The suspense is over. As reported by Bloomberg,"French insulin maker Sanofi (NYSE:SNY) will "pay $150 million up front and as much as $775 million if the drug, Afrezza, meets certain sales and development targets."
The terms reported were that "Paris-based Sanofi will take 65 percent of profit or loss related to Afrezza, and will also advance Valencia, California-based MannKind (NASDAQ:MNKD) as much as $175 million in expenses."
Given what we know about the different players in the diabetes drug marketplace, which was discussed in the two previous articles you can read here and here and this is the very best deal that MannKind could have made.
Through this deal MNKD remains very much an independent company taking a 35% share of both profits and, most importantly, of losses, as the drug goes forward. In the short term, this may not result in the kind of dramatic boost to share price that some longs have been hoping for, as MNKD's profits still depend heavily on Afrezza succeeding in the marketplace. The terms of this deal may also keep many shorts clinging to their positions, in the hope that the rollout of the drug, scheduled for the first quarter of 2015, yields disappointing results.
But for those of us who are rooting for Afrezza because we believe its novel mode of action provides a unique and potentially very helpful tool for restoring normal blood sugars, this partnership is the very best one possible, as Sanofi is the only company that has the expertise, marketing staff, and motivation to make this drug into the success it deserves to be.
Let's look at the reasons why this is true.
Sanofi Understands Fast-Acting Insulin
Sanofi currently sells the fastest of the injected insulins: Apidra, which has a more physiological onset of activity than its competitors, Lilly's (NYSE:LLY) Humalog and Novo Nordisk's (NYSE:NVO) Novolog. However, Apidra came late to the marketplace and was never able to dislodge the earlier entrants. As a result, Sanofi seems to have concentrated its efforts on promoting Apidra for use in insulin pumps, where its faster onset of activity makes the pump's algorithmically delivered insulin far more effective.
All this makes it clear that Sanofi's sales force understands not only how to use fast-acting insulin, but how challenging it is to get the benefits of a new pattern of activity across to doctors. Since Apidra does not have much market share among patients with Type 2 diabetes, promoting the use of Afrezza to those patients does not erode sales of SNY's existing product.
In fact, the widespread use of Afrezza might boost sales of Apidra, as sales reps could suggest doctors transition to Apidra those patients who start off with Afrezza but find they need to be able to fine tune doses in a way that is only possible with injected insulin. This makes it possible that you will see the two insulins marketed to physicians as part of a step strategy where the message is: Start your patient on Afrezza. If that doesn't give enough control, consider using Apidra which is more like Afrezza than competing insulins but can be dosed with greater precision.
Afrezza is Already A Part of Sanofi's Pump-Oriented Future Strategy
Sanofi recently announced a "strategic alliance" with pump-maker Medtronic for "the development of drug-device combinations and delivery of care management services to improve adherence, simplify insulin treatment, and help people with diabetes better manage their condition."
There have already been some experiments done as part of the Artificial Pancreas development project, exploring how Afrezza can be used to fine-tune pump control. You can view a video explaining this research here. The JDRF is making the development and commercialization of the artificial pancreas the centerpiece of its research efforts. So here, too, Afrezza adds to, rather than detracts from the sales potential of Sanofi's Apidra. That's because using Afrezza along with the pump-based artificial pancreas which uses SNY's Apidra may make that solution more effective and hence more appealing to doctors and insurers.
Sanofi Needs to Juice Up Its Insulin Sales as Lantus Approaches Patent Expiration
Lantus, the long-acting basal insulin that has been SNY's blockbuster diabetes drug through the past decade is going to go off patent next year. There are a host of competing basal insulins ready to enter the marketplace, including some ultra-long-acting basal insulins that only need to be injected every few days. So the addition of a new, potentially hot insulin product to SNY's product line gives Sanofi the opportunity to keep its insulin sales numbers healthy.
Most importantly, the looming loss of Lantus's exclusivity gives SNY's sales force the motivation it needs to market Afrezza aggressively.
One Last Advantage That May be the Most Overlooked and Most Important
The biggest problem with the way Afrezza was used during pre-approval drug trials was that basal insulin was not dosed correctly in these studies. This was explained by MNKD executives at various times when asked why Afrezza did not appear to yield better results than injected insulin. That these studies were deeply flawed is crystal clear to anyone who understands how insulin works. For example, this study which is presented as if it were a comparison of Afrezza with Humalog, but is in fact something quite different, since what was actually being compared was Afrezza vs. a NPH/Humalog 70/30 mix. The choice of the mix as the comparison made it impossible to do an apples to apples comparison and led to incorrect dosing of the Afrezza/Lantus combination.
Fortunately, Sanofi's sales reps do understand the correct way to set the dose for Lantus when it is being used in conjunction with a very fast mealtime insulin, since they have been doing just that with their injected Apidra. Therefore, it is likely that SNY sales staff will be able to explain to doctors the correct way to prescribe Afrezza for meal-time use so that it works well with a properly adjusted basal insulin dose.
This has huge advantages both for SNY and MNKD since correct basal dosing will make it possible to use Afrezza effectively without any fear of hypos and--and here's the punch line--using Lantus and Afrezza together, with proper dosing, will give patients far better results than they can get on those Lilly 70/30 mixes.
The Lilly 70/30 mixes are notorious for giving patients the choice of poor control or hypos, since it is impossible to match 70/30 mixed insulin to meal intakes. So getting the Lantus/Apidra combination to work properly will not only make patients happier, as they will get better control with fewer shots and fewer hypos, but it could also result in Lantus winning back a portion of the basal insulin market that LLY has been clawing at with its difficult to control but heavily marketed 70/30 mixes.
As our earlier review of all the players in the diabetes space suggested, no other Big Pharma company has the combination of product expertise and hunger for a hot new diabetes product as SNY has. The success of Afrezza will not damage the sales of any of its current products, and in fact, Afrezza's success may even lead to more such sales. So this deal gives Afrezza exactly what those of us who have wanting to see it succeed have hoped for: The certainty that Afrezza will be marketed effectively by sales reps who understand insulin and are highly motivated to make Afrezza a huge success.
But What About the Stock Price?
There you'll have to be patient. So much of MNKD's stock is held short that it probably won't be until third or fourth quarter 2015, when we finally see that sales figures for Afrezza--and the profit numbers for MNKD--that many of these shorts will throw in the towel.
But for those of us investing for the long-term, this deal gives Afrezza the very best chance to do what we hope it can do. Launched properly, Afrezza's sales should over the next few years earn the profits for MNKD that will push its stock up to a fully justified price considerably higher than today's.
How high? Anyone who tells you they can forecast that number is blowing smoke. Only after we see sales figures and MNKD earnings can believable price projections be possible.
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.