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5 Things MannKind Corp.'s Management Wants You to Know

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."
-- Pfeffer

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."
-- Pfeffer

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."
-- Pfeffer

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."

Mann: "Sorry."

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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Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2014, at 8:14 PM, CanalKid wrote:


    Thanks for an interesting article. Your skepticism about Mannkind's potential sales is at least consistent with your history as a market journalist covering diabetes drugs. What seems problematic about that is that your lay opinion about sales contrasts greatly with those of SNY, a large company that does very successful sales with a huge sales force. SNY obviously believes the product will sell. Do you imagine SNY just came to the table without doing some market research, plan and conservative projection of the possibilities? In a way, it's insulting to the company to infer this and smacks of French bashing, benign jingoism or xenophobia—Popular sports in a fading country that has little to brag about these days.

    You also have a track record of being an extreme skeptic on approvals and sales. As an Amylin investor, I recall your skepticism of the company and its GLP-1 long acting injections Byetta and Bydureon. Although Amylin is now gone, sold at a bargain price to BMS and AZN, the drugs it developed for 12 years before FDA approval are proving very successful in a competitive market. I also recall the fear mongering about their "risks"— my favorite of which was "increased pancreatitis"- sadly perpetrated in part by a trigger happy FDA that has never publicly apologized for its hysteria (an act that obliterated the share price). As the company contended, studies have shown that patients on the drug have a lesser chance of experiencing acute pancreatitis. Now, data are showing that the "gila monster formulations" may have a protective benefit for dementia. Think of the possibilities if that bears fruit!

    In sum, I'd have to say that based on your track record with diabetes coverage, I'll take your skepticism about sales of Afrezza as a positive sign for the company and a harbinger of good things to come for actual sales. I'm content to wait for yet another demonstration that your analyses are at best ultra conservative.



  • Report this Comment On August 14, 2014, at 10:27 AM, Paulamichelle wrote:

    As a patient as well as a investor I think that affrezza is ground breaking and as soon as the commercials come out Drs will be asked to prescribe this ,even if you aren't particularly adverse to needles stabbing yourself daily numerous times a day even though necessary is unpleasant ,and think of the children with this disease and how this can effect them , thanks to all who contribute in this positive change for the millions of diabetics around the world and success to its supporters thanks

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Brian Orelli

Dr. Orelli is a Senior Biotech Specialist. He has written about biotech, pharmaceutical, and medical device companies for The Motley Fool since 2007.

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9/4/2015 3:59 PM
MNKD $3.89 Up +0.20 +5.28%
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