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Post by fraserc22 on Aug 14, 2014 13:11:14 GMT -5
From the Conference Call: "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
Does anyone have a handle on the implications of this quote?
In particular, do we have enough information to reverse engineer MNKD's "internal sales projections" from this comment? And if so, might we be able to reach a reasonable pps estimate?
Any input would be much appreciated, as I'm not quite there yet in terms of the assumptions / calculations needed to reach an answer.
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Post by dreamboatcruise on Aug 14, 2014 13:33:30 GMT -5
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Post by alcc on Aug 15, 2014 0:38:39 GMT -5
Dreamboat, there is no way "expense" is only 29% of revenue. Even if we assume the cost/expense sharing applies only to cost of goods and sales and marketing expense (i.e. no G&A and no R&D), this will likely add up to ~45-50% of revenue. Thus 35% share of profit implies ~18% royalty on revenue, not 25%. I had always felt (and posted) that 25% royalty is a reasonable deal (to both parties). But a 65/35 split on profit is not reasonable any which way you look at it.
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Post by ezrasfund on Aug 15, 2014 8:22:06 GMT -5
But a 65/35 split on profit is not reasonable any which way you look at it. The 35/65 split mirrors the profits in a manufacturer/retailer relationship. If it costs manufacturing company M $2 to make a widget and they sell it to retail company S for $4, then company S will sell the widget for $8 to the customer. In this basic example M makes $2 in profit but S makes $4 in profits; a 33%/66% split of the total profit when COGS is the same percentage of sales for each company. Assuming both companies have the same profit margin, the higher the margins the greater the advantage for the retailer. |
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Post by fraserc22 on Aug 15, 2014 8:56:58 GMT -5
So let's hold as true, for now, that: 1) royalty rate = 25%; and 2) 29% of sales are expenses.
What "internal sales projections" would tend to support these numbers? Can we make any reasonable assumptions?
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Post by dreamboatcruise on Aug 15, 2014 9:01:58 GMT -5
Dreamboat, there is no way "expense" is only 29% of revenue. Even if we assume the cost/expense sharing applies only to cost of goods and sales and marketing expense (i.e. no G&A and no R&D), this will likely add up to ~45-50% of revenue. Thus 35% share of profit implies ~18% royalty on revenue, not 25%. I had always felt (and posted) that 25% royalty is a reasonable deal (to both parties). But a 65/35 split on profit is not reasonable any which way you look at it. I was merely stating the implications of what the company has said. I do not have have any insight into COGS... other than the fact that eventually a vast majority of the costs will be in house and thus not amplified by profits of lower tier vendors getting lumped into COGS... e.g. Sanofi will sell insulin at cost eventually rather than MNKD buying from Amphastar with Amphastar's profit becoming part of Cogs. |
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Post by alcc on Aug 15, 2014 14:46:11 GMT -5
Your numbers for manufacturing v. retail is not correct. Retail net margins are wafer thin but operating expenses are huge. His net profit for the your widget is not likely to be higher than that realized by the manufacturer. The proper analogy for this partnership imo is this: Sanofi and Mannkind form a joint venture company. Into this JV, Mannkind dumps in its intellectual property which has taken more than $1B and 10 years to develop. Sanofi pays Mannkind ~$1B in stages (outside the partnership). Sanofi takes a 65% equity in the JV; Mannkind 35%. How is that fair? |
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Post by alcc on Aug 15, 2014 14:49:16 GMT -5
Dreamboat, there is no way "expense" is only 29% of revenue. Even if we assume the cost/expense sharing applies only to cost of goods and sales and marketing expense (i.e. no G&A and no R&D), this will likely add up to ~45-50% of revenue. Thus 35% share of profit implies ~18% royalty on revenue, not 25%. I had always felt (and posted) that 25% royalty is a reasonable deal (to both parties). But a 65/35 split on profit is not reasonable any which way you look at it. I was merely stating the implications of what the company has said. I do not have have any insight into COGS... other than the fact that eventually a vast majority of the costs will be in house and thus not amplified by profits of lower tier vendors getting lumped into COGS... e.g. Sanofi will sell insulin at cost eventually rather than MNKD buying from Amphastar with Amphastar's profit becoming part of Cogs. I understand what you were trying to do and you did a great job. My point is, there is no way a 35% share of profit equates to 25% royalty rate on end-user revenue. |
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Post by mnkdd on Aug 15, 2014 16:19:16 GMT -5
Your numbers for manufacturing v. retail is not correct. Retail net margins are wafer thin but operating expenses are huge. His net profit for the your widget is not likely to be higher than that realized by the manufacturer. The proper analogy for this partnership imo is this: Sanofi and Mannkind form a joint venture company. Into this JV, Mannkind dumps in its intellectual property which has taken more than $1B and 10 years to develop. Sanofi pays Mannkind ~$1B in stages (outside the partnership). Sanofi takes a 65% equity in the JV; Mannkind 35%. How is that fair? Alcc, not sure if your analogy is that accurate either. You're assuming that Sanofi owns 65% of Mannkind's IP and physical assets, which isn't the case. Mannkind can sell Technosphere, factory, etc if it chooses and Sanofi doesn't get one cent. |
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Post by alcc on Aug 15, 2014 18:36:49 GMT -5
mnkdd, by IP I meant only IP re Afrezza.
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Post by dreamboatcruise on Aug 15, 2014 19:56:49 GMT -5
Your numbers for manufacturing v. retail is not correct. Retail net margins are wafer thin but operating expenses are huge. His net profit for the your widget is not likely to be higher than that realized by the manufacturer. The proper analogy for this partnership imo is this: Sanofi and Mannkind form a joint venture company. Into this JV, Mannkind dumps in its intellectual property which has taken more than $1B and 10 years to develop. Sanofi pays Mannkind ~$1B in stages (outside the partnership). Sanofi takes a 65% equity in the JV; Mannkind 35%. How is that fair? There was also that quote from Matt on the first CC setting up the deal where he said the part some have likely misinterpreted about past accomplishments being recognized... mentioning both Mannkind's and Sanofi accomplishments. I think that was to address your issue of fairness by saying that the deal is in light of Sanofi having spent a lot on developing global diabetes sales/marketing/brand. Granted they've turned a profit on it already. So taking that contribution into account you have... Mannkind brings huge R&D investment into deal but still separately benefits from it in terms of technosphere opportunities Sanofi brings huge marketing/sales/brand investment into deal but still separately benefits from it in terms of Lantus sales Sanofi pays Mannkind $1B on milestones Split of profit significantly tilted to Sanofi I'm not saying I didn't think we'd get a better deal, when "fair" is a pretty nebulous term, and in the way you're wanting to look at it has a lot to do with how things are presented. In reality, however, fair is whatever Mannkind could get by negotiating with the interested parties. |
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Post by hammer on Aug 18, 2014 17:40:12 GMT -5
I was merely stating the implications of what the company has said. I do not have have any insight into COGS... other than the fact that eventually a vast majority of the costs will be in house and thus not amplified by profits of lower tier vendors getting lumped into COGS... e.g. Sanofi will sell insulin at cost eventually rather than MNKD buying from Amphastar with Amphastar's profit becoming part of Cogs. I understand what you were trying to do and you did a great job. My point is, there is no way a 35% share of profit equates to 25% royalty rate on end-user revenue. When you put the pencil to paper with a 70 percent profit, the numbers are very close. retail cost of afrezza= 1800 x 70%= 1260.00 profit MNKD split at 35%= 1260 x 35%= 441 retail cost of afrezza= 1800 x 25% royalty = 450 A 24.5 % royalty makes it equal. Matt did say mid 20 royalty.
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Post by alcc on Aug 18, 2014 17:52:50 GMT -5
You missed my point entirely. Dreamboat backed into the 29% expense number by solving for it as the unknown assuming equal profit to company from 35% of profit and 25% of revenue. I said there is no way COGS + allocatable expenses would as low as 29% (or the 30% you used).
Btw, is $1800 the projected average per patient-year net revenue to company? Too lazy to look it up.
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Post by hammer on Aug 19, 2014 5:23:05 GMT -5
You missed my point entirely. Dreamboat backed into the 29% expense number by solving for it as the unknown assuming equal profit to company from 35% of profit and 25% of revenue. I said there is no way COGS + allocatable expenses would as low as 29% (or the 30% you used). Btw, is $1800 the projected average per patient-year net revenue to company? Too lazy to look it up. 1800 seems to be the consensus estimate over the years for the wholesale cost to suppliers. This pricing was derived from the cost of RRA pens. |
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Post by ezrasfund on Aug 19, 2014 8:15:41 GMT -5
What about the elephant in the room, marketing expenses? Marketing will be a big part of Sanofi's costs, but how are they going to be apportioned to the JV? My understanding is that Sanofi will use their existing sales force and Afrezza will be just one more part of their portfolio. From Sanofi's side charging a only percentage based on sales would be a huge giveaway in the early stages of the roll-out. And yet even after taking out the costs of advertising, regulatory filings and all the rest, marketing alone should stand as a significant expense. As always the devil is in the details.
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