Recently, a bearish article on MannKind was published on Forbes that attacked my own article on SeekingAlpha. The author apparently figured me for a MannKind bull, but had he read my article carefully and also the comment stream, he would have seen I was no blind MannKind supporter. So his attack was misdirected. Neither my old TMF article nor my recent SA article blindly root for MannKind.
Unfortunately, the article was completely lacking in any specific scientific fact supporting the author's bearish stance, so it is hard to debate it. Therefore, in my own article here, I will simply state the facts as I see them, and not try a point-by-point rebuttal, because, like I said, there are hardly any “points”in that article.
So, let me begin by clearly saying that while, as a physician, I like the drug Afrezza, I am not a MannKind bull and I don’t much like how the company is being run. Maybe that will change when/if Afrezza sales pick up, but predicting that is beyond my area of expertise.
Looking At Afrezza
Mannkind’s (MNKD) Afrezza is a convenience product, a luxury version of insulin, if you will, for those who prefer not to take insulin as an injectable or with a pump, a catheter stuck under the skin. Though the debate rages on, there is no consensus on whether it is more, or less, effective - or even safer - than injected insulin.
However, according to an FDA document, “One-third of all health care providers report that their insulin-using patients are concerned about their injections; a similar number of people …report dreading them. Lack of compliance … is a problem in both T1DM (type 1 diabetes mellitus) and T2DM patients, as noted by frequent dose restriction or frank omission of insulin injections.”
Thus, there is almost no debate in the argument that a small, palm-able inhaler is much more convenient than a syringe or a pen - especially to those unused to the syringe or who suffer from trypanophobia.
Why hasn’t Afrezza sold well?
Here we have a product that is as good as SoC, but more convenient to use. How do we sell this product? Certainly not by approaching physicians; most I know don’t worry about patient convenience as long as the treatment works - a little detachment is actually the hallmark of a good physician. Indeed, it is less convenient for them than injectable insulin because they have to learn spirometry, face the risks of learning it wrong, or send patients to a GP to get spirometry done. No, doctors certainly don’t find that convenient.
Patients, on the other hand, ceteris paribus, will certainly find inhalers more convenient than a needle, however small. Now, how do we sell a convenience product? By approaching those to whom the product is more convenient - the patient, the consumer. The DTC (direct to consumer) marketing approach, therefore, has a good chance of working. Unfortunately, companies only do DTC 6 or more months after launch, so DTC has only just been started by Sanofi (SNY), MannKind’s partner, this month.
That is the main reason Afrezza hasn’t sold well so far.
That is also the reason I think MNKD is under-appreciated, because, if their marketing effort takes off, they will gain substantial amount of extra sales. Remember however that this isn’t a blockbuster new cure, so don’t expect billions of dollars in immediate sales (and remember the 35-65 profit sharing model, of which more later). This is convenience, and people adopt convenience slowly. The thing to do is to keep reminding them of the problems with other forms of insulin.
Problems with regular insulin injection are many
If the 6mm needle is used incorrectly, it can puncture a small blood vessel and cause blood droplets to ooze out of the puncture point. This may be small trouble for other people, but for diabetics, any bleeding is a problem. That can also cause minor bruising, which makes the injection site unusable for a while.
Insulin syringes have become so small and thin that they are not supposed to hurt. But sometimes they do, especially when incorrectly administered. That is actually quite common for new patients. They may forget to pinch the skin and plunge the needle into the muscle, especially with the smaller needles.
Or they may use a bent needle, which may break off and get stuck inside the skin. Sometimes they may inject insulin that is cold, which is quite painful. Reused needles are very dangerous, but it is my experience that most users will reuse needles once or twice.
Sometimes there may be inadequate dosing because a bit of insulin drips off the needle point. Usually, this is normal, but if there’s extra dripping, you may not get enough insulin into your body.
Insulin hypertrophy sometimes occurs at injection sites, where the insulin causes lumps of fat to develop. Lipoatrophy is a rare condition that occurs when fat dissolves under the skin, causing depressions in the skin. Lipodystrophy may occur due to fat scarring, using the same site multiple times, or with needle reuse. These places, if reinjected, do not dissolve insulin well, and you may not get your proper dosing. Finally, the visually impaired may have a problem with injected insulin.
Almost all these problems are avoided if an inhaler is used.
Insurance coverage
Another problem Afrezza has faced is insurance. Insurers go for the cheapest working option available as long as someone hasn’t scientifically demonstrated its risks. That isn’t the case with injectable insulin; so there has been concern from the beginning about the coverage status of Afrezza.
Exubera, for example, was scheduled in the top tier drugs, so although it was covered, the co-pay was higher. Depending on how much higher the co-pay is, people may prefer to adjust to the needle rather than pay more for the inhaler. This is a matter of perception, and only direct to consumer marketing will work to change that; along with some arrangement with insurers.
However, as a recent article on SeekingAlpha says, Afrezza has much improved coverage now. The author notes in his article that the largest PBMs in the U.S. already cover Afrezza. In addition, seven of the top 10 insurers also cover the inhaled insulin in some way. While Afrezza’s price is double that of other rapid acting insulin, the adoption by top PBMs and health insurers is a very encouraging sign. The author notes that early trends for coverage suggest an 80% eventual coverage for Afrezza in the U.S.
Safety and efficacy comparison
Eight years ago, in an article published in Nature that discussed Pfizer’s Exubera exit and other prospects, good things were said about Afrezza: "MannKind… has a smaller, palm-sized device to use with its powdered insulin 'Technosphere' formulation, which has been shown to deliver higher blood-insulin concentrations than any of the other powdered products."
One of the most comprehensive documents for studying a drug is its briefing material for the FDA Advisory Committee. According to this document, “Technosphere Insulin Inhalation Powder (TI) is composed of recombinant human insulin and fumaryl diketopiperazine (FDKP), an inert excipient. It is administered with the breath-powered, dry powder Gen2 inhaler that provides ease of use and consistent, reproducible insulin delivery.”
The document also says that inhaled insulin is more rapid acting and mimics the body’s own insulin secretion regimen more closely than other forms of insulin. “Inhaled TI is an ultra-rapid acting insulin with a more rapid onset/shorter duration of action than either subcutaneous (sc) regular human insulin (RHI) or sc rapid-acting analog (RAA) insulins.”
In trials, it has been shown that Afrezza’s unique PK/PD profile makes it “more closely mimic endogenous prandial insulin secretion compared with currently available RHI (regular human insulin) and RAAs (rapid-acting insulin analog).”That means, in terms of onset and duration of insulin action, Afrezza is better than both RHA and RAA, and closely resembles how body-generated insulin works.
In the four phase 3 trials that were conducted on Afrezza, it was consistently shown that it was noninferior to insulin aspart in reducing HbA1c. Trial subjects also unequivocally showed their approval for the inhaler.
As for safety issues, here’s the deal: Afrezza is a dry powder consisting of small particles of about 2 microns inhaled through your mouth into your lungs. That's like inhaling fine dust. That causes coughing, the only significant TEAE, or treatment emergent adverse event, which may be harmful for CLD or COPD patients, or smokers. This is the reason a spirometry is mandatory before prescription, 6 months after, and once every year. This is also why it is not recommended for smokers or for CLD/COPD patients. Other than that, I could find no significant safety issue with Afrezza. Also, coughing for non-COPD, non-smokers is manageable and transient. The trial showed that the annual rate of change of FEV1 (forced expiratory volume in 1 second, or spirometry) was non-significant for the treatment arm, which means that TI-related coughing did not lead to adverse pulmonary consequences.
Two other benefits were observed in trial: one, because TI is so rapid acting, postprandial hypoglycemia was significantly reduced. Two, because of rapid pharmacokinetics of TI, it leaves the body quickly enough that supplemental prandial dosing becomes possible, if required by the condition of the patient.
The reason why TI is so much faster acting, as measured by the glucose infusion rate (GIR), is because it is already a mixture of mostly monomer and some dimer forms. Normal human insulin exists as a hexamer, which needs to be broken down into monomers to work. RAAs exist as fragile hexamers, which break down quicker than RHIs, but still need some time. TIs begin life as mostly monomer, so there’s no delayed breakdown process and the action is much quicker.
Difference with Exubera
Exubera was a cumbersome device because of the properties of the molecules of insulin. Afrezza is not, because MannKind has created molecules that do not need that extra pressure to move through air. It is also possible to control the dosage very precisely, and MannKind is coming up with multiple dosing types, including one for pediatric dosing if that population is approved.
Another major issue with Exubera was Pfizer itself. That was the time when Pfizer was looking for a replacement for Lipitor; it was also the time when they were changing CEOs every few years. Analysts have pointed out that Pfizer’s marketing efforts were lackluster at best, destructive at worst. Sanofi may be doing a better job, although there are doubters.
Thirdly, Exubera was the first inhaler, and there was a lot of entrenched misperception. Afrezza has that advantage over Exubera, that it can avoid the latter’s errors. There was also a learning curve with Exubera, and it didn’t help that the device was so embarrassingly big.
Bottomline, I have given insulin injection with a syringe in the bad old days, for years, to many people. Syringe was cumbersome, painful, lifestyle modifying. Then came the pen, and the thin needle, and it was much more convenient. However, for beginners, and for those who have taken insulin daily for years, it gets cumbersome looking for a place to prick yourself everyday.
It is a matter of perception, and Sanofi needs to work hard to change it.
Valuation
This is the relatively bearish part of my article. There are two aspects to valuing MannKind. The first is of course Afrezza’s sales potential. The second is the total number of outstanding shares. Let me address the second issue first. MNKD has spent tremendous amounts of money getting Afrezza to commercialization. Raising all that money has meant significant dilution. MNKD currently has more than 400 million outstanding shares. Now, dilution is always a risk for any biotech. The idea is that during clinical stages, companies dilute the stake of existing shareholders. But if the company reaches commercialization stage and is successful, it can create value for shareholders through buybacks.
Ideally that should be the case with MNKD. And, given Afrezza’s potential, that is a possibility. But remember that MNKD has a deal with Sanofi and will share only 35% of profits. The deal is structured differently than usual biotech licensing deals. MannKind is not getting a share in the gross sales. It is getting a percentage of profits.
In a conference call shortly after the deal with Sanofi was announced, MannKind said that the structure of the deal was beneficial to both companies. The company said that its internal financial models indicate that the 35% share in profit would equal mid-twenty percentage in royalties. Now a mid-20 percentage royalty is a very good deal but I do not have access to MNKD’s financial model so I am not sure what the company’s assumptions were. They could have been extremely bullish, which would of course make the deal look more attractive than it really is.
So back to MannKind’s valuation. The peak sales estimates for Afrezza range from just $200 million to $5 billion. The huge difference in sales estimates highlights the debate over whether Afrezza will succeed. Indeed, several analysts have brought down their expectations following the launch of Afrezza. But as I explained in the article, while the uptake for Afrezza has been slow, it has potential.
But Afrezza’s potential does not necessarily translate into a high valuation for MannKind.
Let’s first see how much Afrezza can achieve in peak sales. The product is already approved in the U.S. and an approval in the EU could come by 2017. The global market for insulin is expected to reach $47.5 billion by 2020, growing at a CAGR of 12.3%. The largest segment of the insulin market is intermediate and long acting insulin at around 45%. Afrezza is a rapid acting insulin. Assume that rapid acting insulin will account for around 20% of the total market; this would mean that Afrezza’s addressable market by 2020 would be nearly $10 billion. If the insulin market continues to grow at the same CAGR over the next five years, Afrezza’s addressable market would be around $17 billion by 2025, which is when it could achieve peak sales. In the bullish scenario, Afrezza achieves peak sales of $6.80 billion based on 40% penetration rate.
Remember that MannKind gets a share of the profits and not sales. The operating margin for major pharma companies is at around 20%. So this would translate to $1.36 billion. At peak, MannKind’s profit-split revenue would be approximately $475 million. Based on this and roughly 450 million shares outstanding, MNKD is currently trading at around 3.50x peak sales estimates. This is well below the average for the biotech industry. According to Stern, the average for the biotech industry stands at around 10.38. If MNKD’s multiple moves to the industry average, this translates to a value of $10.50 per share for MNKD.
Last year, when MNKD was trading at $11, this wasn’t a good deal. Now, especially with the pullback, the risk-reward profile is better. When in 2011, MNKD had to spend money doing additional trials, had it been approved at that time, things would have been much rosier.
In the best case scenario, MNKD has 200% upside. But the million dollar question is whether Afrezza can meet these bullish expectations notwithstanding its potential. On that, I take the Fifth because my expertise limits me to the science. And I suggest David Kliff join me because while there is much of concern with MannKind, there’s nothing “laughable,”- his words not mine - in a medical product that helps reduce a diabetic’s pain.
