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Biotech investors are always looking for the next big drug that will become a mega-blockbuster. Human Genome Sciences (HGSI) continues to receive a high valuation because of the prospects for Benlysta, which will be the first new therapy to treat Lupus in 50 years. Their market cap is close to $5B, with Benlysta expected to do around $1.5B a year -- split 50/50 with GlaxoSmithKline (NYSE:GSK) -- in 2015 and approval isn't even in hand yet. Dendreon (NASDAQ:DNDN) is valued at over $5B and Provenge is forecasted to do about the same in revenue, $1.5B in 2015. Lupus and Cancer are hot therapies for biotechs.

Who cares about a better insulin? Insulin isn’t sexy and exciting on the surface -- it has been used to treat diabetes for 90 years. Pfizer’s (NYSE:PFE) Exubera was supposed to change all of that with an inhaleable form of insulin and it was forecasted to do $2B a year in annual sales. Instead it was an utter failure and now nobody cares about inhaleable insulin, less alone a better insulin. It is yesterday’s news I guess.

In my last article on MannKind’s (MKND) Afrezza, I tried to address why the street and bear analysts are completely wrong when it comes to Afrezza’s potential and the comparison to Exubera is like comparing a Yugo to a Gulfstream. In this continuation article, I discuss the keys to unlocking Afrezza’s multi-billion dollar potential.

In a report released in late November by national healthcare insurance giant, UnitedHealth Group (NYSE:UNH), they estimate that more than half of America will be a diabetic or pre-diabetic by the end of the next decade at a cost of $3.35 trillion to our healthcare system. According to a recent report from the CDC, a child born today has a one in three chance of becoming a diabetic in a few decades if things don’t change in our country and we could wind up with as many as 500M type 2 diabetics worldwide at the current rate of expansion. Outside of obesity, there is no bigger cost to the world’s healthcare system.

Insulin, even though it has been around for almost a century, is still the best treatment for type 2 diabetics that can’t control the disease through lifestyle modification and metformin alone. Type 1 diabetics don’t have choice but to take insulin but they make up only 5% or so of the overall population of diabetics. Insulin lowers HbA1c better than any form of therapy but it is often a treatment of last resort when it comes to type 2 diabetes. Why? Because there are a number of barriers for introducing insulin that keep it on the back burner for as long as possible. Overcoming these obstacles is the first key to unlocking Afrezza’s potential. Even with these massive roadblocks, insulin is already a $10B product worldwide and growing year over year.

In an article published by Irl Hirsch, M.D. (University of Washington School of Medicine) in 2005 entitled “Optimal Initiation of Insulin in Type 2 Diabetes,” Dr. Hirsch writes about the impact insulin therapy can have on Type 2 Diabetics and the optimal initiation plan to use insulin. Dr. Hirsch states that “it can be anticipated that most patients will eventually require insulin therapy to achieve and maintain glycemic control.” Regarding the ADA’s goal of maintaining a HbA1c < 6.5%, “Such stringent levels of glucose control cannot generally be maintained with oral antidiabetic drugs alone (OADs). However, overall rates of insulin use for Type 2 diabetes in the United States are very low. Approximately 11% of patients are treated with a combination of insulin plus OADs and another 16% receive insulin monotherapy. An A1C < 7.0% is only achieved in 36% of patients.”

Hirsch goes on to describe the barriers to initiating insulin therapy:

“Delays in initiating insulin may stem from both physician and patient barriers. Negative patient perceptions regarding insulin include fear of injections and hypoglycemia. In some cases, patients may perceive insulin as a sign of their personal failure to control the disease. Clinician concerns include hypoglycemia, weight gain, and the misconception that elevated insulin increases cardiovascular risks. In addition, both clinicians and patients may consider insulin therapy to be complicated and labor-intensive.”

Let’s look at how Afrezza addresses each of the barriers to insulin therapy:

Fear of Injections: This is the most common reason cited for delaying insulin therapy. Nobody wants to take a shot, especially not 4 times a day. Under the current standard of care, Basal insulin -- i.e. Sanofi Aventis’ (NYSE:SNY) Lantus -- is typically introduced to patients starting insulin therapy before Prandial mealtime insulin -- i.e. Eli Lilly’s (NYSE:LLY) Lispro. The reason being is one shot a day is easier to convince a patient to take than three or four mealtime injections. This completely changes with Afrezza. Afrezza opens up the door for physicians to start insulin far earlier in the treatment plan than has ever been done before, which will expand the market size. Ironically, this was the main benefit for Exubera and why their sales were expected to be over $2B a year. However, Exubera had a terrible device design and also failed to address the remaining barriers to entry. Even though Exubera didn't have a good device and no clinical benefit over injected insulin, the patients that did try it, actually loved it.

Weight Gain: Unlike existing insulin options, Afrezza does not result in weight gain. The label should say that Afrezza is weight neutral or at a minimum, that it causes less weight gain than rapid-acting analogs.

Fear of Hypoglycemia: Hypoglycemia is the number 1 side effect of insulin therapy. This happens when there is too much insulin in the body, resulting in low blood sugar. This is why titrating the proper dose of insulin is so important with injected insulin. Hypoglycemia can be mild, just causing you to feel bad but sometimes can be severe, resulting in a coma or even death. With Afrezza, this risk is greatly reduced compared to injected insulin. The risk of severe hypos is reduced by an impressive 63%. This is a direct result of the ultra-fast action of Afrezza resulting in peak insulin levels at 14min, which quickly leaves the body – similar to a normal person’s insulin response to a meal. This is a far contrast to the current gold standard mealtime insulin products that peak at 52min and Exubera, which peaked at 49min.

Insulin is Complicated to Dose and Manage: This is the final barrier to overcome and it will take a good education / sales program to effectively address it. Overtime, as physicians become more comfortable, it will no longer be an issue. With Afrezza, the dosing is very simple and typically, you would use the same dosage before every meal. This means there is very little titration that needs to happen before a meal – just basic carbohydrate estimates. It also means there won’t be a need for rigorous self-monitoring of blood glucose. Afrezza’s simplicity and elegance will greatly ease the overhead typically associated with insulin therapy. Overcoming this barrier quickly will be influenced greatly by the next key to unlocking Afrezza’s potential.

A good partner is the final key for unleashing Afrezza’s multi-billion dollar potential. This will also be the largest catalyst to the stock price in my opinion. MannKind needs a partner that desperately needs to expand their diabetes program. A company like Merck (NYSE:MRK) or AstraZeneca (NYSE:AZN) would be a great fit. Whoever the partner is, proper execution of the marketing plan will be the key to Afrezza’s quick adoption by prescribers and patients. With the right partner in place, MannKind could rapidly reach the planned launch capacity of 400,000 patients. At $2K per patient, that equates to $800M a year in revenue. With just $100M in expansions to MannKind’s award-winning plant in Danbury, CT, capacity would go up to 2M patients or $4B in annual sales. It is also worth noting that MannKind already owns enough insulin (at a cost of $3M) to fuel the first $10B in sales. Gross margins for the initial few years on the market will be astounding.

Price Predictions: As a long-term investor, I’m more concerned about the price for MNKD 3-5 years from now as Afrezza is widely used in the US and the rest of the world, as opposed to short term price fluctuations. However, since I am frequently asked for price targets, I’ll go ahead and provide some estimates. All of the technicals for MNKD look excellent with a clear reverse head and shoulder pattern in place. The break above $7.20’s resistance on good volume indicates a possible run to $9 prior to the 12/29 PDUFA, which is also supported by the upper trendline. If this happens, approval could trigger price appreciation to the $15-20 range. However, a further delay or complete response letter would cause a major sell off but how low would depend on what was in the CRL. If it is a slight delay then perhaps back to $5, if something more onerous then it could drop to $3. Partnership is the biggest key to the price appreciation, and I believe this will happen between 2-8 weeks after approval. Once a Big Pharma has signed on to commercialize Afrezza, we will have insight into their sales guidance, which will force the Street to reevaluate revenue expectations. If the Partner guides that Afrezza is a $2-4B drug in the US, which it is, then arbitrage will take place and MNKD would be justified to have a marketcap higher than HGSI or DNDN. Something over $5B is reasonable to expect considering Afrezza’s revenue potential is more than Benlysta and Provenge combined.

However, before any of this can happen, the FDA needs to approve Afrezza. It is possible of course the bears are right and the FDA will issue another CRL. I don’t believe they will but many do and that is why the stock is less than $10. With December 29th only days away, we’ll all know soon. I for one am hoping for an early Christmas present this year.

Disclosure: I am long MNKD.

Source: MannKind’s Afrezza Has Mega-Blockbuster Potential