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Afrezza's Initial Sales Create Buying Opportunity

This article is more than 9 years old.

After a drug receives FDA approval, shareholders expect significant sales will soon follow. However, since obtaining an FDA approval does not remove all of the obstacles to sales, it is often the case that initial sales fall below expectations and the stock drops accordingly. Afrezza’s launch is about to give us just this kind of opportunity to buy MannKind.

Buying high potential biotech stocks after disappointing initial sales, has proven to be a sound strategy for more than one Marketocracy Master. Here’s why. At this point, the risk that the drug doesn’t work has been resolved and the risk that the FDA won’t grant approval has been eliminated. The risk has been reduced to marketing, a normal business risk with which lots of people have firsthand experience, while the upside is as big as ever.

To understand how the launch is going, lets take a look at the normal cycle of doctor visits a diabetic has to plan for. Forbes reader Greg Moulthrop explains:

I see my Endocrinologist every 6 months, the average diabetic sees their Endocrinologist every 3-5 months. The reason for a 3-6 month cycle is because depending on how "controlled" your  diabetes is, the longer you can wait to get essential lab tests done to track one's A1C and other vital tests to organs and such.  The process that I have to go through to get blood drawn to check my A1C and other lab tests to prepare for my Endocrinologist appointment, makes it difficult to get an “out-of-cycle” appointment to see my specialist.  And, there are issues with insurance to seeing my specialist out-of-cycle. Personally, I can see my specialist up to 4 times a year, but I know of others that are allowed only 2 visits a year that are not considered a "critical need".

For sales to take off like a rocket, either doctors or patients need to be motivated enough to schedule out-of-cycle appointments. Otherwise, it will take about 6 months for patients to see their doctors at least once during their normal cycle.

Will doctors bring patients in for out-of-cycle appointments?

Based on my firsthand experience launching a newly approved medical product, this is the conversation I imagine is happening in doctors’ offices all across the country.

Salesrep:  Doctor, I’d like to introduce you to Afrezza, our new inhalable insulin.

Doctor:  Why is Afrezza better than what I’ve already got my patients on?

Salesrep:  Afrezza can be administered without needles, so patient compliance should be better.

Doctor:  Are there any other reasons to switch my patients particularly if what they are already on is working pretty well?

Salesrep:  Afrezza has a different PK profile than other insulins. Patients will have to adjust to this, but the more natural profile may lead to fewer complications.

Doctor:  Fewer complications would be a big advantage, what evidence do you have of this?

Salesrep:  The PK profile is very similar to that of naturally produced insulin in non-diabetic patients. It stands to reason that this would lead to fewer complications. However, we do not yet have the data to prove that complications are reduced.

Doctor:  If you leave me some samples, I’ll be happy to offer them as an option to my patients as they come in for their regularly scheduled appointments.

Will patients call their doctors to set up out-of-cycle appointments?

Vincent DeRobertis, Senior Vice President of Global Healthcare at Research Now, offered to use their diabetes panel get us the feedback we need to answer this question.

Over a single weekend, Research Now was able to get a randomly selected group of 100 diabetes patients to answer a short series of questions.   

The respondents included 65 who currently use an insulin pen and 9 who had heard about Afrezza before being contacted for this survey.

This was the key question I wanted to ask.

Assume that insulin is now available in the form of an inhaler. However, your doctor wants to wait for a year before agreeing to the use of an inhaler, as he/she wants to see if early users develop any complications. Which of the following best describes your likely reaction?

1)  I would try to find another doctor. 

2)  I would agree to wait for another year, as per my doctor’s advice.

3)  I would try to convince my doctor to change his mind and not wait an entire year.

Of 100 respondents, including the 9 who had heard of Afrezza before, there was not a single patient who felt “no needles” was a big enough benefit to warrant changing doctors. The over-whelming majority, 90%, said they would follow their doctor’s advice. Only 10% said they would argue with their doctor. Interestingly, all 9 of the patients who had heard of Afrezza said they would follow their doctor’s advice, none would argue with their doctor.

My Take:  I don’t see Afrezza sales rocketing out of the gate for 2 reasons.

First, the sales reps cannot make the kind of claims that would compel a doctor to bring in his/her patients out-of-cycle.

Second, I don’t see lots of patients lining up to see their doctors out-of-cycle. Almost all of the patients, 91%, had not even heard of Afrezza and all 9 of the patients who knew about Afrezza said they would follow their doctor’s advice, even if it meant they would have to wait a year.

When Sanofi and MannKind have the data to back up a claim that using Afrezza results in fewer complications, it will make a big difference to both doctors and patients. Until then, I expect that most diabetics will hear about Afrezza for the first time when they see their doctor at their “on-cycle” appointments. This means it will take 6 months for all diabetics to learn about Afrezza.  Nevertheless, the benefit of “no needles” should be sufficient to make it a successful product.

Afrezza’s annualized sales need to be in the neighborhood of $3 billion in order for MannKind’s 35% share to justify the company’s current valuation of $2.8 billion. I think it can get there, but it's not going to happen overnight. If you have a 3 year investment horizon, you have enough time for an investment in MannKind to work out. If MannKind’s stock drops after initial sales are announced, that would be a great time to buy it.

Be sure to size the position, so the daily price fluctuations won't affect your overall portfolio’s value so much that all your hair turns white in the next 3 years.  If you find yourself thinking that everyone who doesn’t agree with you 100% on MannKind is an idiot, your position is probably too large.

I like MannKind’s risk-reward profile and I would be willing to bet the farm on a portfolio of 10 stocks with the similar risk-return profiles. But I would not bet the farm on MannKind alone. To find similar stocks, I think its worth clicking on the link below to see what else is in Nate Pile’s portfolio.

Previous articles about MannKind.

MannKind is Nate Pile’s best idea for 2015. Nate is a Marketocracy Master whose portfolio is available to clients of Marketocracy’s Separately Managed Account program. You can view Nate’s top five holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month by visiting our website.

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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.