MannKind's Afrezza (NASDAQ:MNKD) is an exciting addition to the list of drugs available to help people with diabetes achieve normal blood sugar. But as I read posts written by other commentators here on Seeking Alpha, I am seeing troubling signs many are over-estimating the market for this new drug.
The reason for this appears to be that the people writing these analyses do not understand that the term "insulin", when applied to a prescribed drug, covers two very different kinds of insulin products, only one of which can be replaced by Afrezza. Furthermore, because they do not understand how insulins similar to Afrezza are used, they don't grasp that Afrezza can only replace some, not all, of the injected insulins it resembles.
The two kinds of insulin in the market today are long-acting insulins, which doctors often call "basal insulin" and fast-acting insulin. The long-acting insulins include Humulin N from Lilly (NYSE:LLY), Lantus from Sanofi (NYSE:SNY) and Levemir from Novo Nordisk (NYSE:NVS). These long-acting insulins, once injected, are released into the blood stream very slowly over the course of many hours, during which they lower the blood sugar by a small but steady amount.
But long-acting insulin doesn't release enough insulin into the bloodstream at one time to lower the blood sugar spikes that occur after a person eats a meal. So a person using only a long-acting insulin will still experience sharp surges in blood sugar after they eat. It is these surges that over time will damage their retinas, kidneys, nerves, and cardiovascular system.
So some people with diabetes inject a second kind of insulin before they eat a meal. This fast-acting insulin is much more powerful than the long-acting insulin, but it only stays in the blood stream for a few hours, unlike the long-acting insulins. Fast-acting insulins available now include Lilly's Humulin R, Novo Nordisk's Novolin, Lilly's Humalog, Novo Nordisk's Novolog (called Novorapid outside of the U.S.) and Sanofi's Apidra.
The benefit of these fast-acting insulins is that they can flatten the dangerous blood sugar surges that follow meals and lead to complications. The problem with them is that if the insulin does not match up properly with the blood sugar produced by digesting a meal, they can drop blood sugar dramatically and cause hypoglycemic attacks that can put people in the hospital or even kill them.
People with Type 1 diabetes who have suffered an attack on their pancreas that keeps them from secreting any insulin must use both kinds of insulin, long-acting insulin to cover the periods between meals, and fast-acting to cover the big spike in blood sugar that follows eating. But most people with Type 2 still make some insulin, albeit not enough to control their blood sugars and, for reasons we will discuss later, they are only prescribed long-acting insulin or a hybrid form of long-lasting insulin, pre-mixed insulin, that mixes a lot of long-acting insulin with a little fast-acting insulin in a single vial.
With this in mind, it's important to realize that Afrezza is a fast-acting insulin, the kind of insulin that controls blood sugar at meals. For those who already use a fast-acting insulin, Afrezza's advantage is that it is much faster than the injected fast-acting insulins. This makes it possible to take it at the time of eating, not before eating, as is the case with other fast-acting insulins. That, and the fact that Afrezza enters the bloodstream at a rate that closely matches the speed with which digested food sends sugar into the blood makes it less likely to cause dangerous hypos.
So when we estimate Afrezza's potential market, we have to start with the fact that its market consists only of people who will be using a fast-acting insulin. It never will replace the long-acting insulin that covers the fasting state, because you need a very long-lasting insulin to do that properly.
So what is the current market for fast-acting insulins? The market for all insulins is quite large. According to a paper published in the American Diabetes Associations journal, Clinical Diabetes, "global insulin sales reached $16.7 billion in 2011, up 12.5% since 2010. U.S. insulin sales in 2011 totaled $8.3 billion, a 14.9% increase compared to 2010." If insulin use has continued to grow at that rate, current global insulin sales could be somewhere around $22 billion a year, with U.S. sales making up half of those sales, or about $11 billion. But these numbers are for all insulin prescriptions, so they include a large number of prescriptions for long-acting insulin. According to the same report, only $6.57 billion, or 39% of those 2011 worldwide sales, were for fast-acting insulins.
But before you assume that Afrezza could replace all $6.57 billion worth of fast-acting insulin, you have to know that quite a bit of that fast-acting insulin is being used in insulin pumps--the very pumps that Al Mann was so instrumental in bringing to market. Pump users use a computer-controlled pump to administer tiny doses of fast-acting insulin every few minutes through a thin tube inserted into their body. These doses are calculated using sophisticated algorithms that allow for much finer tuning of control than the combination of injected long-acting and fast-acting insulin. Pumps therefore use a lot of fast-acting insulin, but the salient fact for Afrezza investors is that it isn't possible to replace most of that pumped fast-acting insulin with Afrezza, since most of it is being used to replace long-acting insulin. To replace long-acting insulin with Afrezza, a person would have to inhale Afrezza every few minutes throughout the day and night.
So how much fast-acting insulin is used in pumps? An estimated 350,000 people currently use insulin pumps in the United States alone. So if we assume, based on common prescribing patterns, that they are each using 3 vials of fast-acting insulin a month, and that, since pumps must use the more expensive fast-acting insulins, this insulin costs about $200 a vial, that's $2.5 billion of insulin sold in the U.S. right there that won't be replaced by Afrezza--about one-third of all U.S. sales of fast-acting insulin.
But even among those people with Type 1 diabetes who don't use pumps and use a combination of long-acting and fast-acting insulin, many will still need to inject some fast-acting insulin, because while Afrezza's speed makes it match up with some foods very well, it doesn't match up to all foods, and that means that some people with Type 1 diabetes may experience high blood sugars two or three hours after eating if they only use Afrezza, so they may find they do better with the injected, slightly slower, insulin.
Most investors seem to believe that children with Type 1 diabetes will benefit from Afrezza immediately, too. But this is a mistake. Though we would all wish to spare little children from having to take daily shots, it is very unlikely that the FDA will approve Afrezza for use in children. Afrezza is not yet available in the tiny doses that children use, which are often measured in half units. But the smallest Afrezza cartridge that was tested in clinical trials contains 3 units of insulin, which is far more than what a small child might use. Giving a small child a dose that is too strong may put that child into the hospital, so extreme caution is warranted.
The situation is made even more complicated by the fact that insulin given in small doses does not always behave in a linear fashion when compared to the same insulin given in a larger dose. So the FDA will rightly demand evidence that smaller doses of Afrezza intended for children are clinically equivalent to the injected doses those children are currently using. Using rough estimates of the number of children with Type 1 diabetes in the U.S., that removes some 100,000 potential Afrezza users right there. Assuming these children use 1 vial a month of fast-acting insulin at $200 a vial, that is another $240 million more U.S. sales that aren't going to be taken over by Afrezza.
But what about all those rapidly increasing millions of people with Type 2 diabetes who already use insulin? Well, right now, almost all of them are using long-acting basal insulin and the pre-mixed insulins. They can't replace those insulins with Afrezza. The most Afrezza investors can hope is that doctors will prescribe Afrezza as a supplement to those longer-acting forms.
But doctors won't be in a rush to move these patients to fast-acting insulins, even though doing so might greatly improve their health. That's because most people with Type 2 get their diabetes care from family practitioners, who have not been taught how to prescribe insulin. Unlike other drugs, where one size pretty much fits all, each person will need a unique individually titrated dose of fast-acting insulin that matches not only their size and the amount of food they eat at each meal, but also their innate degree of insulin resistance, which varies greatly from person to person. The dose of fast-acting insulin that controls the blood sugar of one 200 lb person with diabetes perfectly might put another in the hospital with a hypoglycemic coma, and leave yet another with dangerously high blood sugars. Only specialist endocrinologists are trained in how to prescribe insulin, but the shortage of these specialists means that few people with Type 2 diabetes have access to one.
So the family doctors who provide care to most people with Type 2 are more comfortable prescribing the slower, weaker, long-acting insulins that don't prevent blood sugar surges, but are far less likely to put their patients into the hospital. Even those family doctors who might have a grasp of how to use insulin are deterred from prescribing it, because their patients too must be educated, if they are to avoid the dangerous hypos that are possible with any fast-acting insulin, including Afrezza, if used improperly.
Unfortunately, already overworked family doctors are not reimbursed for providing diabetes education. So the fear of what insulin can do in the hands of an uneducated patient keeps most family doctors prescribing only the less powerful, long-acting and pre-mixed insulins. Only after patients have deteriorated badly after years of inadequate control do family doctors consider referring the patient to an endocrinologist or prescribe fast-acting insulin, in low doses, on their own.
But even those patients with Type 2 who are referred to endocrinologists may not be put on Afrezza, because many of them are people whose advancing age and poor health gives them limited access to good jobs and quality health insurance. Even with access to health plans provided by ACA or Medicare, older or poorer people with Type 2 may only be able to afford the cheapest plans that limit coverage to a list of cheaper drugs or that charge high deductibles for non-generics. Since Afrezza will be a new brand name drug, these plans will do all they can to force people with Type 2 diabetes who need insulin to use $30 vials of older, cheaper, less effective insulin, rather than pay for $200 vials of long-acting insulin, as well as a $200 set of Afrezza inhalers each month.
So this analysis should make it clear that the one group of people who will drive Afrezza sales, once it is on the market, are teens and adults with Type 1 who are not using pumps, and well-educated, well-insured people with Type 2 who are not getting good control with oral drugs or long-acting insulin alone.
Sometime in the future, it is possible that Afrezza could turn into a first-line drug for Type 2 diabetes--one that is prescribed to patients immediately upon diagnosis. There is abundant research suggesting that treating the newly diagnosed person with Type 2 diabetes with insulin results in much better outcomes years later, even if that patient only uses the insulin for a few months.
But for now, those patients are being put on oral drugs, which are much simpler to prescribe, and because those oral drugs have been so heavily marketed and because family doctors are so much more comfortable prescribing them, the doctors who care for most people with Type 2 diabetes will be likely to take wait-and-see attitude after Afrezza is launched. It will take years of experience after specialists give Afrezza to a lot of patients, as well as some expensive long-term research to come up with the data that will persuade doctors to prescribe it to the majority of their patients with Type 2 diabetes.
So where does that leave our estimates of Afrezza sales?
Afrezza will be prescribed to those people with Type 2 diabetes who are not getting good results with oral drugs or long-acting insulin alone, most likely those with access to diabetes specialists and excellent health insurance. It may very well replace much of the fast-acting injected insulin currently used by that select population.
Depending on how the label is written, Afrezza may also be prescribed for teenagers and older people with Type 1 diabetes, perhaps as a supplement to the insulin supplied by their pumps or to replace some injections of fast-acting insulin, but only if their insurers are willing to add another expensive prescription to their long list of already expensive ones. It is hard to know how large a market these groups represent, as there is no way to get that statistic.
A reasonable estimate might be that Afrezza could replace half of the fast-acting insulin currently sold, the part that isn't being used in pumps or by children. This works out to about $2.5 to $3 billion worth in U.S. sales.
Foreign sales are harder to estimate, because so many foreign countries have government-funded health plans that severely limit patients' access to new and expensive drugs. Beyond that, so many of the developing nations whose populations are developing diabetes at a dramatic rate have very low standards of living. People with incomes of $500 a year--or their cash-strapped government health ministries--in India, rural China, and Africa, are not going to be able to pay for a $200/month insulin, when there are $30 alternatives. Afrezza will remain a drug for the well-off elite in these regions, not the millions swelling the numbers cited in discussions of the worldwide diabetes epidemic.
Looking a few years down the line, it is very possible that with brilliant marketing, Afrezza could be turned into an excellent drug for highly motivated people around the world who are newly diagnosed with Type 2 diabetes, but only if the marketers understand that family doctors and their patients must be educated in how to prescribe and use it. That will require a lot of work on the part of the sales force. And that sales force will be fighting a whisper campaign against Afrezza launched by the other drug companies whose drugs are the current blockbusters that drive their bottom lines.
If it were possible to get insulin to be prescribed to newly diagnosed people with Type 2 diabetes, the sales potential for Afrezza in the U.S. leaps dramatically and could easily double to $5 billion a year or more, but that will take time.
For now, these realistic market numbers suggest that Afrezza has the ability to sell enough to keep the company in business, as it replaces the fast-acting insulin already used by people with Type 2 diabetes who have good health insurance and as it takes the place of some of the fast-acting insulin used by people with Type 1. Over a longer period, if marketed correctly and followed up with expensive but compelling studies showing that it is a superior treatment for recently diagnosed Type 2 diabetes, Afrezza may have the potential to become the blockbuster drug investors are expecting. But no one should ever expect to see Afrezza replacing all the insulin currently in use, and no one should be investing on that premise.
Opportunities and Challenges for Biosimilars: What's on the Horizon in the Global Insulin Market? Clinical Diabetes October 2012 Vol. 30 No. 4 138-150 clinical.diabetesjournals.org/content/30...
Effect of intensive insulin therapy on ß-cell function and glycaemic control in patients with newly diagnosed type 2 diabetes: a multicentre randomised parallel-group trial. Jianping Weng et al. The Lancet 2008; 371:1753-1760 www.thelancet.com/journals/lancet/articl...
Intensive insulin therapy in newly diagnosed type 2 diabetes. Ravi Retnakaran and Daniel J Drucker. Lancet 2008; 371:1725-1726. The Lancet, Volume 371, Issue 9626, Pages 1725 - 1726, 24 May 2008
Disclosure: The author is long MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.