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Summary

  • MannKind’s substantial prior costs & Sanofi’s near term future costs will affect how soon profits will start to accrue.
  • The date of initial profitability is less important than what happens to the early income from sales.
  • Despite the delay in the date of profitability, the implications of the plan to make MannKind whole before declaring profits has enormous benefits for MannKind’s valuation.
  • Ultimately, what matters is not either party’s share of the profits, but rather the size and timing of future sales.
  • MannKind has negotiated a favorable partnership arrangement, and done so with the best possible partner.

The partnership between Sanofi (NYSE:SNY) and MannKind (NASDAQ:MNKD) calls for all of each company's relevant present and prior costs to be counted when calculating net profits. This does not mean, as at least one commenter has suggested, that Sanofi is paying MannKind for its prior costs. Rather it means that sales revenue will be used to reimburse both companies for their relevant present and prior costs before there are any profits to distribute.

Apparently, MannKind has invested well over $1 billion in Afrezza. Sanofi, in addition to making upfront and milestone payments to MannKind, will incur sizeable expenses related to negotiating the agreement, running studies, working with the FDA, and commercializing Afrezza.

These arrangements have two major implications for MannKind. First, it delays the date when profits are split. When this fact finally dawns upon some investors, their first emotional reaction is likely to be negative.

But the second implication is that because both companies will be made whole prior to distributing profits, MannKind will have plenty of money to spend before profits show up, without taking the upfront $150 million and milestone payments into consideration. Although MannKind spent more than $1 billion, it doesn't have long term debts anywhere close to $1 billion. According to its March 2014 quarterly balance sheet, its long-term debt was under $150 million. Thus if MannKind used all of its upfront payment to eliminate it long term debt (I am not championing this course of action), it would still have over $1 billion in revenue to spend as it chooses.

Profits are not everything. Those who are arguing that the partnership's financial arrangements are unfair to MannKind are ignoring the fact that they will be receiving substantial income long before Afrezza becomes profitable. Because MannKind will soon have a greatly improved balance sheet and a robust R&D program focused on the technosphere platform and its recently-neglected pipeline, MannKind shares are considerably undervalued.

Only if Afrezza is incredibly profitable will the 35%/65% profit make a difference in the long run. If it does, then as others have observed, there will be plenty for everyone. The most important part of the financial agreement was making MannKind whole before reaching profitability.

How can MannKind supporters or skeptics say that this is a bad deal if, including the bonus and milestone payments, MannKind receives around $2 billion before adding in that it will also get more than a third of eventual profits? Given the structure of this agreement, the key to valuing MannKind shares is not its share of future profits, but the size and timing of future sales.

Finally, Seeking Alpha author Psycho Analyst got it right: No one can do that better than Sanofi. Not only is its sales force outstanding, but Sanofi also fully understands the need for educating and coaching physicians and nurses, and it is also committed to making Afrezza affordable in developing companies. I am proud to be a MannKind investor.

Disclosure: The author is long MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Properly Treating Costs: Re-Evaluating The MannKind And Sanofi Partnership