Seeking some clarification on return of Sanofi inventory.

[capnbob]

"We expect that any unsold Sanofi inventory at the end of the third quarter may be returned."

Has anyone any idea how much inventory might be returned? I'm wondering specifically because they also said:

"MannKind will continue to be credited with 35% of profits from Sanofi branded sales in the quarter as part of our collaboration accounting"

Will the "collaboration accounting" extend to the returned inventory as well? That would imply that MNKD would be selling Sanofi branded product in addition to its own, and would have to return 65% of the profits to SNY. If that's the case, then the return of a large amount of inventory at the end of the third quarter might have a serious impact on earnings.

[matt]

Mannkind cannot sell any returned Sanofi branded inventory, and neither can Sanofi. If Sanofi returns the inventory, it would have to be reworked which involves reinspection of each unit and repackaging with the correct details. Whether that is economic or not depends on the remaining shelf life and the cost to repackage versus producing new.  In any case, Mannkind and Sanofi will not be splitting profits or costs after the 180 day wind-down period.

There is nothing in the contract that requires Mannkind to buy the old inventory but if they don't then Sanofi could sell it for whatever price they can get for it during the 180 day wind down period. However, just because Sanofi cannot sell it doesn't mean that its distribution system partners cannot, and it may not be in Mannkind's interest to have fire sale inventory in the hands of the national distributors just when they are trying to relaunch under their own name. I expect the parties agreed to some form of post-contract return policy that shares the burden of returned but unexpired product.  Typically that would see Sanofi getting a credit for their original purchase cost minus the cost of reworking the product into Mannkind packaging; a better result for all concerned.

[mnkdfann]

I'm not a lawyer, but this appears to be the relevant part of the contract:

13.3: "In the case of a termination of this Agreement in its entirety, within 30 days after MannKind has given notice to Sanofi requesting the cessation of activities pursuant to the provision of this Section, Sanofi shall notify MannKind of an estimate of the quantity of Product and its shelf life remaining in Sanofi’s inventory and MannKind shall have the right to purchase any such quantities of Product from Sanofi at a price mutually agreed by the Parties. To the extent MannKind does not purchase such quantities, Sanofi may sell such quantities during the 180 days after the effective date of such termination within the shelf life remaining for Product."

www.sec.gov/Archives/edgar/data/899460/000119312514406347/d783199dex101.htm

[capnbob]

May 12, 2016 16:16:18 GMT -5 matt said:

Mannkind cannot sell any returned Sanofi branded inventory, and neither can Sanofi. If Sanofi returns the inventory, it would have to be reworked which involves reinspection of each unit and repackaging with the correct details. Whether that is economic or not depends on the remaining shelf life and the cost to repackage versus producing new.  In any case, Mannkind and Sanofi will not be splitting profits or costs after the 180 day wind-down period.

There is nothing in the contract that requires Mannkind to buy the old inventory but if they don't then Sanofi could sell it for whatever price they can get for it during the 180 day wind down period. However, just because Sanofi cannot sell it doesn't mean that its distribution system partners cannot, and it may not be in Mannkind's interest to have fire sale inventory in the hands of the national distributors just when they are trying to relaunch under their own name. I expect the parties agreed to some form of post-contract return policy that shares the burden of returned but unexpired product.  Typically that would see Sanofi getting a credit for their original purchase cost minus the cost of reworking the product into Mannkind packaging; a better result for all concerned.

"Mannkind cannot sell any returned Sanofi branded inventory..." Does it say that somewhere in the contract?   I did see this under article 13:

"(iv) Termination Assistance. Sanofi and its Affiliates and sublicensees may continue to sell its inventory of Product in the Territory for up to […***…] months after the effective date of the termination or offer MannKind to purchase the inventories of Product at a price mutually agreed by the Parties. MannKind may to the extent permitted by the applicable Third Party, assume such supply or distribution agreement. MannKind shall provide such other assistance, at no cost to Sanofi, as may be reasonably necessary or useful for Sanofi to terminate the Development or Commercialization of the applicable Product in the applicable countries of the Territory."

I interpreted -- probably incorrectly -- that, "MannKind may...assume such supply or distribution agreement," meant it could just pick up the "baton" where SNY left it and continue to sell either branded product through the distributors. To me, that would make sense. In that case, the "returned" product wouldn't be physically returned to MNKD, but ownership would be transferred and product would just remain on the distributor shelf until all sold out. That was why I wondered how much might be returned at the end of the third quarter.

[mnkdfann]

Capnbob, I believe the Section 13.3 I posted is what applies.

What you excerpted comes from Section "13.4 Rights on Termination By Sanofi for Breach or Insolvency of MannKind" and that is not the applicable section.

I realize the above does not exactly answer your question. But regarding your question, why would Mannkind even WANT to sell Sanofi branded product? It seems common sense they would have to do as matt said ("reinspection of each unit and repackaging with the correct details").

[anderson]

What about putting Mannkind stickers over the Sanofi logo on the returned product and giving them away as samples?