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Evaluating MannKind (MNKD) & Sanofi (SNY) Agreement for Afrezza

August 15, 2014 | About:

MannKind (MNKD) has seen volatile price swings upon the partnership announcement for Afrezza with Sanofi (SNY). MNKD stock is down ~9% since the announcement. Full details of the collaboration have not yet been disclosed and neither have Afrezza projections. Therefore, much of the ongoing price movements are due to speculation. With that said though, there are takeaways from this deal.

Overview of Terms

MannKind will receive an upfront $150M payment and potential milestones of up to $775M, depending upon specific regulatory, development and sales targets. Sanofi and MannKind will share profits and losses at a 65/35 split, respectively. Sanofi has also agreed to advance MannKind a loan of up to $175M to cover its share of Afrezza expenses that MannKind will need to repay.

Sanofi Stopgap for Lantus Patent Expiration

Lantus, the long-acting basal insulin that has been SNY’s blockbuster diabetes drug with $7.5B sales in 2013 will expire in the US and most of the EU by May 2015. Sanofi needed to minimize the revenue impact of generics and has taken a step by partnering with MannKind. Sanofi’s sales force, which has pushed the world’s leading diabetic drug, will integrate Afrezza when the companies plan to launch in Q1 2015. Therefore, both MannKind and Sanofi are relying on Afrezza to be successful.

Financially, Sanofi gains majority access to a potentially multi-billion dollar drug for less than a billion ($925M to be exact). It seems Sanofi was able to avoid the regulatory risk with Afrezza’s FDA approval and only taking on marketing risk (which they are global leaders for diabetes). At a first glance, this deal was a big win for Sanofi.

Why MannKind is Selling Off

Market’s original reaction to MannKind’s announcement was that management gave away 65% of Afrezza for less than $1B. However, as mentioned above, the final details of the agreement have not yet been released, so a thorough analysis is hard to conduct.

MannKind’s management primary goal was to see Afrezza succeed. To realize this, the company secured the leading global pharma in the diabetes care market. With Sanofi’s expertise and resources, it’s unlikely to see Afrezza flop. With Sanofi on their corner, much of the marketing risk is taken off the table for MannKind. Without looking at the figures, the deal makes lots of sense for MannKind.

I believe the market had higher expectations (maybe too high) on the terms of a Afrezza deal. A revenue agreement, instead of P/L, would have been more beneficial. However, I believe MannKind was set on having Sanofi as their partner, and thus took less favorable terms to ensure the marketing success of Afrezza.

Additionally, MannKind does not have any upcoming catalysts that event driven investors are interested in. With approval and partnership announcement, MannKind has had quite the eventful summer. The drug won’t hit markets until Q1 2015, with sales data expected sometime in Q3 2015. During this time, MannKind could be seen as “dead money” by the investment community, thus leading to the selloff.

Projecting 2015

Financially, MannKind reduced development costs by 65%. The $175M loan that MannKind received from Sanofi indicates that the costs to market Afrezza will be approximately $500M (35% of $500M = $175M). Therefore, it will take about $500M worth of profits for MannKind to get even on the loan.

afrezza profit sharing projection

The above table assumes that the profit margin from Afrezza will be 20%, which is around the same range Sanofi reports in the company statements. If 2015 sales are $1B, MannKind would receive approximately $70M, excluding milestone payments from Sanofi. At the same time, peak sales of Afrezza have been projected to be more than $1B that I assume in 2015, the launch year.

Conclusion

The announced deal has given Sanofi an outlet to sustain its diabetic sales, even with the expiration of Lantus. MannKind landed the market leading diabetic sales force to push Afrezza, however this was done at a high cost. The success of this partnership will be decided by Afrezza’s success in penetrating the diabetes care market.

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Comments

peter.verbeke
Peter.verbeke - 2 months ago

I think the 20% operating margin on Afrezza is way too low. That may be the overall number for Sanofy, but it includes 14% R&D and 14% Other + Non-recurring both of which should not count towards the profit margin fro Afrezza. So we're already at 48%.

Also overall Sanofi Admin/Sales is 25%. Of course I don't know the terms of the deal, but if Sanofi does not hire salesstaff for Afrezza specifically (and I don't think they will), the number should also come down. So I think the Mannkind 35% will come out of slightly over 50% over revenue. So I expect the profit sharing to yield 150% more than your estimate.

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