|
|
Post by rak5555 on Dec 3, 2014 12:34:17 GMT -5
Some folks on various other boards seem confused about the amortization of milestone payments. I just want to make certain that no one here is similarly confused. I am fairly certain there is no language in the partnership agreement that states that the milestone payments are refundable. Once paid, the milestone payments belong to MNKD and will flow through "cash" on the balance sheet. Most likely, the offsetting balance sheet entry will be a contra-asset account that will be amortized into revenue as certain conditions are met with respect to the financial viability of the partnership.
This accounting treatment is being mandated by MNKD's auditors. Their rational is that the milestone payments could potentially have to be used to offset MNKD's (35%)share of partnership losses. Applying conservative accounting principles, the auditors want to avoid showing huge revenue flows (from milestone payments) that may be offset in the future by huge expenses (if the partnership is terminated prior to earning a net profit). Keep in mind that MNKD's partnership expenses will be rather small compared to SNYs once the product is launched.
Example: Assume SNY pays $350 million in milestone payments to MNKD. Assume SNY spends a billion dollars in marketing, sales, and advertising and MNKD spends zero dollars. Assume the venture is terminated. MNKD would owe SNY $350 million as their share of the losses. If the milestone payments were allowed to be booked as revenue, MNKD would have a $350 million positive earnings event when milestones are paid followed by a huge $350 million expense when the partnership is terminated. Accountants hate this. So, instead the $350 million in milestone payments are deferred (not taken as revenue) and when the agreement is terminated, the $350 million mnkd owes SNY is taken out of the deferred account versus charged to the bottom line. If instead of the partnership failing, it begins to generate a consistent profit, the auditors will allow mnkd to begin to amortize the milestone payments.
Note that none of this accounting has anything to do with the actual cash. MNKD is free to do whatever it wants with the milestone payments. For example, they could use all $350 million from the above example to pay for technoshere trials. Keep in mind, they have the $175 million LOC to pay for partnership losses.
Although I state the above as fact, it is JMHO and I welcome challenges and refinements.
|
|
|
|
Post by jpg on Dec 3, 2014 12:53:14 GMT -5
Some of the best profesional bashers are activly using the word refundable on various boards. I agree with your interpretation of this and don't understand how refundable made it into the 'pros' language?
JPG
|
|
|
|
Post by babaoriley on Dec 3, 2014 13:00:04 GMT -5
Unfortunate choice of words! Listened to call on the way into work this morning. Matt and Hakan sure sounded excited - NOT! Oh well. If Afrezza is not profitable, then who cares about this silliness, as the share price will likely reflect only the value of technoshpere which will be severely tainted as well. As far as analysis, I think rak is all over it!!
|
|
|
|
Post by spiro on Dec 3, 2014 13:44:29 GMT -5
Rak, thanks for clarifying all of this financial crap. I am still not sure what you are talking about and I really don't care. I just want MNKD's share price to go up. We have heard a ton of mumbo jumbo from Matt, Hakan and Al for too many years. it is now time for them to deliver the goods. I have listened to so many of those damn conference calls, that I am actually starting to understand what Hakan says. But I am still not sure Hakan actually says what he means to convey in English. I look forward to the day that MNKD executives never uses words like could, may, likely, possible, potential, expected or uncertain and start using words like definite, without doubt, unequivocally, or decidedly among others.
Spiro
|
|
|
|
Post by jpg on Dec 3, 2014 14:09:28 GMT -5
If I understand the confusion and how it spread it seems to have been started by one single pro MNKD basher (who is probably the best basher I have had the displeasure of reading). I've got to hand it to the guy: he is good at what he does... I wonder how much he makes doing this?
JPG
|
|
|
|
Post by ezrasfund on Dec 3, 2014 14:58:04 GMT -5
Here is my attempt at clarification.
Another thought about the "refundable" milestone payments. It is not that the milestone payments are refundable, but that MNKD could potentially need to repay SNY if Afrezza does not become profitable. Repay what? Repay the money SNY lends them (via the $175 million line of credit) to cover MNKD's 35% share of expenses, not the milestones. Remember that SNY is also paying 65% of MNKD's production costs, and those would not be repaid to SNY. MNKD is paying 35% of the marketing and sales costs, but the sales costs are zero until the drug is sold, and are then based on sales as a percent of total SNY sales by the diabetes reps. For example when Afrezza reaches 50% of total sales by these diabetes reps, including Lantus sales, then the JV would be responsible for 50% of costs and MNKD's share will be 17.5% of that total sales and marketing expense.
What is also important is that payments from the JV to MNKD are significantly front loaded, as ramp up of production is expensive and costs are lower once everything is up and running. But payments to Sanofi are back loaded, as they will be due no money from the JV for the ramp up of the sales force, but will only be reimbursed based on actual sales volume. But as any salesman know the real commissions are made with established customers who continue to order with much less work after getting that initial order.
They are also making hay with this chestnut from the Feb 2014 CC:
"Given the imminent PDUFA date, it is important that we proceed in preparing for commercialization of AFREZZA. We are making excellent progress preparing for post-launch manufacturing. The second and third [fill/finish] machines are now being installed in our Danbury facility and when completed and validated soon after launch, should give us a capacity to produce up to 350 million cartridges per year, as Hakan has noted, with later addition of equipment and factories that have an annual capacity of about 2 billion cartridges."
"...when completed and validated soon after launch..." what could be clearer than that? It would seem that they are still adhering to the schedule.
|
|
|
|
Post by jpg on Dec 3, 2014 15:08:24 GMT -5
Here is my attempt at clarification. Another thought about the "refundable" milestone payments. It is not that the milestone payments are refundable, but that MNKD could potentially need to repay SNY if Afrezza does not become profitable. Repay what? Repay the money SNY lends them (via the $175 million line of credit) to cover MNKD's 35% share of expenses, not the milestones. Remember that SNY is also paying 65% of MNKD's production costs, and those would not be repaid to SNY. MNKD is paying 35% of the marketing costs, but those costs are zero until the drug is sold, and are then based on sales as a percent of total SNY sales by the diabetes reps. For example when Afrezza reaches 50% of total sales by these diabetes reps, including Lantus sales, then the JV would be responsible for 50% of costs and MNKD's share will be 17.5% of that total sales and marketing expense. What is also important is that payments from the JV to MNKD are significantly front loaded, as ramp up of production is expensive and costs are lower once everything is up and running. But payments to Sanofi are back loaded, as they will be due no money from the JV for the ramp up of sales and marketing, but will only be reimbursed based on actual sales volume. But as any salesman know the real commissions are made with established customers who continue to order with much less work after getting that initial order. They are also making hay with this chestnut from the Feb 2014 CC: "Given the imminent PDUFA date, it is important that we proceed in preparing for commercialization of AFREZZA. We are making excellent progress preparing for post-launch manufacturing. The second and third [fill/finish] machines are now being installed in our Danbury facility and when completed and validated soon after launch, should give us a capacity to produce up to 350 million cartridges per year, as Hakan has noted, with later addition of equipment and factories that have an annual capacity of about 2 billion cartridges." "...when completed and validated soon after launch..." what could be clearer than that? It would seem that they are still adhering to the schedule. Agreed but the bashers somehow turned all this nuanced and complex info and turned it into a one liner which starts with: milestone refund... JPG |
|
|
|
Post by brentie on Dec 3, 2014 15:31:54 GMT -5
"Given the imminent PDUFA date, it is important that we proceed in preparing for commercialization of AFREZZA. We are making excellent progress preparing for post-launch manufacturing. The second and third [fill/finish] machines are now being installed in our Danbury facility and when completed and validated soon after launch, should give us a capacity to produce up to 350 million cartridges per year, as Hakan has noted, with later addition of equipment and factories that have an annual capacity of about 2 billion cartridges." "...when completed and validated soon after launch..." what could be clearer than that? It would seem that they are still adhering to the schedule. Ezra, they are adhering to the schedule, but the point is how long it's going to take to get the fourth and fifth filling machines. MNkd told us on one of the conference calls that the second and third machines will be operating by the middle of next year, Swingtrader posted this... "When they first installed the line the German engineering firm said 9 months to have it installed on the floor. Management (if you can believe them ever) said that could be expedited to 5-7 months. With SNY at the table and offering a guarantee my guess is the engineering firm could gear up for a specific contract period to make it happen more quickly but that type of gear is very complicated and then usually has to pass FDA inspections." The second and third machines were being installed 9 months ago and they may not be pushing out product for another 7 months, to me that means that we are looking for at least a year to a year and a half to get the next 2 machines operating. If Afrezza takes off like we all hope it does, we may not be able to keep up with demand. That's not a good thing. We can only hope that they have already ordered more machines but of course they'll never tell us that. |
|
|
|
Post by ezrasfund on Dec 3, 2014 15:32:59 GMT -5
I made a clarification in my post which may be lost in the fray. At the 15 minute mark in the CC is where Matt explains that marketing costs are allocated based on success, and SNY will get reimbursed based on actually selling the product. But I would make a distinction between sales and marketing, a distinction that Matt seemed to blur in his response. In other words while the costs of the sales force would be allocated to Afrezza based on actual sales, the costs of marketing like advertising and informational materials will all be considered part of the JV.
|
|
|
|
Post by ezrasfund on Dec 3, 2014 15:46:49 GMT -5
Brentie, I have a question about this...
"The second and third machines were being installed 9 months ago and they may not be pushing out product for another 7 months, to me that means that we are looking for at least a year to a year and a half to get the next 2 machines operating. If Afrezza takes off like we all hope it does, we may not be able to keep up with demand. That's not a good thing. We can only hope that they have already ordered more machines but of course they'll never tell us that."
It's the 7 months part. Where is that from? If they launch in mid January and lines 2 and 3 are not in production until August 1st, there is really a big problem, but if those line are running production in February they are on target. Let's wait till February before making that call. Also, they may have been dragging their feet a bit when they were waiting for final approval of the partnership and funding was uncertain. Now it should be full speed ahead.
|
|
|
|
Post by brentie on Dec 3, 2014 15:56:27 GMT -5
Ezra, Agreed, but MNKD is the ones who said they will be operating by the middle of the year and they said that a month ago. They may have said that to give themselves a cushion and hopefully they'll be operating long before July; but the point remains, it's going to take a long time to get the next machines operating and that concerns me. I hope Al is planning ahead. Hakan: "During the first half of 2015, we will have added two additional filling lines to make sure our capacity can meet currents and anticipate the demand growth." seekingalpha.com/article/2661685-mannkinds-mnkd-ceo-alfred-mann-on-q3-2014-results-earnings-call-transcript?find=lines&all=false |
|
|
|
Post by Chris-C on Dec 3, 2014 16:33:05 GMT -5
Ezra, Agreed, but MNKD is the ones who said they will be operating by the middle of the year and they said that a month ago. They may have said that to give themselves a cushion and hopefully they'll be operating long before July; but the point remains, it's going to take a long time to get the next machines operating and that concerns me. I hope Al is planning ahead. Hakan: "During the first half of 2015, we will have added two additional filling lines to make sure our capacity can meet currents and anticipate the demand growth." seekingalpha.com/article/2661685-mannkinds-mnkd-ceo-alfred-mann-on-q3-2014-results-earnings-call-transcript?find=lines&all=falseWhere does existing inventory come into play here? Any operational line can produce and stockpile inventory before sales begin. As I recall, the powder has a relatively decent shelf life as long as it is stored appropriately. Is there any reason why inventory is not being produced and stored as we speak, given that the plant has been inspected and approved, supplies of approved insulin are on hand, and sales reps are already on the street? A key question to me would be how much of a stockpile is needed to address demand while new production lines are being installed? I love to assume that execs know what they are doing, but I remember Amylin having supply issues once Byetta was first approved. I think the CEO was ushered out the door shortly thereafter. Insights welcome! Chris-C |
|
|
|
Post by ezrasfund on Dec 3, 2014 17:20:22 GMT -5
Brentie, English may not be Hakan's native tongue, but he got his tenses correct here. "We will have added..."
The future perfect is a verb form or construction used to describe an event that is expected or planned to happen before a time of reference in the future, such as will have finished in the English sentence "I will have finished by tomorrow." It is a grammatical combination of the future tense, or other marking of future time, and the perfect, a grammatical aspect that views an event as prior and completed.
So what he said is that by July 1st the adding of 2 additional lines will be in the past, prior and completed. Just how far in the past we will see.
|
|
|
|
Post by mnholdem on Dec 3, 2014 19:10:24 GMT -5
There are times, when I read these call transcripts, that I ponder how Matt can never put together a grammatically correct sentence, even if you omit all the "you know's". It's got me wondering if they simply employed a poor choice of words and meant to say that the milestone payments will be used to refund a third of Sanofi's expenses. If these guys could ever finish a sentence before switching direction they, you know, I mean in terms of how this will be accounted for, you know, the payments are being deferred for that reason. Understand? Hell, no! This sentence wasn't a quote but simply an example of how Matt speaks. I really wish that Al would take that hat from Matt and give it to somebody who is a presenter, not a financial officer... you know?
|
|
Deleted
Deleted Member
Posts: 0
|
Post by Deleted on Dec 3, 2014 19:47:09 GMT -5
Two comments:
1) I don't agree with the filling line ideas at all. The announcements of milestone receipts are imminent. Those lines are near ready to go, it's been eluded to in the recent ccs and confirmed by Matt. The idea that they won't be in service by July is ludicrous
2) about all this talk with refunds: who cares, we wouldn't be invested if we thought it was even a remotely a chance of happening, so why even waste the energy trying to figure it out
Oh and one more. Matt is an idiot for even going down the path of hypothesizing the whole "if we aren't profitable and SNY shelves afrezza"
|
|
