As we think about what kind of deal might emerge, consider the following: A straight-forward licensing deal that involved only an upfront payment, royalty rate and expense sharing agreements (for P4 studies etc.) should not be that complicated. However, if the BP ends up with a significant equity stake, things get much more complicated as valuation stories are quite diverse at the moment. Owing in part to the length of negotiations, I surmise that a material transfer of equity will be part of the deal. This would also be suggested by the type of deals Greenhill does. They do not appear to do straight licensing deals.
If a material equity stake is placed, it will run into the Billions of dollars (even for a 20% share). If these shares are sold by the company, the company gets the money, but the share count goes up proportionately (dilution). MNKD would not need $1B+ - especially if the partner is handling the marketing expenses and post-approval development. However, another possibility is that the equity transfer is done through a tender offer. In this case, the shares are purchased from current shareholders. For example, the agreement could specify that BP would pay MNKD a $500m licensing fee at an agreed-upon revenue split conditioned upon a successful tender of 20% of MNKD shares at say $20/share (probably as a stock swap). This way, those investors who are willing to take their profit at that level can do so, and those who think it will go to 50 or 70 or 700 can hold. The BP ends up with a significant equity stake in the company, and thus shares MNKDs profits beyond their revenue split while positioning themselves for a potential buy-out down the road if things go well. The tender could be executed fairly quickly, would allow Al to recoup some of his investment, but would also allow him to hold most of his shares for the big valuation he anticipates in the intermediate future.
You outline an interesting but highly unlikely possibility. If the prospective partner wanted an equity position, a more likely scenario would have the company selling newly issued shares. A 20% stake would mean roughly 100 million shares, on a fully diluted basis. And at $20 a share, again using your figure, this would add $2 billion to Mannkind's coffers and value the company at a reasonable $10 billion.
Quite frankly, a deal along these lines would be more than acceptable to me. The sharply improved balance sheet, a strong marketing partner that has an incentive to sell Afrezza, and the $20 purchase price would undoubtedly have the stock moving above $20. As for the notion of dilution resulting from the company selling newly issued shares, there certainly will be no dilution at a $20 price, or anywhere near there.
g_noh, your scenario is ridiculous. In your scenario, when is Al ever going to sell his share if every tender offer is issuance of new shares? The purpose of the tender offer is to sell current ownership share to a new partner/owner. In theory, all shareholders will tender 20% of their shares including Al. In your scneario, Al would have to buy a proportionate share to maintain his equity share of the company. I am sure Al is no longer looking forward to that.
I'm struggling with the concept. I would think that most investors would see the partners willingness (in fact, eagerness) to buy 20 percent of the company at $20 per share would cause most if us to lock our shares away. Heck, the fact of the tender coupled with the partnership announcement might well set the floor on market trades. It might be hard for anyone to get shares for less than $25 or even more if such an announcement were made. My sense of it would be that the impact of such news on the market for the stock might make the deal self defeating.
Sentiment: Strong Buy
I wrestled with that as well. The reason a bidding war might not break out is that at $20 - ish, it is such a large multiple to the current price that some (all you need is 20%) would prefer to tender than to wait another year for the sales figures to begin to roll in. Nevertheless, you raise a good point.
yeh this deal significantly affects the MNKD share price. Hard to know until they release it. Do you still use the assumption sales$$ x 8-10 as a leading indicator of MC? Or is this assumption too generalized in this deal structure?
Pricing a deal like the one described would not have to be done as aggressively as some might think justifiable, because you would only need to offer a price that would capture what in effect would be the valuation expectations of those in the bottom 20%. Another way of thinking about it is that even those who believe the stock will be worth $50 in due time might be willing to take profits on 20% of their holdings at $20 (or some number considered "undervalued" by others). Moreover, Al controls enough of the company to buy all 20% if need be, thus ensuring that the tender offer would be completed.