MannKind (NASDAQ: MNKD ) recently signed a marketing partnership with Sanofi (NYSE: SNY ) and later in the day held a second conference call to discuss its second-quarter earnings. Here are five quotes from MannKind's management with details on the future of the company and its inhaled insulin Afrezza.
1. "The profit-sharing arrangement is an important conceptual element of the deal structure, as both parties have incentives to maximize overall product profits and minimize costs."
-- Matthew J. Pfeffer, CFO, principal accounting officer, and corporate vice president.
MannKind and Sanofi could have set up the sales payments as a royalty on sales of Afrezza, but they opted for a profit-sharing arrangement where MannKind gets 35% of the profits (it also has to accept 35% of the losses). As Pfeffer points out, the profit-sharing agreement allows MannKind to benefit from keeping its manufacturing costs down. The plan is to eventually use Sanofi's insulin to make Afrezza, which should help reduce the cost of goods.
2. "When we model the deal with our internal sales projections, which of course, we've not disclosed, but we do, do that kind of modeling routinely in these kinds of analyses, we did obviously compare it to our traditional royalty-based deal and found that to get essentially equivalent economics, the royalty terms would be somewhere in the mid-20% range, which is a pretty favorable royalty comparison."
From the preceding information, we can calculate MannKind's expected profit margin. If 25% of sales equals 35% of profits, then profits/sales must equal 0.25/0.35, or about 71%.
That's presumably at close to peak sales when the sales force is a minor expense. Early in the launch, manufacturing and selling Afrezza will probably cost more than revenue from the sales of the product. Sanofi has offered to front MannKind up to $175 million to cover its portion of the losses from the profit-sharing agreement.
In the short term, MannKind would get more from a royalty, but it caps the upside potential. If sales exceed expectations, profit margins -- and therefore MannKind's portion of the profits -- should be higher, and the deal works in MannKind's favor.
3. "Because you're right, once you reach profitability, you will suddenly rope in all those otherwise dilutive securities."
When (if!) MannKind becomes profitable, it'll have to include all the in the money options and warrants in the share count when calculating its earnings per share, reducing the EPS number. Investors should already use that number when calculating MannKind's market cap. The basic share count is at 380.8 million shares, but there are another 56.8 million shares that should be included in the fully diluted share count.
4. "Cash and cash equivalents were $41.2 million at June 30, 2014, compared to $35.8 million in the first quarter of 2014. In the second quarter 2014, $16.3 million of proceeds from warrant and stock option exercises were received in addition to $20 million in Tranche B notes purchased by Deerfield."
Looks like MannKind burned through over $30 million during the second quarter. Fortunately with the commercialization deal in place, some of those expenses, mostly research and development, will be shifted over to the joint venture. MannKind also won't have any manufacturing expenses since the joint venture will reimburse MannKind for the manufacturing Afrezza.
With the $150 million upfront payment from Sanofi and credit facilities still available, MannKind has plenty of cash to last a few years at the lower burn rate, although it'll probably use some of the cash to develop other drug-device combinations using its inhaler device technology.
In response to an analyst question about what else the deal with Sanofi covers, Alfred Mann, founder, chairman, and CEO of MannKind, chimes in:
Mann: "They also have rights to our new process."
Pfeffer: "We've not disclosed that yet, Al."
File that one under "things management didn't want you to know."
While it was a funny exchange and shows how excited Mann is about his baby, I'm not sure it was the biggest faux pas Mann could have made. It seems safe to assume Sanofi would have rights to any second-generation Afrezza product that would compete with the one it's licensing. The bigger disclosure blunder might be that MannKind is working on a second-generation product; I'm not sure the company had let investors know it has a follow-up device yet.
We close with one more quote:
5. "We know our customers, we know the patients, we know the physicians, we know the barriers to deliver and we know how to leverage this opportunity."
-- Pierre Chancel, Sanofi's senior vice president of global diabetes and global marketing
There are no guarantees that Sanofi will be able to persuade doctors to prescribe Afrezza. I believe physicians will be timid at the beginning, prescribing it mostly to patients who refuse to inject themselves.
But without a doubt, Sanofi is one of the best companies MannKind could have gotten to market Afrezza, since it sells multiple diabetes drugs and glucose monitors. It wouldn't surprise me if MannKind turned down offers with better terms from companies that aren't diabetes powerhouses, because it rightfully believes that Sanofi has a better chance at making Afrezza a commercial success.
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