Here's the SA article from
seekingalpha.com/article/2536485-mannkind-reality-check?uprof=45
Please DON'T add to his click coffer! The comments tend to be scathing...esp from George Rho.
Summary Never search the internet to find only what you already believe about a stock.
True reality is always in the details.
Wall Street gurus are always smarter than the retail investor that doesn't do their homework.
On April 1st, 2014, MannKind (NASDAQ:MNKD) had a favorable Adcom meeting where the committee members gave overwhelming support for the approval of Afrezza. MannKind's stock was halted the entire day of April 1st, however, when it began trading the next day the lowest price where the stock traded was $6.83.
In the interim since this eventful Adcom meeting the stock traded as high as $11.48. There have been several events during this period until October 1st, 2014. These events include:
· FDA approval of Afrezza
· Partnership Deal With Sanofi
· Receipt of $150 million upfront payment
However, on October 1st, 2014, the stock has retreated from the $11.48 interim high by a little more than 50%. The shares are now even down by a little more than 16% since the stock began trading after the flow of good news began back on April 1st.
In the following commentary I would like to share a litany of reasons that might explain what has been construed as good news for MannKind investors, where the underlying reality of the situation really is showing there isn't much good news for MannKind investors.
The latest twist to the MannKind story is the recent proclamation that MannKind is turning from being a biotech company and instead rebranding as a technology focused corporation. For some diehard MannKind investors they have taken this to mean that the MannKind Technosphere inhaler will be the focus. It appears these investors assume that the inhaler technology that MannKind has is unique and that MannKind has solid and defendable patents that will protect them from other companies entering their 'potential' market.
For one assuming that MannKind has a viable future with their inhaler technology, they should instead understand what MannKind is clearly stating in their SEC filings as it relates to what they face by redirecting the business model for their company.
On March 3rd, 2014, MannKind filed their 2013 annual report and had the following comments about their patents:
"Overall, AFREZZA is protected by over 220 issued patents, and we also have over 300 pending applications in the United States and selected jurisdictions around the world that may provide additional protection if and when they are allowed. These include composition and inhaler and cartridge patents providing protection for AFREZZA with various expiration dates, the longer-lived of which will not expire until between 2029 and 2032. In addition, we have certain method of treatment claims that have terms extending into 2026 and 2029."
Now only five months later, August 11, 2014, MannKind files their 2nd Q report with the SEC and this is what they now say about their patents:
"Moreover, the term of a patent is limited and, as a result, the patents protecting our products expire at various dates. For example, some patents providing protection for our AFREZZA inhalation powder expired in 2012. Other patents providing similar protection have terms extending into 2020, 2030 and 2031. In addition, patents providing protection for our inhaler and cartridges have terms extending into 2023, 2031 and 2032, and we have method of treatment claims that extend into 2026 and 2029. As and when these different patents expire, AFREZZA could become subject to increased competition. As a consequence, we may not be able to recover our development costs."
With this latest SEC filing we find that not only didn't they tell investors in March that they had a patent that expired in 2012, the original time frame for all their patents had shifted so much that it's hard to determine which timeline is applicable to their patent claims. If this disparity isn't enough of a concern then understand what they further explain in this latest shift of their patent claims as shown in the August, 2014, filing:
"Moreover, certain components of AFREZZA may be manufactured outside the United States and imported into the United States. As such, third parties could file complaints under 19 U.S.C. Section 337(a)(1)(B), or a 337 action, with the International Trade Commission, or the ITC. A 337 action can be expensive and would consume time and other resources. There is a risk that the ITC would decide that we are infringing a third party's patents and either enjoin us from importing the infringing products or parts thereof into the United States or set a bond in an amount that the ITC considers would offset our competitive advantage from the continued importation during the statutory review period. The bond could be up to 100% of the value of the patented products. We may not prevail in any legal action, and a required license under the patent may not be available on acceptable terms, or at all, resulting in a permanent injunction preventing any further importation of the infringing products or parts thereof into the United States. We also may not be able to develop a non-infringing product design on commercially reasonable terms, or at all.
Although we own a number of domestic and foreign patents and patent applications relating to AFREZZA, we have identified certain third-party patents having claims relating to pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial manufacture and sale of AFREZZA. If a court were to determine that AFREZZA was infringing any of these patent rights, we would have to establish with the court that these patents were invalid or unenforceable in order to avoid legal liability for infringement of these patents. However, proving patent invalidity or unenforceability can be difficult because issued patents are presumed valid. Therefore, in the event that we are unable to prevail in a non-infringement or invalidity action we will have to either acquire the third-party patents outright or seek a royalty-bearing license. Royalty-bearing licenses effectively increase production costs and therefore may materially affect product profitability. Furthermore, should the patent holder refuse to either assign or license us the infringed patents, it may be necessary to cease manufacturing the product entirely and/or design around the patents, if possible? In either event, our business would be harmed and our profitability could be materially adversely impacted."
What MannKind is telling their shareholders is that they have a myriad of issues facing their patents for their Technosphere inhaler; they even tell you that they have identified third-party patents having claims relating to pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial manufacture and sale of AFREZZA. Maybe these issues that are outlined by MannKind will explain why in the Sanofi agreement Sanofi placed liens on MannKinds's headquarters building and certain supplies of insulin. They placed no liens on the Technosphere inhaler, so if MannKind goes bankrupt and can't repay Sanofi the $175 million, it appears that Sanofi has foregone having any approved inhaler for delivering Afrezza.
These issues of MannKind having the Holy Grail with their inhaler technology, individuals propagating this have been remiss in jumping to their conclusions, and this could have been alleviated by merely researching the history of inhalers. This is what the FDA information created in 1998 said -"metered-dose inhalers have grown in popularity since their introduction in the late 1950's, and they are currently used by over 25 million Americans for a variety of diseases, such as asthma, COPD, and other lung diseases-." Since this newly founded belief that inhalers are something new, the reality is that they have been used for more than 50 years. Their use and application are so great that in 2013, a renowned publisher of scientific books, Wiley-Blackwell, published a book - Inhalation Drug Delivery, where they detail the inhalation products and specific equipment and techniques used in manufacturing of such products. As for MannKind's inhalation technology they have talked for years about the product and now all these years later there are those 'beating a drum' that they have something unique. Tell that to Astra-Zeneca, Orion and other major pharmaceutical companies that have been using their own inhalers for decades. Simple question-why hasn't anyone signed a deal with MannKind for using their inhalers? This can be answered by what MannKind has told their shareholders -"we have identified certain third-party patents having claims relating to pulmonary insulin delivery that may trigger an allegation of infringement upon the commercial manufacture and sale of AFREZZA." Any potential deal involving the use of MannKind's inhaler product, the interested company will first request from MannKind -"Show me the patents that you hold on the inhaler." "Are there potential patents that might preclude your claimed patents for the inhaler?" Well, in the latest SEC filings MannKind has taken the time now to actually answer the last item that potential adopters of their inhaler product want to know.
With the partnership alliance announcement on August 11th, 2014, the information released outlining the deal; it was clearly transmitted through their SEC filings that Sanofi would assume the marketing of Afrezza with profits and losses being split on a 65/35 ratio with Sanofi garnering the 65% portion. Also, as a part of this MNKD/SNY deal, MannKind would receive a $150 million upfront payment and Sanofi would loan MNKD up to $175 million for funding their portion of the marketing deal for Afrezza. The clearly outlined deal states that MannKind is to use the loan for funding their portion of the expenses incurred covered in the SNY partnership, and that repayment would come from any future profits.
However, with these particulars being detailed in the SEC filing there are many who have apparently misconstrued exactly what will be covered under the joint partnership expense categories. The very nature of Sanofi making the loan covenants being so clearly defined; the prudent thing would have been for Sanofi to include the $175 million as a part of the upfront payment. The fact that Sanofi didn't give them $325 million in upfront payment without any strings attached is belied by the reality that Sanofi made a loan secured by the MannKind home office facility and their supply of insulin, but not the inhaler. This was a savvy move by Sanofi, constructing a contract that gives them the ultimate options in controlling their investment dollars.
There are some that now take the position that MannKind is going to have their manufacturing cost for Afrezza fully paid for by Sanofi, and it appears that this comes from the statement by a MannKind executive who commented that MNKD would provide Sanofi Afrezza at MannKind's cost. This is what the MannKind executive stated -"That's why we are certainly are eager to qualify the Sanofi insulin as quickly as we can since we will provide them all products at cost and certainly buying it from a third party as having a profit share arrangement with the close partner."
The nuance of the English language can be difficult; however, the words 'provide them all products at cost' doesn't necessarily mean 'sell them all product at cost". However, for better clarity on this matter of Sanofi covering all expenses in manufacturing Afrezza it would be better to see how MannKind treats this subject in the SEC filings:
"We have never been profitable or generated positive cash flow from operations and, as of June 30, 2014, we had incurred a cumulative net loss of $2.4 billion. The cumulative net loss has resulted principally from costs incurred in our research and development programs, the write-off of goodwill and general operating expenses. We expect to make substantial expenditures and to incur increasing operating losses in the future in order to support the commercialization of AFREZZA, including costs and expenses to manufacture AFREZZA on a commercial scale. In addition, we have agreed to purchase annual minimum quantities of Insulin under our supply agreement with Amphastar of an aggregate of approximately €120.1 million in calendar years 2015 through 2019. We may not have the necessary capital resources on hand in order to service this contractual commitment, and we may become obligated to make additional payments under the supply agreement in the event of its termination under certain scenarios."
"As of June 30, 2014, we had $41.2 million in cash and cash equivalents. We believe that our existing capital resources will enable us to continue planned operations at least into the first quarter of 2015. However, we cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletion of the capital resources more rapidly than we currently anticipate. We may need to raise additional capital, whether through the sale of equity or debt securities, additional strategic business collaborations, the establishment of other funding facilities, licensing arrangements, asset sales or other means, in order to support our ongoing activities related to the commercialization of AFREZZA and the development of other product candidates. However, we cannot provide assurances that such additional capital will be available through these or other means.
We intend to use our capital resources to support the commercialization of AFREZZA. We are expending a portion of our capital resources to scale up our manufacturing capabilities in our Danbury facilities and to develop our other product candidates. We also intend to use our capital resources for general corporate purposes."
MannKind clearly states they will have substantial expenditures and incur increasing operating losses in the future in order to support the commercialization of Afrezza, including costs and expenses to manufacture Afrezza on a commercial scale. It becomes very clear that MannKind doesn't state or imply that Sanofi will be reimbursing them for supplying of Afrezza, where they then will market the drug. If it were the case that Sanofi was going to reimburse MannKind for Afrezza COGS this would be a material event that would deem it necessary to convey this information to their shareholders, therefore, the omission of any such information should remove any possibility of this being the case.
In order to further amplify on the issue of Sanofi reimbursing MannKind for them providing Afrezza, one should note that Sanofi required MannKind entering into a long-term contract with Amphastar for a yearly supply of insulin that would cost about $150 million for each of the four years for the contract. Why would Sanofi turn around and pay MannKind for the insulin, when they could have bought it themselves from Amphastar and at a better discount?
The fact is MNKD clearly states to shareholders - "We may not have the necessary capital resources on hand in order to service this contractual commitment, and we may become obligated to make additional payments under the supply agreement in the event of its termination under certain scenarios." This statement should clearly identify for anyone thinking that Sanofi is going to reimburse MannKind for the COGS for Afrezza, this is MannKind's obligation and there are concerns if they will have the necessary capital to pay their debts to Amphastar. There is no way to construe that Sanofi is paying the bill for MannKind's debt to Amphastar-and MannKind tells you this fact!
I'm sure that in the history of small biotechs obtaining a partnership with a major pharmaceutical company, where the smaller company is giving the larger company the rights to market their drug, that such a deal as the MannKind/Sanofi partnership has been done. However, after extensive searching for such a deal I can find no record of anything similar to the Sanofi arrangement. Sanofi has basically made a deal where they will have full recourse for regaining their loan that is capped at $175 million and their upfront payment of $150 million to MannKind. Based on the Amphastar deal, the yearly maximum of insulin that should be on hand at the Danbury facility should not exceed $175-$200 million, and should MannKind go into default, then Sanofi has a lien on this insulin supply and they also have a lien on the MannKind headquarters' facility in California. Considering that MannKind carries their real estate property on their books with a valuation of $183 million, if only half of this valuation is their California facility that means that Sanofi has a lien worth $91.5 million, just for the building. Now when you consider that with the upfront payment of $150 million and the 'potential' loan of $175 million, Sanofi has a lien for hard assets that total approximately $266.5 million. Even if Sanofi loans the full $175 million, when you add in the $150 million upfront, the maximum exposure for Sanofi's $325 million outlay, that could be offset with a potential return of $266.5 million in MNKD's hard assets, therefore exposing Sanofi to the potential of losing $58.5 million.
In order to place a better perspective on the dire situation that MannKind went into the negotiations with Sanofi, is a much overlooked detail in their SEC filings. If one should bother to look for such items this is what they would find about an obligation that MannKind entered into back in 2013:
"In connection with the execution of the Facility Agreement, on July 1, 2013, the Company issued Milestone Rights to the Milestone Purchasers. The Milestone Rights provide the Milestone Purchasers certain rights to receive payments of up to $90.0 million upon the occurrence of specified strategic and sales milestones, including the first commercial sale of an AFREZZA product and the achievement of specified net sales figures. The payments due under the Milestone Rights are subject to pro rata reduction in the event of certain funding failures by Deerfield under the Facility Agreement. The Milestone Agreement includes customary representations and warranties and covenants by the Company, including restrictions on transfers of intellectual property related to AFREZZA. The Milestone Rights are subject to acceleration in the event the Company transfers its intellectual property related to AFREZZA in violation of the terms of the Milestone Agreement. The Milestone Rights were initially recorded as a short-term liability equal to $3.2 million included in Accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet and a long term liability equal to $13.1 million included in other liabilities. As of June 30, 2014, there have been no material changes to facts and circumstances that would impact the valuation or classification of the Milestone Rights."
In simple terms they obligated themselves to paying out $90 million in Afrezza sales revenue where they got in return about $15 million in cash, when you note the current and long-term liabilities they are reporting on their financial reports with the SEC. Anyone cutting such a deal where they give up $90 million for a mere $15 million of short-term cash, that is either a bad negotiator or someone that is desperate for cash. Therefore, when you consider this $90 million obligation and the potential of another $175 million loan from Sanofi, MannKind will have to see their profits exceed $265 million before they make one penny of actual profit on Afrezza. And during this period of actually getting to the $265 million threshold, the ongoing expenses that MannKind will be incurring for all salaries and expense non-related to Afrezza, they were being very candid when they admitted in the latest SEC filing that they have operating cash that will only go into early 2015. Details! Details! SEC filing details!
And one other additional reality check is the cumbersome FDA required prescribing information that MannKind has to place with each prescription. A perusal of the information gives the clear picture of the difficulty that Sanofi sales representatives will have in dealing with critical issues that the prescribing doctors will want being resolved before they advocate one of their patients using Afrezza .
The first item is the Black Box warning patients about the risk for those with chronic lungs disease. It goes on to state that Afrezza is not a substitute for long-acting insulin. Then there is the explicit warning about the diabetic ketoacidosis issue for those using Afrezza. As if this isn't enough warning for potential Afrezza users, there is the list of drug interactions that has the potential for increasing the risk of hypoglycemia for users that will relate to some of the more common daily drugs that patients might be taking.
Then when you consider that MannKind spent billions of dollars getting the clinical data on a total of about 6,000 patients, now MannKind and Sanofi will have to track 8,000-10,000 patients for five (5) years with in-depth clinical data collections for Type 2 diabetic in order to assess the serious potential risk for pulmonary malignancy with Afrezza use. And yes! The FDA actually required that MannKind use the term-'serious potential' in detailing the need for this five (5) year clinical trial. This trial will require the enrollment to be based on a 1:1 ratio for those using Afrezza and the comparator patients. Can one imagine how the doctors conducting these trials will have to explain to the Afrezza users why they are being enrolled into such a trial, when they have other options that don't require them to participate for five (5) years hoping that they don't develop a pulmonary malignancy? Such a trial is going to cost millions of dollars, so how long will the $175 million loan monies last for MannKind's share of this expense?
On June 31st, 2014, the end of the 2 Q, the total outstanding shares of MannKind stock stood at 394,036,984; however, in the interim timeframe before they filed the SEC documents on August 11, 2014, the outstanding share count went to 402,380,752 shares, for an increase of 8,343,768 shares being added to the market. For a discerning investor they should look at the sequence of events that occurred on August 11th, 2014. First MannKind released a press release at 7:22 a.m. announcing the Sanofi partnership; second the MNKD stock began trading by surging 26% at the open and reached a share price of $10.08; then thirdly at 9:00 a.m. MannKind released their 2nd Q report that included details of the Sanofi partnership. Now in the interim of 9:00 a.m. August 11th, 2014 and extending to the closing price of October 1, 2014, MannKind shares have lost 43% of their August 11th valuation.
So what is it that gave those shorting, or merely wanting to sell their shares, a reason to either sell or add to their short position? I can only hope that some of the points I've pointed out might shed some light on this causation! Overlooking the details of an investment opportunity are often a cumbersome undertaking for the lay investor, however, if one ignores the details then they need to understand that the savvy Wall Street gurus, search the SEC disclosure with a discerning eye for critical issues. It should be obvious to the Doubting Thomas's investors that the precipitous decline in MannKind's stock goes back to the SEC filings on April 11th, 2014. With all the supposedly critical milestones needed to sky rocket the price of MannKind's stock, most have occurred. With my paraphrasing the first transmission made by the Moon astronauts-"MannKind investors, you have a problem!
Always remember, DENIAL isn't a river in Africa!
