seekingalpha.com/article/2889206-what-mannkind-investors-can-learn-from-the-sanofi-conference-call?auth_param=k9285:1ad7hkv:ad39fc6e82a9cccc56bb6cc702acffd8&uprof=45What MannKind Investors Can Learn From The Sanofi Conference Call
As most of you know, Afrezza is the new inhaled insulin which Sanofi (NYSE:SNY) just officially launched in the U.S. in partnership with its inventor, MannKind Corp. (NASDAQ:MNKD)
After the January 20, 2015 JPMorgan Healthcare Conference where Sanofi concentrated almost entirely on discussing the unapproved drugs in its pipeline, and made only a brief reference to Afrezza, naysayers claimed that Sanofi was going to delay the launch of Afrezza.
We all know how true that prediction turned out to be. Investors who bought into MNKD stock the day after the conference are sitting on more than a 33% gain today. But the same naysayers continue to argue that Sanofi's commitment to Afrezza went out the door with its fired CEO.
But if there is still doubt in the minds of MNKD investors as to Sanofi's commitment to Afrezza, today's year end report from Sanofi and the conference call that accompanied it should set them to rest. Sanofi placed Afrezza front and center in its annual report to shareholders. Company interim CEO Serge Weinberg states in the video released with the annual results,
"... the increased rebates in the U.S. and the roll-out of the Affordable Care Act are expected to impact the U.S. outlook of Lantus® in 2015. Sanofi expects to mitigate this impact on the Diabetes division in 2015 through the launches of Toujeo® and Afrezza® ... As you probably know, Afrezza®, the only inhaled insulin, is available in the U.S. since Tuesday. Afrezza® is a drug-device combination product that consists of a dry formulation of human insulin delivered from a small and portable inhaler to help patients achieve blood sugar control. This product is an important addition to Sanofi's growing diabetes portfolio."
During the conference call, Sanofi spokespeople called Afrezza a "technological breakthrough" both as a device and as a medication. They also referred to the benefit it has of requiring limited patient training. Later it was called a "new paradigm."
The Unmentioned Threats To Lantus/Toujeo
What Sanofi spokespeople did not say, understandably since to say this would have dropped Sanofi's share price dramatically, is that Afrezza is the only product it has now or in its pipeline that has the potential to counteract the real headwinds facing its diabetes franchise.
Lantus, a super-blockbuster basal insulin, has been a major source of Sanofi's corporate profits. During the conference call, a Sanofi speaker stated that there are 6 million basal insulin patients in the U.S.. Until this past year, Lantus controlled the lions share of those basal insulin prescriptions. But it now faces a major headwind in the emergence of very strong competitors.
Lantus' patents are expiring, and though the company is using all the legal avenues it can find to extend its exclusivity, a biosimilar version of Lantus to be sold by Lilly (NYSE:LLY) has already been approved for sale in Europe and will go on sale in May, 2015. Merck is also developing another biosimilar version of Lantus. The writing is on the wall.
A further threat comes from Novo Nordisk (NYSE:NVO). NVO ramped up its discounting of its own basal insulin, Levemir, which greatly increased the Levemir's market share this past year.
But a bigger threat comes from the fast that NVO has not one but two basal insulins. The second one, Tresiba, is a new longer-acting basal insulin that is currently on the market in 23 countries worldwide, including Japan. According to NVO's annual report, "In Japan, where Tresiba was launched in March 2013 with the same level of reimbursement as insulin glargine, its share of the basal insulin market has grown steadily and Tresiba has now captured 26% of the basal insulin market measured in monthly value market share."
Tresiba is not yet approved for sale in the U.S. but if were to take 26% of the U.S. insulin market after its expected approval at the end of this year, Sanofi would be looking at a huge hit to its bottom line.
To keep this from happening, Sanofi developed a new formulation of Lantus which it is calling Toujeo. It claims that it, too, like Tresiba, is longer lasting and causes fewer hypos. Tougeo is coming up for FDA approval this quarter. The FDA did not approve Tresiba the first time it came up for review this past year, sending it back for more studies of its heart risk. Because Toujeo is not a new molecule, the way Tresiba is, but just another formulation of Lantus, it is possible that the FDA may not be as concerned about heart risk. ORIGIN, a long term study of Lantus appears to prove that while it doesn't improve cardiovascular outcomes, it also doesn't worsen them.
Pricing May Cause Insurers To Favor Lantus over Toujeo
But NVO's annual report also makes it clear that even with the advantages Tresiba offers users--long duration and lowered likelihood of hypos, the company is struggling to get insurers to put this new insulin on the same tier as Lantus. This may sound like good news for Sanofi, but it may not be.
That's because even if Toujeo is approved, it will be entering a market where payers are far more price sensitive than they were in the past and where many patients are doing very well on Lantus without any hypos.
What's more, Toujeo has not been found to lower blood sugar any better than Lantus. Its only claim of superiority rests on some evidence that it produces fewer hypos. But reading the fine print we learn that Toujeo did not lower hypo incidence in people with Type 1 diabetes. This raises the question of whether it was the insulin itself causing the improvement in the trial or the way it was prescribed to Type 2s.
If the only market for a non-cost-competitive Toujeo's is patients who frequently hypo on Lantus, and if its greater expense puts it in a higher tier in formularies, it may not be able to repair the decline in earnings Sanofi expects to see from its diabetes franchise now that Lantus must compete on price.
Enter Afrezza, The Only Insulin Of Its Kind
All this highlights just how important it is to Sanofi that its newly launched diabetes drug, Afrezza, become successful. Unlike Lantus, which is facing competition from so many different angles, Afrezza has no competition in the niche of non-injected insulins.
In the conference call today, a speaker from Sanofi reiterated that 40% of patients with type 2 diabetes who should be taking insulin hold off out of a fear of needles. The Sanofi spokesperson then went on to stress that Afrezza was going to be marketed to these "insulin-naive" patients, only editing that phrase to "short-acting naive" patients after a moment's thought.
Some of that thought might have been due to remembering that the company needs to keep selling basal insulin, and must keep analysts believing that it can recover its lost Lantus-related dollars from Toujeo.
But, in fact, though this is not currently on the Afrezza label, there is reason to believe that many patients with Type 2 diabetes might be able to use Afrezza instead of basal insulin. Substantiating this is the fact that Afrezza poster boy, Sam Finta, who tweets as
afrezzauser, and who is an insulin-dependent Type 1, demonstrated, using Continual Glucose Monitor System screen shots, that he could attain near normal blood sugars for two days using no Lantus at all, just Afrezza. Since blood sugars in Type 2 diabetes are much easier to control than those in Sam's Type 1 diabetes, it is very possible that the market for Afrezza in "insulin naive" patients-those who have taken no insulin at all, is huge. Possibly much larger than the market for Lantus or any basal insulin.
Addressing Formulary Adoption
Obviously, adoption by insurance plans is the elephant in the room-one that NVO's annual report highlighted, too, as NVO states that it has been facing difficulty with pharmacy benefit managers dropping its products or putting them in expensive tiers. So it shouldn't be surprising that during the conference call, one analyst asked about whether Sanofi's newly released products are going to be getting into formularies.
Sanofi is very aware of this issue. Though this is never mentioned by the company, they learned the hard way what happens when you price a new product too high. Several years ago, Sanofi launched an excellent fast-acting insulin, Apidra, which failed to take market share from competitors Novolog and Humalog largely because its high price kept it out of many formularies.
Today Sanofi's representative answered the question about formularies by saying that while there is a lag time for new drugs to be listed and that adding drugs to the Medicare Part D formulary takes even longer, it is the company's "priority" to get these products listed.
Already we have seen some evidence that they have addressed this priority. For example, you can see the very aggressive discount coupon they are offering on the afrezza.com web site. This coupon gives the user one free Afrezza prescription and several more at $30 each. Afrezza is also already listed on quite a few formularies at a tier which while not always as low as that of favored injected insulins is cheap enough to attract the motivated patient--one whose fear of injections has put them at risk of amputation and kidney failure.
A Bright Future Awaits Afrezza--But We Still Must Be Patient
A Sanofi speaker stated that they expect their newly launched products to start showing significant sales during the second half of the year. MNKD investors should heed this and ignore the first few months of sales reports.
A Sanofi speaker also explained, without elaboration, that Afrezza is undergoing a two stage launch, of which this week's U.S. launch is only a portion. I assume this refers to the launch in the rest of the world, which won't happen for another years or more, and the company's stated goal of running the studies needed to expand the label.
All this should make it clear that we can now set aside any doubts that Sanofi is dedicated to making Afrezza succeed. I see no other product in its pipeline that has the blockbuster potential this drug has. Its other drugs include one for a rare condition, Gaucher's disease, a drug for MS that is a third line drug with severe side effects, Lemtrada, and Praluent, a very expensive monoclonal antibody for resistant high cholesterol that is likely to be prescribed mostly to people with severe genetic problems. A dengue vaccine is promising, but it will not be a drug everyone must take every day.
Obviously Sanofi, with its declining profits and the strong headwinds it is facing in its diabetes business, is not going to announce that it is relying heavily on the success of any newly launched drug to save its profitability. But logic suggests that it is. Investors in both Sanofi and MannKind have to hope they can make it happen.