been approved. MannKind theoretically should be able to swing more than that, although deal terms are fluid. If it's given an option of $100 million up front with a 20% royalty or $50 million up front with a 30% royalty, the latter is probably a better deal since the extra 10% should bring in more than $50 million over the life of the product.

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