After years of discussions, MannKind (NASDAQ:MNKD) finally has a partner for its inhaled insulin Afrezza.

And a pretty good one at that.


Source: MannKind

The biotech announced a deal with diabetes expert Sanofi (NYSE:SNY) yesterday. There are two ways of looking at the deal:

1. MannKind is giving up a lot
The biotech used to own 100% of the rights to Afrezza. Now it owns just 35%.

That's a big haircut. There's no sugarcoating it, MannKind is giving up a lot of upside.

MannKind probably couldn't market Afrezza effectively on its own, so a partnership or a full sale was always expected. But it would have been nice to have seen MannKind retain closer to 50% ownership.

2. Sanofi is offering a lot ... upfront
MannKind gets $150 million up front. That's certainly bigger than the company could have gotten before the approval and shows Sanofi is confident its 65% ownership can produce $150 million in profits fairly quickly.

Sanofi is so confident in the prospects it's even willing to cover MannKind's portion of the losses from the partnership, up to $175 million. It's not actually free money -- it's a loan -- but if Afrezza is a flop, MannKind doesn't have much to fall back on, and Sanofi may never see the loan repaid, making it another sign of Sanofi's confidence.

The deal calls for up to $775 million in milestone payments "dependent upon specific regulatory and development targets, as well as sales thresholds." Given the vague details, it's hard to know how much of those milestones MannKind might eventually get although the biotech did say the sales milestones start at $250 million in aggregate sales, which seems achievable.

The biotech also disclosed the milestone payments include $30 million for EU approval and $20 million for approval in Japan, which aren't long-shots, but aren't sure things necessarily either.

MannKind's good outweighs the bad



The funny thing about this deal is the more bullish you were on Afrezza, the less you should like the deal. If Afrezza becomes a $1 billion blockbuster within a few years, taking a smaller up-front payment and retaining more of the profits would be a better deal.

As someone who's less bullish on Afrezza's potential -- at least in the short term -- it looks like a good deal to me. MannKind gets some much-needed cash and doesn't have to cover any of the losses during the initial launch. Sanofi's $150 million payment and agreement to cover MannKind's share of the losses is a solid endorsement of Afrezza's potential.

Beyond the numbers, the deal also looks good because of the chosen partner. Sanofi is a global diabetes powerhouse with glucose monitors and five diabetes drugs, so it should have an easier time convincing doctors to prescribe Afrezza than a company with limited diabetes experience.

But the question remains
While I like the deal terms and the partner, it does bring up the question of valuation -- I wonder if MannKind looks a little overvalued at a $3.2 billion market cap, given that it just signed away a lot of potential drug profit.

The big question, though, for investors is just how big of a seller Afrezza will be. We'll see soon enough whether Sanofi can make Afrezza a quick blockbuster, as it plans to launch the drug device in the first quarter of next year.

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