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Post by matt on Aug 9, 2016 14:32:20 GMT -5
It is essentially impossible to get detailed activity based cost accounting detail from GAAP financial data, and even if you try the numbers are not comparable quarter to quarter. For example, a big part of manufacturing cost is absorption of fixed overhead costs (like depreciation, quality inspectors, maintenance). Fixed costs are even more relevant at low production volume because the same costs are spread over fewer units.
This time last year, Afrezza was being made for Sanofi in small batches at a fully burdened cost. In Q4 the auditors force the company to take some big write-downs, and a lot of that related to manufacturing capacity. So a machine that was being depreciated from an original cost basis of $100 this time last year, may now be depreciated from a written down value of $30. A unit of Afrezza made this year will get a lower overhead allocation than one made last year before the write down, all because of a magic accounting entry. Would it help to know the unit cost in either year if they are not comparable, and does it matter to cash flow what the raw material inventory and buildings originally cost? The answer is no; those are sunk costs and the money is not coming back. What you want to know is the variable incremental unit cost, and that is not knowable for an outsider and it is almost unknowable for those working at the company.
The only easy number on your list is distribution cost; all the big pharmaceutical wholesalers operate on margins less than 1% of sales and on average they make about 0.5%. On a script that Symphony reports as a $500 sale, the cost to move the box from point A to point B is about $2.50.
Everything else would be a wildly inaccurate guess.
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Post by matt on Aug 9, 2016 7:54:52 GMT -5
If you figure demand for product was very low during the first quarter and they still spent 7.5 million, what will it turn into as demand increases? Just an educated guess, but a lot of manufacturing cost at low volume is absorption of fixed cost. There are variable costs, like materials and labor, and there are fixed costs like depreciation. In a pharma plant there are calibrations and quality procedures that have to be done on a cycle that varies with the calendar rather than the volume produced. If your three month inspection is due then it has to be done whether you make 1 unit or 1 million units. Then there are other "semi-variable" costs that move in a step function where you have to add resources in chunks. For example, if you need one supervisor to oversee production of 1 million units, and two supervisors to oversee 2 million units, then you also need two supervisors to oversee 1.1 million units. Overall, it is very hard to determine what the manufacturing cost ledger relationships look like from just the quarterly financials. On the cash side, I think management is putting a bit of spin on that that may be misleading some shareholders. Yes, Sanofi had the insulin put for $9 million but I believe the partnership agreement allows them to offset that against anything owed on the credit line so it is not a source of cash but a reduction in debt. Similarly, the tax credit may be more like a prepaid expense that is only useful if the company owes taxes; there are very few tax credits anywhere in the world that are refundable for a taxpayer that does not pay any tax. As such, neither item helps the cash challenge. I think the date for raising funds is still November (or earlier). The burn continues at a good clip and the marketing expenses won't fully hit until Q3 so you really can't go by Q2 numbers. The company is also putting some spin on the reasons for a decline in R&D spending, but either the company is dedicated to developing new products on the Technosphere platform or they aren't. If you want to fantasize about TS development and what that will bring in the future then fine, but the company can't get there by ratcheting back R&D spending. Either the R&D number needs to go up, or contributions from TS will not be happening. Which leaves the need to raise cash well before cash runs out early in 2017. When companies play chicken with the financial markets on fund raising, the markets react by very punitive pricing because they know the company is desperate, so the raise has to be done before full year 2016 numbers are available in March, and it is very hard to raise money after Thanksgiving. That leaves the two weeks after the 10Q for third quarter is published but before Thanksgiving and absent a spectacular Q3, raising money in Sept/Oct is not out of the question.
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Post by matt on Aug 8, 2016 9:34:54 GMT -5
If a large surprise amount of money suddenly appeared on the balance sheet, the risk of bankruptcy would be minimized which alone is a positive. Money always comes with strings so if it is an investment then there will be dilution and/or warrant overhang. So decreasing risk of bankruptcy would be a positive, but dilution is a negative. Where is winds up depends on the balance of the two and without a specific transaction in mind it is hard to guess on the net direction.
Truly free money, as from a Sanofi termination payment, would be different of course, but I truly believe that has the same chance as a snowball in hell. The burden of proof that Sanofi deliberately sand-bagged the launch would be on MNKD and I don't think the facts are there to support a settlement. Milestones are possible but early milestones tend to be tiny and big milestones come after successful commercialization, so those are many years away.
As for Matt putting in more money, I always find it interesting that shareholders expect management to put 100% of their personal wealth on the line. I am sensitive to that only because I have been president of two small companies and my shareholders wanted me to do that same. I didn't. Firstly, when 100% of your wealth is tied into a single company then you are a stupid investor because there is a total lack of diversification. If your salary, benefits, bonus, pension/401K, options, and your personal stock portfolio are all dependent on the fortune of one company, then you are over-weighted. If Matt is that reckless with his personal wealth, I wouldn't want him running a company. Secondly, I had three children that had high school and university tuitions to pay, a mortgage, insurance, car repairs, and other costs of a normal life. What you see reported in SEC documents as executive compensation is quite different from the cash that gets deposited in the bank, as a lot of what gets reported is the theoretical increase in option value that may never be realized (my wife insists that the grocery store only takes cash). Do the math on what Matt really takes home in cash, after deducting federal, Social Security, and California taxes, figure out what his mortgage payment might be (California is not a cheap place to buy a house), and then consider if asking him to invest $1 million out of his personal savings is a reasonable expectation.
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Post by matt on Aug 7, 2016 9:01:03 GMT -5
You're out of your tree. Who do you think you're fooling??? 5000 scripts per week before November would not only bring us close to cash flow even, the share price would skyrocket and fincaning would thus not be any issue if needed. Like davinci said, you need to do the numbers. Scripts drive revenue, which is a single line on a set of financial statements. I said that 10,000 would be cash flow break-even, and I stand by that number. Why? If we take the trending price per Rx of 533 (off the chart that Liane updates weekly) 10,000 scripts would yield $21 million a month in revenue. What does that $21 million need to cover? 1. The contract sales force, which we know costs around $10 million / month. 2. R&D. Everyone talks about how great Technosphere will be, but it will be worthless without further research. R&D has been averaging $2 million / month. 3. General & Administrative expenses averaged $3.3 million a month in 2015, $2.5 million for the first quarter. Call it $3 million / month. 4. Production cost averaged $5.6 million a month in 2015, and $2.5 million in the first quarter. That was to support very limited sales volumes; if the company is successful with relaunch the cost per month will scale up accordingly. It will not be linear, due to production economies of scale, but the number will substantially larger. 5. Working capital, like accounts receivable, was Sanofi's problem. Now that has to be financed by Mannkind's balance sheet and that is a use of cash that doesn't hit the income statement. 6. The company booked $5.5 million in losses per month on the Amphastar contract in 2015. That contract has not gone away and the current year exposure based on the last 10Q was $13 million. So add all of that up, and you will see that it might take substantially more than 10,000 scripts to reach cash flow break even. In the meantime, the company will burn cash, the balance sheet will deteriorate, and that is what Wall Street will be looking at. Any decent financial analyst would do the same calculation I just outlined and come to a similar conclusion on the revenue needed to support the organization as it is today, and 5,000 scripts per week just isn't enough. Many on this forum advocate dropping the unit selling price to drive penetration, but that would require even more scripts to make up the shortfall in revenue so that really isn't a feasible solution either. With 5,000 scripts the share price would move up, no doubt about that, but the financing terms will still be tough until the company can prove that it can generate enough cash to meet its maturing commitments and that will cost dearly in dilution. That level of sales buys time and loosens up the financial markets, but it is still not enough to fix the overall financial situation.
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Post by matt on Aug 6, 2016 10:56:31 GMT -5
I think it is important to remember that there is a difference between a drug and the company that makes the drug. Does Afrezza work well, at least for a significant segment of the diabetic population? I think that question has been answered yes. Did the company dig itself into too deep a hole financially to ever crawl out? That is what troubles Wall Street. It is entirely possible that the drug will succeed but the company will fail.
Like davinci, I worry about the company's continue access to financing on reasonable terms. The cash burn is huge relative to the revenue, and no matter how heroic the efforts of the sales team the company will not get to cash flow break even any time soon. If scripts per week can grow to a decent number, like 5,000 Trx per week, before Q3 results come out in November, then I think the financial markets will be reasonably accepting, not friendly but accepting. However, if script growth can't hit some number like that then financing, if available at all, will crush existing shareholders. I know it is still early days in the launch cycle, but given where scripts are today 5,000 is a tough nut to crack, and even then the company will only be half-way to cash flow break-even. Less than that kind of progress and I think Wall Street will be vindicated in their outlook.
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Post by matt on Aug 6, 2016 8:06:26 GMT -5
Patent reviews are like a tennis game. The inventor gets to serve the ball, the patent examiner hits it back, and the game is on. The inventor (or assignee company) asks for lots of claims with minimal disclosure while the patent examiner narrows the permitted claims and demands more disclosure. There is a lot of back and forth discussing the exact language and what will be shown in the application before something is agreed. Remember too that once the patent is published competitors can raise objections to certain items arguing, for example, that a particular claim is prior art, was obvious to someone skilled in the art, or interferes with another patent (all of which invalidate the claim). Eventually it all get sorted out, but it can take several years.
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Post by matt on Aug 5, 2016 9:16:09 GMT -5
Mannkind seems to have 2 more shell companies that no one ever talks about. www.sec.gov/Archives/edgar/data/899460/000119312514406347/d783199dex101.htmTECHNOSPHERE INTERNATIONAL C.V., a Dutch limited partnership, having a principal place of business at 1097 JB Amsterdam, Prins Bernhardplein 200, Netherlands (“TICV”), MANNKIND NETHERLANDS B.V., a Dutch limited liability company, having a principal place of business at 1097 JB Amsterdam, Prins Bernhardplein 200, Netherlands Those are plastered all around on the Sanofi partnership agreements. Figured everyone knew about those. MannKind Limited on the other hand...I would love for someone to dig up an offical MannKind Corp document on that! What name is on those two? Let's post those papers and compare them to MannKind Limited. Should make for an interesting comparison. I wonder what the dates are on those two? I wonder why they were were used instead of MannKind Limited. The reason to use Dutch structures is because they are far more flexible than UK structures. To fully understand the details you need to school yourself on the various tax treaty networks that exist, withholding rules within the EU, and use of Dutch partnerships to accommodate partners in countries without a bilateral treaty with the Dutch. Many companies have an EU holding company headquarters in the Netherlands that owns all the other EU legal entities because that is the most efficient way to move cash and payments for intangibles (like royalties) between companies under the same parent. The Dutch entity is then a direct subsidiary of the US parent or another US subsidiary.
Why the Netherlands? They have the most extensive tax treaty network of any country and as an EU member states there is zero withholding on remittances from member states. Some counterparties will only sign contracts with EU entities (who wouldn't want to avoid California courts) and the Netherlands suits perfectly. Their corporate code is almost identical to that of Delaware, and the Enterprise Chamber of the Amsterdam Circuit Court of Appeals is well respected as an independent, fair, and commercially oriented forum that can be relied on to make sensible rulings.
When you look at the legal structure of a multinational, you should not wonder why there are Dutch entities. If you see a structure without Dutch entities, you should wonder about the quality of the legal advice.
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Post by matt on Aug 5, 2016 9:02:56 GMT -5
No doctor has ever lost a lawsuit for using an FDA approved drug in the manner specified on the label, and state laws to the contrary are preempted. Like the others have said, the goal is to assemble a critical number of controlled studies that clearly demonstrate that use of Afrezza is clinically superior, and that those benefits are not outweighed by the side effects.
Mannkind has not come close to meeting that level of evidence, but if they do you will see medical practice change quickly and especially for newly diagnosed patients. Medical practice is not static, but it is increasingly evidence-based which is precisely how it should be, but collecting evidence is expensive and time consuming.
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Post by matt on Aug 4, 2016 6:46:03 GMT -5
I think a lot has to do with the regulatory environment. When you say "pair" CGM with Afrezza you have to be very clear exactly what that relationship involves. If the products are marketed together there is a very good chance that FDA will deem the pair a "combination product" which requires additional clinical trials to test that specific device with that specific drug. A change in either the drug or the device presses the reset button on the label. Given the pace of change in the electronics world this is more of an issue for the device maker than the drug maker.
If I had the leading CGM technology I would not want to have any kind of exclusive relationship with any particular insulin partner. It is better from the device manufacturer's perspective to play the field and let the market dictate which insulins will be most successful commercially and let the monitors flow into those supply chains on a non-exclusive basis. If you are a device company, you want everybody to be your friend and nobody your enemy unless you also own the drug, in which case you use the device to drive demand for a high margin drug. Unfortunately, insulin is not a high margin drug.
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Post by matt on Aug 2, 2016 10:07:43 GMT -5
No, not even hypothetically speaking. Mannkind Limited was a UK corporation and a wholly owned subsidiary while RLS is a Washington corporation as I recall. You sometimes see liquidation / reincorporation across state lines, as when the company wants to change its state of domicile, but you can't do that across country borders without triggering all manner of nasty legal and tax consequences unless the liquidated subsidiary is totally devoid of activity, both present and past, because liquidation triggers a deemed distribution under IRS Section 1248 (trust me on this, you don't want to know the details of Subpart F of the tax code).
However, if it was a pure shell company with a de minimus amount of cash (say $20), no liabilities and no retained earning then nobody cares what you do. Still, you can't change Mannkind Limited into RLS without notice because one was a wholly owned subsidiary and the other is not. That can't happen without the proper disclosures, and if RLS was a subsidiary then any royalties or other contracts would get eliminated in the intercompany accounting.
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Post by matt on Aug 1, 2016 15:53:11 GMT -5
There really isn't that much to understand about shorting. The days to cover simply shows the ability of the shorts to cover if, in fact, the stock took a massive upward swing because the volume is not there to allow covering. However, what is missing in that analysis is the number of call options outstanding. If, for example, an investor was short 100,000 shares but owned calls on 100,000 shares there really is no imbalance in that portfolio. If the price spikes the investor could simply exercise the call option, take deliver on the shares and cover the short. For that matter, an investor could also use options to construct a synthetic short position that gives the same payoff as a real short without ever showing up in the short interest, so the reporting is not perfect.
As for your observation that 32 days to cover seems high . . . well, there is nothing wrong with your observational powers. There are other stocks with similarly large days to cover ratios, but not very many. What it tells you is that some people have very firm convictions about the likely price trend and the potential for reorganization. If a stock is cancelled in a reorg, it never has to be paid back and that represents the best possible economic outcome for a short. However, it is also a dangerous game to play.
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Post by matt on Aug 1, 2016 15:26:47 GMT -5
Hakan was the sole officer, but there is usually a requirement for a resident director (somebody who actually lives in the UK) and that is what Quayseco did. The same thing applies in most states; anybody can form a corporation in Delaware but you have to have a resident agent to accept official documents and court filings, and you must also have at least one officer. Agents typically will not act as the sole officer due to the legal liability.
I do think Hakan signed the paperwork, what I meant is that his filing to liquidate an inactive shell was coincidental to his leaving Mannkind. I have been the sole director of several foreign shell companies for my various employers. It really doesn't involve much work except keeping the local agent paid, at least until the point that you take the company active. Then somebody else usually steps in to run the day-to-day operations. The real question is why they kept it active for so long if they had no plans to use it. Maybe they did have plans and they just never materialized, but that is a question for the company.
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Post by matt on Aug 1, 2016 10:48:49 GMT -5
A lot of companies have a lot of dormant entities. They are typically set up by overly eager lawyers preparing for a transaction that never happened, and then they never get liquidated, just as many worthless patents stay on the books accruing annuity fees, simply because it is easier to pay a lawyer's invoice than it is to take the time to thoughtfully prune the portfolio. This behavior happens in companies of all sizes.
I suspect Hakan's departure had nothing to do with it and it was simply a corporate effort to reduce spending. If the subsidiary had a purpose, it would have been easy to nominate a new director to replace Hakan. In most countries you can accomplish it with just a signature and one page resolution from the parent company.
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Post by matt on Aug 1, 2016 9:59:19 GMT -5
DBA means "Doing Business As" and is typical when the person is an employee. There is no significance to having a dormant subsidiary; the fact that there was a company will stay on the Companies House database for a number of years.
As to why they no longer have a subsidiary, you would have to ask the company. However, if they have no significant activity in the UK then why pay the fees? Having a subsidiary is not free because of the agent fees, franchise taxes, and so forth. It can easily come to $5,000 depending on the country and if you aren't getting any benefit, you might as well not pay.
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Post by matt on Aug 1, 2016 7:18:30 GMT -5
1. Mannkind needs to have an "establishment license" for each location where they operate. This is so FDA has a comprehensive list of the facilities that they need to inspect periodically. Each establishment also needs to list the name of the person responsible for FDA compliance at that establishment, and the address of the facility. It looks like Raymond Urbanski is the designated person. The license itself allows the company to handle controlled substances, including unapproved and experimental drugs, that they otherwise wouldn't be able to have in their possession.
2. Mannkind had a UK subsidiary with Hakan listed as the managing director, with somebody from Quayseco Limited listed as the resident managing director (they seem to be a resident nominee directors for many companies). Mannkind filed for voluntary dissolution so it was "struck off" which is UK legalese for administratively dissolved, thus the UK subsidiary is no more.
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