A Realistic MNKD Long-Term Price Target Based On Hard Data About Worldwide Insulin Use

| About: MannKind Corporation (MNKD)


Hard data makes it clear that the worldwide population of people with diabetes will be around 600 million over the next 15 years.

65% of diabetics live in developing nations, but they use only 30% of the world's insulin.

15% of American and British diabetics currently use insulin.

We calculate how many diabetics MNKD could provide with Afrezza at full factory capacity and how much additional growth is possible worldwide using the most optimistic assumptions.

The spirited debate that followed my previous post about the size of the market for MannKind's (NASDAQ:MNKD) Afrezza insulin led me to:

1. Review published data about the number of cases of diabetes around the world today and the estimates for the growth in the diabetic population over the next 15 years.

2. Review data on the percentage of diagnosed people with diabetes who use insulin in the U.S.

3. Estimate worldwide total market for insulin based on these figures.

4. Calculate MNKD's potential earnings per share based on best-case estimates of total market and MNKD management's statements about their factory capacity.

The Data on the Total Number of Diabetics Worldwide

The upside for any diabetes drug is limited by the size of the population diagnosed with diabetes. So before we can determine what potential sales for MannKind's new ultra fast acting insulin, Afrezza, might be, we need to know how large that population actually might be. Though some investors speculate that there may be billions of people who suffer from diabetes, the facts show a far more modest count.

The best estimates we have for the worldwide incidence of diabetes comes from The International Diabetes Foundation, which has collected and analyzed data from "peer-reviewed journals, national health statistics reports, reports from international agencies such as the WHO and CDC". Their analysis and conclusions appears in their publication, "IDF Diabetes Atlas" (2013) and are summarized online at their web site.

As you can see, their data reveal that there are currently an estimated 382 million people in the world with diabetes. The IDF's FAQ states this number already includes the hefty number of people who are suspected of having diabetes, but who have not yet been formally diagnosed. Looking to the future, The IDF estimate that "by 2035 this will rise to 592 million." The IDF's data does not provide information about what kind of diabetes these statistics represent, as the source data they analyzed does not include this information.

The IDF's graphs show that diabetes is predominantly a disease found in lower and middle income populations. It states that China and India alone account for 163.4 million cases, or 43% of all cases worldwide. In comparison, the United States is the home of only 24.4 million cases, or 6.4% of the world's total diabetes case burden.

Though India and China are developing nations with a very evident wealthy class, the majority of the people in these nations are still very poor. A Gallup poll reported that median per capita income in India at the end of 2013 was $616 per year. The Shanghai Daily reported that the 2013 per capita disposable income of all Chinese residents was $2,993 a year. You can get an idea of how poor these nation's diabetics are by comparing these numbers with the Census Bureau's finding that the average per capita income of U.S. citizens between 2008 and 2012 was $28,051.

It is important to keep these numbers in mind when estimating the market for Afrezza, which MNKD management has stated will be priced to be competitive with insulin pens costing roughly $2,400 a year.

The IDF's statistics also confirm what I had stated in my earlier article about Afrezza, that, in all regions of the world except Africa, diabetes is a disease primarily of the middle aged and elderly. This suggests that though the IDF does not break down cases into Type 1 and Type 2 diabetes, the great majority of cases worldwide are of Type 2 diabetes - the form of diabetes where supplemental insulin is rarely required to preserve life. Sulfonylurea drugs and metformin, available as generic pills costing pennies a dose can keep people with Type 2 diabetes going for decades.

The IDF states that growing life expectancy worldwide is a significant factor leading to the increase in cases of diabetes. But while life expectancy is driving the growth in diabetes diagnoses, it's poverty that is driving the increasing number of deaths attributed to diabetes. The IDF's statistics show that the regions with the highest number of diabetes-related deaths in people younger than 60 were Africa, Southeast Asia (with population centered primarily in India) and Southeast Asia (with the population overwhelmingly found in China).

From this, it's clear that the world burden of diabetes is likely to hover somewhere near half a billion people during the period that Afrezza remains under patent. But roughly half of these people will be very poor, and most of them are likely to have Type 2 diabetes, which can be controlled with cheap pills.

How Many Diabetics Use Insulin?

When assessing the market for Afrezza, we need to keep in mind, that only a small proportion of people with diabetes need insulin to stay alive, and of those do who use insulin, many control their diabetes with cheap insulins rather than the expensive fast-acting insulins with which Afrezza will compete.

We can see this from other statistics that the IDF provides for us, those about insulin use worldwide. They write "Some 65% of people with diabetes live in developing countries and account for only 30% of the world's total insulin usage each year. This is in sharp contrast to the industrialized world that has 35% of the world's diabetic population but account for about 70% of the world's total insulin usage each year."

Applying that 30% figure to the estimated world incidence of diabetes, we come up with 114.6 million insulin users world wide. Those 30% are in many cases the wealthy in those developing nations. The IDF explains that it is poverty that denies insulin to large numbers of the world's poor. They state, "...in some parts of Africa many people with type 1 diabetes under the age of 15 can expect to live for just one year after diagnosis."

So what percentage of diabetics in the developed world use insulin?

In the UK, which is typical of countries with state run health systems, a study published this year the BBC reported that 421,300 of the nation's 2.8 million diabetics (both Type 1 and Type 2) were using insulin, This works out to 15% of all diagnosed diabetics.

U.S. News and World Report reported very similar findings in regard to Americans with Type 2 diabetes: 15% of them were using insulin. Using the data they based their report on, that worked out to about 4 million people. Of these, 91% were using the expensive analog insulins, and paying a median of $36 per prescription. Unfortunately, this data, does not tell us if these patients were using long-acting insulin, which can't be replaced by Afrezza, or the short-acting kind that can be.

But from this data it is possible to conclude that if every person with Type 2 diabetes currently using the more expensive insulins were to add Afrezza at mealtimes, we would be looking at 3.6 million U.S. prescriptions. Were the rest of the world to be able to afford expensive insulins, applying that 15% ratio of insulin users to all diabetics in the world gives us an absolute ceiling of 57.3 million people worldwide who could ever possibly be users of Afrezza. That is the absolute ceiling, though global poverty makes it is highly unlikely that anywhere near that number of people with Type 2 diabetes will ever get any insulin, to say nothing of a new, patented brand name insulin like Afrezza.

Most diabetics in emerging nations who are fortunate enough to get any insulin at all will get the much cheaper injected forms of regular human insulin, sold as generics. The U.S. News and World Report we cited earlier points out that as recently as 2000, 96.4% of Americans who used insulin for diabetes used those cheaper regular human insulin formulations. This underlines the point that as inconvenient as they might be, those cheaper insulins do keep people with diabetes alive and, in many cases, healthy.

So given that there is a cheaper alternative for people who need a fast-acting insulin, the market for Afrezza is likely to include a much smaller cut of the estimated 57.3 million people worldwide who are using insulin, most of whom live in developed nations with generous health insurance plans. Being very optimistic and assuming 10% of prescriptions worldwide might be written for Afrezza - which would require that doctors put many patients with Type 2 on Afrezza who had only been using long-acting insulin in the past, that would work out to another 5.7 million users worldwide, added to the 4 million in the U.S.

MannKind's Business Planning Closely Reflects These Estimates

In the published transcript of the company's presentation at the Goldman Sachs Healthcare Conference, MannKind's COO, Hakon Edstrom, said of the company's factory currently being built out in Danbury, CT, "Initially we will have capacity to support about 400,000 patients, eventually close to 2 billion patients."

Since there won't be anywhere near 2 billion people with diabetes worldwide for many decades, it is clear that Mr. Edstrom had made an unfortunate slip and was confusing doses with patients. And, as it turns out, was exactly the case. In a previous presentation, at the Jefferies Global Healthcare Conference, Matt Pfeffer, MannKind's CFO stated "the facility is scaled to do up to two billion cartridges per year" and that "At launch, we expect to have three of those fill-up finish lines in place, which should give us about 375 million per year capacity." Pfeffer said something similar in last week's presentation at the Wells Fargo Healthcare Conference.

Note that he said "cartridges" not patients. If we assume that a single month's prescription will be for 90 cartridges - three a day - a single patient will be using 1,080 cartridges a year. That means the 375 million cartridges coming out of MNKD's factory can supply 347,222 patients with a year's worth of insulin. When the factory is cranking out the full two billion cartridges a year the company projects, MNKD will have the ability to support 1,851,852 patients, each using 1,080 cartridges a year.

Total Potential Revenue for Afrezza

Now that we have these figures, it is possible to hazard a wild guess as to what the gross revenue from the sales of Afrezza could be. These are wild guesses because the actual price paid to drug companies for insulin or any other drug is not public information. We can find out the prices that the uninsured and those on Medicare currently pay for insulin, but it is well known that insurers negotiate deals that let them pay far less for the drugs they agree to cover.

You can see what patients paying their own way or on Medicare pay for a month's supply of Novolog flex pens at various pharmacies at the GoodRx web site. The Novolog flex pen is an insulin pen, one of the fast-acting insulin products that MNKD's executives have stated Afrezza would be priced against, and one which they hope Afrezza will replace. As you can see the retail prices for a typical month's worth of pens range from $276 to $471. If we guess that insurers pay less than the lowest retail price, we might estimate a price of somewhere around $235 per month as the price range that would make Afrezza competitive. (MNKD has made it clear Afrezza's price will not be competitive with the much cheaper and far slower regular human insulins some pump users use.)

Using these figures, we can ballpark some numbers. They suggest that when Afrezza begins to sell the insulin its factory is manufacturing, the gross revenue from sales of Afrezza is not likely to exceed $979.17 million dollars a year. (347,222 users using twelve $235 monthly prescriptions each year) When all 2 billion doses are being manufactured, that total isn't likely to exceed $5.2 billion (1.85 million users using twelve $235 prescriptions) and since those figures assume every dose made gets sold, the real numbers are likely to be far less.

And that is just raw sales data. The earnings attributed to those sales will be much lower, once we exclude the costs of the raw material, of processing Afrezza and of distributing and marketing the product through a partner. Add to that the hefty cost of amortizing the expenses MannKind has accrued over the very long period of time it has taken to bring Afrezza to market, and you can see that with a generous 15% margin, net earnings from Afrezza with the factory maxed out would be around $783 million - assuming the sales force has sold every cartridge made. The 15% margin is reasonable, given that Novo Nordisk (NYSE:NVO) reports a 30.6% net margin for its product line, but MNKD will be giving up a big chunk of Afrezza's profits to its not-yet-disclosed partner.

Possible Earnings Per Share for Afrezza

With the 377.93 million share float listed by Yahoo Finance, and assuming no further dilution - a big assumption - net earnings of $783 million work out to that works out to $2.07 per share. This number is, remember, based on highly optimistic assumptions about adoption by Type 2s currently not using fast-acting insulin, price, sell-through, and margins. Applying the typical growth stock P/E ratio to this share price, we see that were all these assumptions to play out, it would be possible for MNKD to be valued at $41.40 per share.

Of course, we live in the real world, where lots of inventory expires unsold, and other drugs compete with Afrezza for customer dollars, So the actual earnings per share - and stock price for the next five years - are likely to be a lot less. A reasonable person would halve that number and come up with a target price of $20.70 per share, and would remind investors that this number applies only if the factory build-out proceeds to full capacity the way the company hopes is will, and if insurers are willing to cover Afrezza at a price of at least $235 a month. If the price to insurers drops, the earnings drop, too. A tighter margin due to a less advantageous deal with a partner will similarly lower the share price, as will any further dilution of the float.

Adding international sales, using the data we collected earlier, gives us a ceiling of a possible total 9.7 million worldwide fast-acting insulin users which is about five times what we estimated for U.S. sales. There will be price pressure, since national health plans around the world do negotiate with drug companies, unlike those in the U.S. If all goes well, and those prescriptions materialize, a price near $100 a share could become a reality, but not in the near future, and possibly never, given the strong emphasis on cost cutting and on using the cheapest possible drug that prevails among most government-funded health plans.

Many estimates investors post here on Seeking Alpha assume that Afrezza's ultimate market will include far more of the world's Type 2 diabetics who are currently not using any insulin at all. This is indeed a possibility, but one that would require the build out of more factories and very generous reimbursement policies on the part of insurers who would have to see a good reason to switch patients from cheap generic pills to a very expensive insulin.

But no matter how rosy these scenarios might be, a review of the statistics presented here should suggest caution. The market for Afrezza, as a drug prescribed to people with Type 2 diabetes who are not currently using any insulin, is likely to be limited to wealthier, well-employed, younger people in the developed world - excluding those developed countries with financially strapped national health services who would be unlikely to use it to replace pills.

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.