Published on Retail Investor 360: Tuesday, 19 August 2014 15:40 Written by Doctor Hung V. Tran, MD, MS. Disclosure: We are long MNKD and we do not have any financial relationship with any company we cover.
360 Catalyst Key
- Afrezza is one of Sanofi's carefully chosen medicines to catalyze the French Powerhouse Pharma’s next leap in earnings. Likewise, Sanofi's other chosen drug is Regeneron's cholesterol-lowering drug, Alirocumab
- Bloomberg sources are suggesting that Sanofi is bidding against GSK to acquire another stellar drug, Pirfenidone, to treat Idiopathic Pulmonary Fibrosis (IPF).
- The quality of Sanofi's chosen drugs speaks volumes for the quality and prospects of Afrezza
- Sanofi's powerhouse sales/marketing teams will deliver three powerful blockbusters (Lantus, Alirocumab and Afrezza) to the same patients who have multiple coexisting diseases including obesity, high cholesterol, prediabetes and diabetes
- Sanofi's elite sales/marketing teams for Lantus already have existing relationships with hospitals, clinics and physicians' offices around the world. The teams can sell/market Afrezza with minimal costs, saving both time and money
- In assessing the global picture, MannKind's 35 percent portion of the 35/65-profit split will be substantial due to the aforementioned Sanofi's synergistic growth strategy.
- Sanofi's label expansion will catalyze Afrezza's dominant blockbuster sales, because Afrezza is the prime candidate to cover the astoundingly large prediabetes market.
- Many companies that tried to capture the obesity market directly are delivering disappointing results. A better way to capture obesity is indirectly through diabetes and prediabetes.
The market has been confused regarding Mannkind's recent partnership with Sanofi to commercialize the company's lead drug, Afrezza. MannKind expects to launch Afrezza as treatment for both Type 1 and Type 2 diabetes as early as the first quarter of 2015.
Contrary to the market's negativity, the 35/65 profit split for MannKind Corporation (NASDAQ: MNKD) and the company's commercial partner Sanofi SA ADR (NYSE:SNY), respectively, is favorable for both parties. If Afrezza registers blockbuster sales as projected, then it is highly favorable to receive less as an up front payment but a larger share of the profits – which was the deal MannKind secured. The notion that MannKind should receive 50 percent of the profits is unrealistic, because similar companies receive significantly less than 20 percent of profits.
In addition, as a rule of thumb, companies that form partnerships early in their lead drug's development usually receive less than 10 percent of the profit. It was not coincidental that MannKind delayed closing the partnership deal entail after FDA approval because members of the management like Dr. Mann are highly experienced in deal-making and have unparalleled track records of performance. Therefore, investors should smile rather than frown upon this deal.
It's not unreasonable to conclude that Sanofi acknowledges Afrezza's capability to replace Lantus' $6 billion in revenues, as Lantus' patent will expire in February 2015. Otherwise, why did the French Powerhouse Pharma, the most dominant global diabetes leader, choose Afrezza over other diabetes drugs?
Interestingly, Sanofi also partnered with Regeneron for another potentially revolutionary LDL cholesterol-lowering drug, Alirocumab, which demonstrated similar safety yet better efficacy than Lipitor in its phase 3 clinical trials. Therefore, Alirocumab has the potential to cut into a vast cholesterol market, as the blockbuster Lipitor recognized more than $12 billion in peak sales in 2010 for Pfizer.
On August 13, 2014 a Bloomberg article stated that Sanofi is trying to outbid GlaxoSmithKline plc. ADR (NYSE: GSK) to acquire InterMune, Inc. – the maker of Pirfenidone. We have been following InterMune for over five years. In early 2014, Pirfenidone posted stellar phase 3 clinical trials results for the ASCEND Trials, which prompted InterMune to resubmit the New Drug Application (or NDA) for Pirfenidone recently. The agency not only accepted the NDA but also fast-tracked the application and assigned a target PDUFA date of November 23, 2014.
Our research suggested that Pirfenidone has more than 85 percent chance of FDA approval. Based on the biochemistry and trials data of Pirfenidone, we are highly optimistic that the drug will gain "complete dominance in the fibrotic lung disease market." Pirfenidone had been approved and is being increasingly prescribed in more than 29 European countries under the trademark, Esbriet. In Japan and South Korea, Shionogi & Co. marketed the drug as Pirespa. Pirfenidone effectively treats a progressively lethal lung disease called idiopathic pulmonary fibrosis (IPF) – of which there is no effective treatment. The current standard of care is solely directed at symptomatic management rather than treating underlying fibrotic disease.
In viewing the global picture, the fact Sanofi only selected top-of-the-line drugs and "cream of the crop" companies like InterMune and Regeneron as commercial partners speaks volumes for the quality and potential of MannKind and its FDA-approved ultra rapid acting insulin Afrezza. Furthermore, the recently inked partnership agreement with MannKind also reveals the growth strategies of the world diabetes leader, Sanofi. Based on our Integrated Research, Afrezza is the final key to catalyze the French Powerhouse's next leap in earnings.By having multiple drugs that treat several related comorbidities for the same patients, Sanofi's elite global sales and marketing teams will be able to reduce sales and marketing costs, leading to an overall lower corporate spending.
In addition, the close "physiological relationship" among chronic diseases including obesity, high cholesterol, prediabetes and diabetes will enable Sanofi to expand its label for Afrezza – which further lends credence to Sanofi's multi-pronged approach of reducing costs and delivering synergistic growth for shareholders. If there is such a thing as a perfect global partner for MannKind, Sanofi is indeed the chosen one, as the French Diabetes Powerhouse has the highly resourceful sales and marketing infrastructure as well as optimized corporate strategies to ensure Afrezza's complete dominance in the enormous $29 billion (US) insulin market – growing at an astounding rate of 12.4 percent to reach $45 billion by 2020.
Source: International Diabetes Federation
Furthermore, Sanofi is also the best global commercial partner for Regeneron to position Alirocumab to be the top leader in the high cholesterol (hyperlipidemia or hypercholesterolemia) market. Given Alirocumab's stellar phase 3 trial data (that trumped Lipitor's efficacy while posting similar safety profiles) it will not be surprising if Alirocumab dominates Lipitor's blockbuster sales in the near future. Lipitor is one of the top-selling blockbusters as it registered more than $12 billion peak annual sales in 2010 for Pfizer.
Patients with obesity also tend to have high cholesterol (hypercholesterolemia), high blood pressure (hypertension) and insulin resistance (prediabetes and diabetes). And given that the prevalence and incidence of obesity is strikingly high, there's much synergistic growth with Sanofi's sales/marketing strategy. Sanofi markets diabetes care products over 120 countries, employs roughly 33,500 sales reps for diabetes (of those approximately 4770 sales reps is in the United States). This fundamental is highly favorable for MannKind and Afrezza because Sanofi is the only company with this robust global infrastructure that will enable Afrezza to synergistically capture the prediabetes market – that is significantly larger than the market for diabetes per se.
The irony in diabetes treatment is that there is no drug better than insulin to treat diabetes, yet the majority of patients who never had insulin shots (i.e. insulin-naive patients) are fearful of needles. Further, patients who have been on insulin injection for many years (usually patients with Type 1 diabetes) do not complain of needle pain. Needless to say, these patients do not like the inconvenience of carrying needles and insulin.
In addition, needles stigma is of notable importance as it is a significant barrier to care. We strongly believe that the psychosocial aspects of medicine and disease play a critical outcome in diabetes complications. Furthermore, the issue of storage (at optimal temperature) for conventional injectable insulin is also an inconvenience, creating another barrier to optimal care. As we previously elucidated in our research, Afrezza superbly removes all such barriers to spark the third revolution in diabetes management.
Obesity often coexists in the insulin resistance spectrum (of prediabetes and diabetes) because of their linked "etiology" or root causes. Hence, patients with obesity often suffer comorbid "insulin resistance." In the bodily state of insulin resistance – occurring in patients with obesity, prediabetes and diabetes – cells are less responsive to a natural hormone produced by the pancreas called insulin. In the early phase of prediabetes and diabetes, pancreatic Beta cells are still making insulin. Nonetheless, other cells in our body like those in the liver are not able to effectively respond to insulin, calling these cells to grab the glucose (i.e. sugar) molecules circulating in blood and to process these particles into "energy" equivalents needed for bodily health and functioning.
Insulin Treatment is Irreplaceable Due to The Pathologic Nature of Insulin Resistance. As a patient become increasingly obese, he or she will develop insulin resistance. Consequently, pancreatic Beta cells initially ramp up their insulin production to compensate for the increasing insulin resistance or lowering efficacy – a period known as the "honey money" phase.
Therapeutic Lifestyles Changes (TLCs) and the Progression of Insulin Resistance. To improve insulin sensitivity (i.e., to reverse the prediabetes course), patients will have to go on Therapeutic Life Styles (TLC) modification by increasing exercise and dieting. Research shows that as the patients lose weight they will become more sensitive to insulin as well as gaining a plethora of health benefits such as lowering of high blood pressure, improving cholesterols and having positive moods. However, the dilemma to treatment is that many barriers (be they social or medical access barriers) are preventing patients from fully leveraging the high benefits of TLCs.
Without early insulin treatment as recommended by the American Diabetes Association (or ADA), patients with prediabetes will advance to diabetes and eventually their pancreatic Beta cells will stop making insulin. Untreated or less than optimal diabetes treatment (mostly due to compliance and barriers to care) put the patients at risk for the dreaded diabetes complications that include damage to the heart, kidneys, eyes and limbs. Hence, this explains the ADA's good intention in pushing for earlier insulin treatment. Only Afrezza can stop this insulin resistance train because Afrezza removes fear, inconvenience and needles stigma. Moreover, Afrezza is also quite easy to use and it will take much less training/education than what some might believe.
Shareholders should realize that no matter how favorable a deal or how promising a company's prospect, Mr. Market cannot be consoled at times. Moreover, the battles of the bulls versus bears have favored the bears' pessimism as they claw into the pockets of honest working Americans and international investors.
However, the war on diabetes is a far cry from won, and the hopes for MannKind have yet to die. When Afrezza hits Main Street and is being prescribed "en masse" by doctors, there will be no denying the long overdue merits for MannKind shareholders, Dr. Alfred Mann, Afrezza and the company's proprietary Technosphere.
Keys Summary in The Mannkind-Sanofi Partnership. In 360's previous articles detailing the MannKind-Sanofi Partnership, we elucidated the terms as follows: A $150 million upfront payment from Sanofi plus $175 million commercialization costs, and $775 million of milestones payments, which amount to $1.100 billion. The $150 million up front payment indeed shaped up MannKind's balance sheet. Regarding the other $175 million, MannKind could use this money to pay Amphastar – in procuring the recombinant insulin supply needed to manufacture Afrezza. With MannKind's current cash position shored up by Sanofi's commercial partnership, the company should not be constrained by near-future cash flow. If all goes as planned, MannKind and Sanofi will launch Afrezza in early 2015.
The bottom line
As a final note, long-term/intelligent MannKind shareholders should look at the big picture to gain big profits from biopharma investing. In the grand scheme of the current $29 billion insulin market in the U.S. alone, growing by an astounding rate of 12.4 percent per annum to reach $45 billion by 2020, 385 million patients with diabetes worldwide, 70 percent of Americans with obesity plus the globalization of chronic diseases such as obesity, diabetes, hypertension, hypercholesterolemia … Afrezza will procure multi-billion-dollar revenues for MannKind and Sanofi. The ultra rapid acting insulin will not solely replace Lantus but also surpass the Illustrious Basal Insulin's blockbuster sales. By then, all the chatter about the minutiae of this deal, as well as the 35/65 profit-split, will be moot.
It is likely that shareholders will have to be patient until at least near the end of 2015 for Afrezza to demonstrate its prowess. As true to the saying that a good Mann cannot be kept down forever, so it's also true that no short contingent can indefinitely bash a good stock. There are situations that favor shorting, such as the case with Enron. However, MannKind is a good company producing insulin to treat millions of patients with diabetes and obesity worldwide, calling for a better treatment approach.
As we alluded to earlier, obesity and diabetes are closely related in etiology and prevalence. Several companies attempted to capture the obesity market but have yet find any real success. Based on our research, we strongly believe that an ingenious strategy to capture the obesity market is via the diabetes (and more so the prediabetes) market per se. Shareholders who have been disappointed by following Mr. Market's lead and invested in obesity could purchase shares of MannKind.
If Afrezza will be able to win the hearts of clinicians and patients as demonstratedby 360 Biotech's research, as well as, the research performed by another independent third party last year. In the mean time, share price could change significantly in either direction depending on Mr. Market's mood, and the mood of his twins, Mr. Short and Mr. Long. It is not unreasonable to conclude that MannKind’s share price is affected by the behind the scene workings of Mr. Market's Shady Associates, which include Mr. "FullofSteam", "Mr. Whites" and his PROP, and "Mr. Jo Pinkman."
Shareholders who are troubled by Mr. Market should tune out from reading the news or watching CNBC. Instead, investors will benefits most from reading "The Intelligent Investor" by Benjamin Graham as well as "One Up On Wall Street" by Peter Lynch. On the parting note, the best way to "lynch" out Mr. Market, Mr. Short, and/or Mr. Associates is to practice patience, due diligence, independent research, and to have the conviction even in the midst of attacks from the vicious, Mr. Father of all bears.
360 Biotech's research has been leveraged amongst the pros to forecast trials data such as the Flint Trials for Intercept, InterMune, or MannKind. The secrets are no longer sealed as everyday investors know whom to trust. Investing in biotech is highly risky but it can be quite rewarding when investors have an edge in data analysis. Physicians who are rigidly scientific tend to lack the analytical prowess of financial experts. Conversely, Wall Street financiers usually do not possess a physician's medical expertise. Likewise, PhDs as a group are skillful in data analysis but these scientists might not be familiar with physicians' prescribing pattern, which is a requisite to successful investing in biotech. Hence, experts will improve their analytical skills, as well as, forecasting accuracy if they leverage on each other complimentary skills. 360 Biotech's strength resides in our middle ground or the Integrated Research approach – leveraging on our background as MDs, researchers, and financially analysts.
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