In the comment section of my last article, several people posted reports saying that their local pharmacies now have MannKind Corp.'s (NASDAQ:MNKD) Afrezza in stock or on order. A screen shot was posted of Afrezza being listed as in stock at Cardinal Health. The discount web site, rxcut.com also displays a price for Afrezza which appears to be taken from a pharmacy benefit manager's database.
The pricing data that is emerging with these reports suggests that Afrezza is indeed priced to be competitive with other fast acting insulins. Prices reported for the 4 unit 90 cartridge (a 30-day supply) range from Cardinal Health's $215 to $269.99 at CVS.
If you compare this to the $303 to $423 retail price of Novolog FlexPens at Wal-Mart and CVS, as listed on GoodRx.com, you will see that Sanofi (SNY) is pricing this new inhaled insulin aggressively. However, retail prices don't mean much when it comes to drugs, so we still have no real idea of what Sanofi will be paid by insurers and pharmacy benefit managers. All we know is that the retail price compares well with that of injected fast-acting insulins.
Estimating sales based on unit sales of fast-acting injected insulins
Since the retail pricing is in line, making Afrezza competitive with existing products, we can learn a lot by looking at historical sales data for the other fast acting insulins currently on the market.
Luckily for us, this data is available online in Drugs.com's list of the top 100 U.S. bestselling drugs of 2013. The main fast-acting insulins that dominate this niche, Novolog from Novo Nordisk (NVO) and Humalog from Lilly (LLY) appear on this list in both their vial and pen forms. So, we can quickly determine how many units they sold over the course of the year and what their total revenue was for those 2013 U.S. sales.
These are not all the fast-acting insulins on sale in the U.S. There is one more, Apidra, Sanofi's fast-acting insulin. But it is not a bestseller, so it did not appear on this list. The total worldwide sales for Apidra were reported (in Euros) in Sanofi's Annual report for 2013 along with what percentage of their total sales are attributable to the United States - 29%. Using those figures, it is possible to come up with a ballpark figure for Apidra's U.S. sales and add it into the mix.
Please note that I am only considering the sales of the expensive, patented analog fast-acting insulins. I am ignoring the regular human insulin preparations, Humulin and Novolin. These are much cheaper, but they are also much slower insulins and harder to use. They are usually prescribed to people with poor insurance coverage who would not be part of the target market for Afrezza at its current price point.
Here are the 2013 U.S. Sales numbers for these insulins. They include all the Drugs.com data for all forms of Humalog and Novolog with an additional estimated $108 million in U.S. sales for Apidra.
Total 2013 US Sales Dollars
All Analog Fast Acting Insulins
Total 2013 Units
All Analog Fast Acting Insulin
So, let's calculate what would happen if Afrezza were to take over one quarter of this market and sell 10 million units, at a price somewhere around $200 per unit (a unit being that 90 cartridge box). That could be a reasonable price given that LLY earned $203 per unit for the sales of its Humalog KwikPens in 2013.
That would generate sales of $2 billion, which is more than the dollar amount that 10 million units of these injected insulins earned. But for the moment, let's work out what that might mean for profits and stock price.
Assuming that there is a 30% margin for these insulin sales, a number that corresponds to the margin Novo Nordisk reports, a company that sells insulin as its main product, we come up with a profit from the sales of those 10 million units of $600 million.
MannKind's share of that profit according to the partnership terms would be 35%, or $210 million dollars. With 405.70 million shares outstanding (WSJ figures) that works out to $.52 per share. Assuming a modest 15 PE ratio, this level of U.S. sales would justify a price of $7.76.
A more conservative estimate based on dollar sales
However, given competitive pressures and the additional downward pressure on price that is becoming evident as pharmacy benefit managers become more aggressive about cost cutting, we have to heed the fact that the dollar sales figures reported for these other insulins show that they have on average been selling at unit prices closer to $125 than $200. So, we would do better to figure out a reasonable valuation for MNKD using the dollar amount that these other insulins actually earned in 2013 rather than the number of units they sold.
If Afrezza could capture $1 billion of those $4.8 billion insulin dollars, roughly one fifth of all sales, the numbers are much more modest. At a 30% margin, that $1 billion in sales would generate a profit of $300 million. MNKD's share of these profits would be $105 million dollars. That works out to $.26 per share, which at a PE of 15 would justify a price of only $3.90/share.
But wait! (As the TV hucksters say.) There's more!
Additional revenue from stealing market share from other injected drugs for type 2 diabetes
Before you sell your shares to a hungry short seller, remind yourself that Afrezza doesn't only compete with fast acting insulins. It also competes with several other blockbuster drugs prescribed to patients with Type 2 diabetes and it has a good chance of taking away a considerable chunk of their shares.
The most vulnerable of these drugs is the injected drug Victoza, made by Novo Nordisk. Victoza is on the list of the top 100 drugs sold in 2013. However, it causes very unpleasant side effects, including projectile vomiting, and while it is effective in a subset of patients who use it, a large majority of those who take it do not see significant improvements in their blood sugar.
What has relevance for those who claim that Afrezza's black box is a sales killer, is the fact that this top 100 drug comes with a black box warning that cites its potential for causing not one but two kinds of cancer. The warning section of the label also notes postmarketing reports "including fatal and non-fatal hemorrhagic or necrotizing pancreatitis." Nothing on the Afrezza label should raise anywhere near the concern that these fatal conditions listed on the Victoza label should raise.
So, doctors may decide that Afrezza might be a good choice for some of their patients who have been taking Victoza but still are seeing very poor blood sugars.
Victoza is a very expensive drug. There were 2.5 million Victoza prescriptions sold in 2013, earning drugmaker Novo Nordisk $1.08 billion dollars in sales. That works out to $432 per unit.
So, Afrezza should not only be cost competitive with Victoza but might provide better blood sugar control to people with Type 2 diabetes - even those who are not using basal insulin - with far fewer side effects and much less risk. That is because Victoza's mechanism primarily lowers post-meal blood sugars, as does Afrezza. It does not lower basal blood sugar.
If Afrezza could take only one third of the dollars currently spent on Victoza, it could earn another $356 million. With a 30% margin, that yields $106.9 profit, of which MNKD would earn $37 million.
And Victoza is only one of several very similar injected drugs for type 2 that might lose market share to Afrezza which share Victoza's steep price and worrisome, potentially fatal side effects. These other drugs are AstraZeneca's (AZN) Bydureon and Byetta. I can't find U.S.-only sales numbers for these drugs, but analysts project worldwide sales of $384.3 for Byetta in 2015. Bydureon's sales have been extremely disappointing so far, possibly due to the fact it must be injected with a huge needle.
If Afrezza could capture 30% of those Byetta/Bydureon dollars we could add another $13 million to MNKD's profits.
When we do the math, the additional $50 million in the profits made by taking market share from Victoza and Byetta could add another $.123 to MNKD's earnings per share. That would bring them up to $.38 per share, justifying a price of $5.71 at a modest PE of 15.
Yet more revenue from replacing ineffective, expensive, and dangerous oral drugs for type 2
None of these numbers includes the patients with Type 2 who are taking no injected drugs at all. Many of these patients are taking Merck's (MRK) Januvia. There were 9.2 million Januvia prescriptions sold in 2013, generating $2.77 billion dollars in U.S. sales.
An additional 3.7 million prescriptions of Janumet were sold. Janumet is a combo pill made up of Januvia and Metformin. Janumet brought in another $958 million from its U.S. sales alone.
Yet another similar drug, Onglyza, is not on the bestseller list, but it is selling a several hundred million dollars worth of prescriptions, worldwide.
These oral drugs also have significant side effects. The label for Januvia notes,
There have been postmarketing reports of acute pancreatitis, including fatal and non-fatal hemorrhagic or necrotizing pancreatitis. There have been postmarketing reports of acute renal failure, sometimes requiring dialysis...serious allergic and hypersensitivity reactions in patients treated with JANUVIA such as anaphylaxis, angioedema, and exfoliative skin conditions including Stevens-Johnson syndrome.
And these drugs don't work very well for many people with type 2 diabetes. These are the patients who should be taking insulin. However, many have stayed with these pills out of fear of needles.
If Afrezza could capture 30% of the $3.73 billion currently spent on these Januvia drugs, those sales would add another $117 million to MNKD's profits, which would add another $.29 to its earnings, bringing them up to $.67 a share. That would justify a price of $10.04 at a conservative PE of 15.
Januvia is not a cheap drug, so the patients currently using it are those who have good insurance plans, plans that are either already covering Afrezza or are likely to do so within a year or so of the product launch. Note that I didn't even figure in additional units sold to patients currently using the very similar, equally expensive drug Onglyza.
And I am not even attempting to estimate how many other needle-phobic patients there might be out there who aren't taking any of these other drugs right now, due to contraindications or having had bad experiences with them in the past. They too are candidates to become Afrezza users.
One other group also could provide another big group of Afrezza customers. There were 40.5 million units of Lantus sold in the U.S. 2013 earning Sanofi $5.4 billion in U.S. sales alone. Many of these were bought by patients with type 2 diabetes who are using only basal insulin. They may have been avoiding fast-acting insulin because they don't want to have to carry around needles and worry about dosing. If only a small percentage of these people add Afrezza to their daily regimens, we could easily see another significant rise in earnings and share price.
And then there is the rest of the world
All these figures we have just reviewed are for sales made only in the United States. Since the United States represents 29% of Sanofi's worldwide sales, a successful Afrezza, sold worldwide, could triple profits and earnings, making a price near $30 quite possible, should the stock remain at a conservative PE of 15 and a lot more if investors become more enthusiastic about MNKD's future.
Caution: these numbers work only if the drug is a hit with doctors and patients
Obviously, these are best case numbers. Nothing we know now can tell us if doctors and patients will adopt Afrezza. But Afrezza is showing up on some formularies, and it appears that it is indeed priced competitively. It also appears to be rolling out to pharmacies, making it likely that the drug will launch very soon. Rumor has it that Sanofi has held its educational session for drug reps in Las Vegas this past week. This may mean they will be heading out to visit doctors soon.
Meanwhile, hold on to your hats and expect to see some serious volatility in the price. There were, as of December 31, 2014, some 75.6 million shares sold short. There are a lot of people being paid to raise fear and doubt in the minds of stockholders to shake loose the shares those shorts need to buy to close out their positions.
This article was written by
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.