Pricing Discounts and Resulting Break-even Scenarios

[otherottawaguy]

I have been working on a few break-even scenarios when specific discounts are applied. The following is a summary table:

Annual Fix Costs	$120,000,000
Retail Cost of Box	$300.00
Monthly box(es)	150%			required to make it work
Monthly Cost to Client	$450.00
Client Annual Cost	$5,400.00	12	Month
Current per 90 day	$1,350.00	3	Month
Marketing	20%			(include POS mark-up)
Variable Cost	20%
Margin after COGS	60%
Net to MNKD	$810.00			per 90 day prescription
US TD1 Mrkt Size	1,250,000
MAX Danbury Capacity	2,000,000	12	max lines	annual dosages of 1 box/mnth
Current Danbury Cap.	222,222	2	curr lines	at 1.5 box/month req
Max Wkly TRX	Discount	Sale Price (90 day after discount)	Max Rev (Wkly) (Price x TRX)	Max Var Costs (Wkly) 90 day X (Var %+Mrkt %)	Fixed Costs (Annual Cost / 52)	Profit / Loss (Wkly)	Profit / Loss (Annual)	% of US TD1 Mrkt	% of Curr Danbury
500	100%	$0	$0	$270,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	0%	1%
1000	80%	$270	$270,000	$540,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	0%	2%
2000	70%	$405	$810,000	$1,080,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	1%	4%
4000	60%	$540	$2,160,000	$2,160,000	$2,307,692.31	$(2,577,692.31)	$(120,000,000.00)	1%	7%
6000	40%	$810	$4,860,000	$3,240,000	$2,307,692.31	$(687,692.31)	$(35,760,000.00)	2%	11%
6500	33%	$904	$5,879,250	$3,510,000	$2,307,692.31	$61,557.69	$3,201,000.00	2%	12%
8000	25%	$1012.50	$8,100,000	$4,320,000	$2,307,692.31	$1,472,307.69	$76,560,000.00	3%	14%
10000	25%	$1012.50	$10,125,000	$5,400,000	$2,307,692.31	$2,417,307.69	$125,700,000.00	3%	18%
20000	25%	$1012.50	$20,250,000	$10,800,000	$2,307,692.31	$7,142,307.69	$371,400,000.00	6%	36%
30000	25%	$1012.50	$30,375,000	$16,200,000	$2,307,692.31	$11,867,307.69	$617,100,000.00	10%	54%
Break Even Scenarios
4000	17%	$1120	$4,482,000	$2,160,000	$2,307,692.31	$14,307.69	$744,000.00	1%	7%
5000	25%	$1012	$5,062,500	$2,700,000	$2,307,692.31	$54,807.69	$2,850,000.00	2%	9%
6500	33%	$904	$5,879,250	$3,510,000	$2,307,692.31	$61,557.69	$3,201,000.00	2%	12%
17500	50%	$675	$11,812,500	$9,450,000	$2,307,692.31	$54,807.69	$2,850,000.00	6%	32%
55000	56%	$594	$32,967,000	$29,970,000	$2,307,692.31	$689,307.69	$35,844,000.00	18%	100%

[otherottawaguy]

I would appreciate some feedback on the input numbers above. I will update and make the sheet avail on google docs once I am happy with the inputs.

OOG

[matt]

I got as far as the line that says "Net to MNKD $810". If you go back and look at Liane's weekly spreadsheet of the data reported by Ripano, it shows Q3 TRx of 3,694 while the 10Q for the same period reports $573 thousand in commercial sales. That implies gross sales to MNKD of $155 per script, and cost of sales for the period was $1,172 per script for a net to MNKD of negative $1,017 per script.

The cost of sales is driven in large part by poor fixed cost absorption on such a low unit volume so if unit volume improves the same fixed overhead will get allocated across more units, thereby lowering average unit cost. That will certainly help the numbers.  However, even if you make an extreme assumption that the cost of production for Q3 was zero (which it wasn't) there would still be the difference between your assumed net of $810 and the reported actual of $155 per script.

Unfortunately I can't help explain that discrepancy away but before you spend more time on the rest of the model I think you need to have your revenue assumption thoroughly validated. The numbers reported by IMS and Symphony are not true revenue numbers; they are the full retail list price sales as reported by the pharmacies before rebates to insurers, discounts to supply chain partners, cost of the discount cards, etc.  They bear no resemblance to the prices manufacturers will actually see. If you want to understand the accounting better, I recommend this presentation that was done by the accounting firm Deloitte:

Gross to Net Accounting

It is a very complicated topic and I am not sure anybody outside the company has enough visibility to the true numbers to make an intelligent guess at breakeven volume.  However, since your whole model relies on having an accurate sales figure to which you can apply various discounts, you need to scrub that number thoroughly. 

[wildthing]

Jan 17, 2017 14:01:29 GMT -5 otherottawaguy said:

I have been working on a few break-even scenarios when specific discounts are applied. The following is a summary table:

Annual Fix Costs	$120,000,000
Retail Cost of Box	$300.00
Monthly box(es)	150%			required to make it work
Monthly Cost to Client	$450.00
Client Annual Cost	$5,400.00	12	Month
Current per 90 day	$1,350	3	Month
Marketing	20%			(include POS mark-up)
Variable Cost	20%
Margin after COGS	60%
Net to MNKD	$810.00			per 90 day prescription
US TD1 Mrkt Size	1,250,000
MAX Danbury Capacity (Annual)	2,000,000	12	max lines	annual dosages of 1 box/mnth
Current Danbury Cap. (Annual)	222,222	2	curr lines	at 1.5 box/month req
Max Wkly TRX	Discount	Sale Price (90 day after discount)	Max Rev (Wkly) (Price x TRX)	Max Var Costs (Wkly) 90 day X (Var %+Mrkt %)"	Fixed Costs (Annual Cost / 52)	Profit/Loss (Wkly)	Profit/Loss (Annual)	% of US TD1 Mrkt	% of Curr Danbury
500	100%	$0	$0	$270,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	0%	1%
1000	80%	$270	$270,000	$540,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	0%	2%
2000	70%	$405	$810,000	$1,080,000	$2,307,692.31	$(2,577,692.31)	$(134,040,000.00)	0%	4%
4000	60%	$540	$2,160,000	$2,160,000	$2,307,692.31	$(2,577,692.31)	$(120,000,000.00)	1%	7%
6000	40%	$810	$4,860,000	$3,240,000	$2,307,692.31	$(687,692.31)	$(35,760,000.00)	1%	11%
6500	33%	$904	$5,879,250	$3,510,000	$2,307,692.31	$61,557.69	$3,201,000.00	2%	12%
8000	25%	$1012.50	$8,100,000	$4,320,000	$2,307,692.31	$1,472,307.69	$76,560,000.00	2%	14%
10000	25%	$1012.50	$10,125,000	$5,400,000	$2,307,692.31	$2,417,307.69	$125,700,000.00	3%	18%
20000	25%	$1012.50	$20,250,000	$10,800,000	$2,307,692.31	$7,142,307.69	$371,400,000.00	6%	36%
30000	25%	$1012.50	$30,375,000	$16,200,000	$2,307,692.31	$11,867,307.69	$617,100,000.00	10%	54%
Break Even Scenarios
4000	17%	$1120	$4,482,000	$2,160,000	$2,307,692.31	$14,307.69	$744,000.00	1%	7%
5000	25%	$1012	$5,062,500	$2,700,000	$2,307,692.31	$54,807.69	$2,850,000.00	2%	9%
6500	33%	$904	$5,879,250	$3,510,000	$2,307,692.31	$61,557.69	$3,201,000.00	2%	12%
17500	50%	$675	$11,812,500	$9,450,000	$2,307,692.31	$54,807.69	$2,850,000.00	6%	32%
55000	56%	$594	$32,967,000	$29,970,000	$2,307,692.31	$689,307.69	$35,844,000.00	18%	100%

I would question the "US TD1 Mrkt Size 3,000,000." Most recent estimates I saw were that there are less than 1.5 million type 1 diabetics in the country:

www.diabetes.org/diabetes-basics/statistics

[otherottawaguy]

I have updated model with clearer column definition and adjusted the TD1 population. To do much more with the numbers will require some significant edits. Will post this to Google docs with a two links, one to a non editable, the other to an editable workbook for those that want to play around with the numbers.

OOG

[otherottawaguy]

Links to the docs:

Locked copy:
drive.google.com/open?id=0B7MWk-JqDbQ3ajNRUE96cFJJTjg

Editable Copy:
drive.google.com/open?id=0B7MWk-JqDbQ3YkVNSm9oYlZoNFk

Enjoy,

OOG