Eiseman's SA article ($1B R&D expense reimbursement) discussion thread

[brentie]

Aug 13, 2014 18:41:17 GMT -5 gamblerjag said:

Can't someone clarify with Matt if Eisman's interpetaton is corret..  I'm sure he would respond..  since it's not a secret.

Jeff Eiseman , Contributor

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Author’s reply » opc11:



Thank for your balanced comments. Please see my second response to Derek above (at 6:49 before seeing the additional comment he made below at 6:19) where I provide info regarding how to listen to the part of the conference that addressed these issues.



After the article was published, I thought it would be prudent to contact Matt Pfeffer to see if I understood correctly or needed to walk back part or all of what I said. Apparently, he has taken off for a few days. If I hear from him I will transmit what he says.

[ezrasfund]

seanismorris wrote...

"But, the language that we do have suggests (for example) if Sanofi spent 500M marketing Afrezza Mannkind would be responsible for 35% of that. That's why the loan agreement from Sanofi exists, because they know that there is no way Mannkind could cover it. But, Sanofi does expect that if would eventually be covered by Afrezzas sales."

I am not sure this is true.  My understanding is that each party pays its costs, and all costs are accounted for before any profits are distributed.  This leaves open the question of what happens and how costs will be borne if there are no profits.  The question of how costs will be borne before there are profits is a bit different and has been answered it seems.  Beyond the payment Sanofi made to enter into the partnership they will lend MNKD up to $175 million so that MNKD can ramp up production and cover their own costs.

Another way that the 35/65 split can be understood is from the manufacturer to retailer model.  If M makes a widget for $2 and sells it to retailer S for $4, then retailer S will sell the widget for $8.  If COGS is an equal percentage of revenues for both M and S then S will make twice as much money as M.  Hence the 35%/65% split.

[trenddiver]

Matt's quote about COG in CC

"We haven’t given a lot of disclosure there, except to say that I mean, under the supply agreement, which will eventually become public as well, I mean, we are obliged to. So, the product to Sanofi at our cost and that’s our intention. The ultimate profit from such sales will flow through when they actually make some sales and it come -- drops down to the bottom-line and into collaboration. So other than to say we're going to sell at cost, we've not said what our cost structure is at this point."

It appears Matt has left the discussion of COG intentionally vague. Hopefully this will be clarified soon

Trend

[seanismorris]

I suppose you could look at it bottom up (adding up all the cost) or top down where from the Net profits you then subtract each party's costs then dividing the remaining funds 65/35.  Initially, their will be no profits so the loan facility will be tapped. But, it doesn't really make any difference.

But the bottom line, is Mannkind is selling Afrezza at cost to the Sanofi/Mannkind Partnership (call it SMP) and Sanofi will be selling the marketing expenses (at cost) to SMP, then they will do the profit sharing.

Eventually, Sanofi will be also be selling insulin at cost to Mannkind, and that cost will be passed along to SMP.  

Once, the insulin switch takes place SMP will be more profitable so Mannkind will also make more. But, Mannkind will benefit more from the new insulin (assuming Sanofi could have sold the insulin elsewhere).  So, in real terms they will be making more from the partnership that 35%, who knows Mannkind could be making the equivalent of 50% if the deal was don't with another party that didn't produce insulin.

But, there will be no reimbursement for old R&D expenses, that just doesn't make sense. Should Mannkind also reimburse Sanofi for building a global brand?  That's all part of the reason the split is 65/35.

[obamayoumama]

Let's say a taxi company says that you can get a ride at cost.  They would need to be reimbursed for the gas, the salary of the driver, the depreciation of the taxi, the cost of wear and tear, and a portion of cost of the corporate overhead.  You would be paying for everything but the final profit from the ride.  The taxi ride might normally be $25.00, but the net profit might be two dollars, you would be paying $23.00, not the $4.00 in gas.  I recall Matt saying that MNKD did their modeling of the Partnership based on internal projections of sales and that the split was on the level of 50/50 split or equal to the mid 20's of a royalty payment.  I think Jeff was correct.  

[MnkdMainer (MM)]

I wish Eiseman were correct, but I see no evidence whatsoever that he is.

[BD]

There are a lot more comments on the SA post now, including form Eiseman, who apparently has been up all evening thinking about this and who has now "walked back some but not all" of what he wrote.

The final post (as I write this) says we'll just have to wait to hear from Matt on this... that sounds about right.

[alethea]

The pre deal costs have already been expensed, likely as R & D. Pre-deal costs will NOT be incorporated into COGS, there was no product being sold.

It is absurd to think Sanofi will pay for the expenses of the last 10 years as COGS for future sales of product that does not exist at the time of the deal. NO WAY, NO HOW.

[papihoyos]

I understood as well that MNKD would be reimburse for prior R & D which I estimated at $1.6B plus the $925M. But when you look at it closely they are only receiving 65% of these amounts because the costs will be included as a cost in the JV. MNKD will net roughly $1.6B. I posted thread on this subject called P & L projections and attached a workbook with my assumptions.

[papihoyos]

Matt said in CC "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."

Read more: www.nasdaq.com/article/5-things-mannkind-corps-management-wants-you-to-know-cm379929#ixzz3AKuRQZXL

How does 35% of profit equate to mid 20% royalties? What Matt was alluding to is the prior period R & D reimbursement, that's how.

[MnkdMainer (MM)]

Papi,

I wish you and Jeff were right, but, again, having reviewed the PR and CC, I see no evidence whatsoever that you are.  It simply is not there.

MM

[ezrasfund]

I would again ask if it is correct that going forward Sanofi will include the costs of any clinical trials and regulatory submissions in the shared pre-profit expenses. I believe this was stated in the CC with Sanofi. If so it seems to make sense that MNKD would also be compensated for similar costs that they have incurred to date, unless MNKD was receiving a lump sum payment which should be more than $150 Million. Also Matt did refer to the fact that expenses on the balance sheet would be re-characterized from R&D to COGS which was not possible when there were no sales.

[mdcenter61]

Aug 14, 2014 8:27:02 GMT -5 ezrasfund said:

I would again ask if it is correct that going forward Sanofi will include the costs of any clinical trials and regulatory submissions in the shared pre-profit expenses. I believe this was stated in the CC with Sanofi. If so it seems to make sense that MNKD would also be compensated for similar costs that they have incurred to date, unless MNKD was receiving a lump sum payment which should be more than $150 Million. Also Matt did refer to the fact that expenses on the balance sheet would be re-characterized from R&D to COGS which was not possible when there were no sales.

Ezra, if Matt said "expenses on the balance sheet", that would really be confusing since R&D under GAAP is expensed rather than capitalized and goes straight to the P&L. it is, of course, a component of the accumulated deficit, or negative retained earnings in the equity portion of the balance sheet. Sure hope for more clarity on this one.

[ezrasfund]

Sorry, I am not an accountant, and I don't think there is a transcript of the early morning Sanofi call. What I am referring to is expenses from the P&L's which are now shown as losses on the balance sheet.

I clipped the following quotes from Matt's opening statement during the afternoon CC. I think it answers the question with another question. "First...Second...There's also...". It is the "There's also" part that has not been fleshed out. What I read into this "retrospective aspect" is that MNKD will be compensated for their past expenses, but Sanofi will also get recognition of their investments in sales and marketing infrastructure. The "$64,000 question" is just what those numbers will be. If it was considered a wash, I'm not sure it would be even mentioned, and it seems unlikely that MNKD will owe Sanofi on this, so that leaves the question of how big MNKD's credit will be.

So I believe that Eiseman is right, but there is an offsetting amount due to Sanofi's prior investments in sales and marketing infrastructure.

Matt from the CC:

"First, it's important to consider the overall economics of the deal. The upfront and milestone payments to MannKind are intended recognize our significant investment in the product to date....

Secondly, 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...

There's also a retrospective aspect as well. It recognizes Sanofi for the substantial investment and involvement has made building a market-leading commercial infrastructure and also recognizes MannKind's investment in the product today [to date]."

[dreamboatcruise]

Aug 14, 2014 8:27:02 GMT -5 ezrasfund said:

I would again ask if it is correct that going forward Sanofi will include the costs of any clinical trials and regulatory submissions in the shared pre-profit expenses. I believe this was stated in the CC with Sanofi. If so it seems to make sense that MNKD would also be compensated for similar costs that they have incurred to date, unless MNKD was receiving a lump sum payment which should be more than $150 Million. Also Matt did refer to the fact that expenses on the balance sheet would be re-characterized from R&D to COGS which was not possible when there were no sales.

Deals are deals and there is no formula that must be used, regardless of what might make sense to you.  In reality, getting the best deal possible makes sense to each of the parties and those goals are conflicting.  Sure, it would make sense for Mannkind to have Sanofi give them an extra billion... and it would make sense to Sanofi to not do that.  It would also make sense that unless another drug company was likely to offer an extra billion Sanofi would have little compelling reason to agree to it.

Deals like this include upfront payments such as the $150M in part to recognize value that exists in the drug.  I fail to see why there would be a more complicated structure involving both a straightforward payment and some as yet ill defined method of paying more over time based on prior costs.

One can listen to the calls and there is really no way of interpreting what is said as indicating what you'd like to believe.  Further, I personally have never heard of this being done in any other drug licensing deal (i.e. a structure for mixing sunk costs in with future COGS or shared expenses rather than simple recognizing them with the upfront fee).  If you show me even ONE other deal that included such an arrangement that might give some indication that what "makes sense" to you also makes sense to deal makers and the accounting considerations that drive them.