Why Piper Jaffray is Wrong on Mannkind
According to
this article, analyst Joshua E. Schimmer lowered the price target on MNKD to $1.50. Here is the summary on the downgrade report:
Piper Jaffray’s Joshua E. Schimmer has downgraded the rating on MannKind from Neutral to Underweight, while reducing the price target to $1.50.
Schimmer believes the company has “vastly over-estimated” the commercial potential of Afrezza for diabetes. The drug is being viewed as a very niche product.
According to the Piper Jaffray report, the launch of the company’s new diabetes drug, Afrezza, has been “lacklustre to say the least.” Checks with specialists suggest that while there is an increasing use of Afrezza in their practice, although not a “dramatic” increase.
Schimmer pointed out that physicians were viewing Afrezza as a “niche” product that is mainly beneficial only to a small group of “needlephobic” patients. “The hassles of PFT monitoring and repeated cartridge administration were seen as drawbacks unlikely to abate any time soon” the report said.
The patient blogs, on the other hand, describe “good” glucose control but view the drug as a device that is “very challenging” to use and takes a lot of time to learn.
“While the unmet need for glucose control is high, we are skeptical that MNKD will find attractive commercial opportunities where the TI profile can command premium pricing and be differentiated versus alternative easy-to-use injectibles,” Schimmer added.
In addition, MannKind has been struggling with its convertible notes, high expenses and its obligation to Sanofi SA under the 35/65 split for Afrezza. Schimmer also expressed concern regarding Afrezza weak sales dragging the stock down further.
The EPS estimates for 2015 and 2016 have been reduced from $0.28 to $0.25 and from $0.19 to $0.17, respectively.
According
this article, Joshua Schimmer commented, "IMS scripts for Afrezza have been lackluster to say the least, so we spoke with five primary care and endocrinology specialists with high volumes of diabetes patients to gauge their experience with and outlook for the product. Unfortunately it sounds to us that while awareness is high and some patient blogs on the internet describe some very exciting and differentiated results, Afrezza is being viewed as a very niche product. Physicians envisioned growing use in their practices, but not dramatically so. We believe MNKD has vastly over-estimated the commercial potential for the drug and are lowering our penetration estimates. Even our revised assumptions may be too aggressive so our discount rate is increasing from 10.5% to 11%. Our new PT is $1.50/share, which is roughly 60% down from current levels."
BELOW IS MY POINT-BY-POINT REBUTTAL OF THE PIPER JAFFRAY REPORT.
SAMPLE SIZE OF THE REPORT
"IMS scrips for Afrezza have been lackluster to say the least, so we spoke with five primary care and endocrinology specialists with high volumes of diabetes patients to gauge their experience with and outlook for the product."So we now know five primary care and endocrinology specialists constitute the sample size and basis of this Piper Jaffray downgrade report. I am not statistician, but five seems to be a very small number to me. Compared with what analyst Shaunak Deepak Jefferies in his report, pursuant to
this article, they surveyed 120 physicians.
LACKLUSTER LAUNCH
According to the Piper Jaffray report, the launch of the company’s new diabetes drug, Afrezza, has been “lackluster to say the least.” Checks with specialists suggest that while there is an increasing use of Afrezza in their practice, although not a “dramatic” increase.
One of the points mentioned by Schimmer in his research note is that Afrezza's commercial launch has been lackluster. With respect to this,
Kanak Kanti De has commented in his article
Piper Jaffray Overly Bearish On MannKind: well this was well known before Schimmer's research note came out so the market reaction is somewhat surprising. Afrezza has seen a slow start but as Kanak Kanti De has noted in his article
Premarket Biotech Digest: Pumps And Dumps, MannKind DTC Campaign, uptake for an inhaled insulin will be slow. One of the earlier user of Afrezza, Sam Finta (Afrezzauer) has
noted in his blog in January 2015 (before Afrezza was lanched) that Afrezza scripts perhaps would not pick up immediately out of the gate as the average waiting time for an appointment with an endocrinologist can be 6 – 9 weeks or MORE. Many doctors don’t have any direct experience yet with this new innovative drug (they will need to see it in action and get “real world” training on how to dose/prescribe it for their patients) but it will gather ongoing and amazing momentum as more people figure out this just isn’t your “dad’s old insulin”–it’s a brand new state-of-the-art “real-time” insulin.
In fact, due to Sanofi has so far has a controlled launch of Afrezza, both Afrezza’s awareness among the doctors and the public is not widespread yet. Additionally, insurance coverage of Afrezza is sparing. According to author of “Too Sweet-The Not So Serious Side to Diabetes”,
Laura Kronen, who is also an Afrezza user, “
The only problem with #afrezza is that no one knows about it. Such a shame that a truly life changing drug is getting pushed under the rug.” Here is another comment from an Afrezza user on August 19, 2015: “
I won my personal bet. My internist never heard of Afrezza. I explained it to him & showed him the Dreamboat & cartridges. Sanofi is sad.”
And on insurance of coverage, here is the data provided by
Formularylookup.com on 08.24.2015.
Insurance Status Toujeo Afrezza Lantus Novolog Levemir
Preferred
32% 4% 89% 66% 86%
Covered
19% 22% 6% 15% 2%
Restricted
27% 42% 4% 15% 9%
Not Covered
22% 32% 1% 13% 3%
With such limited awareness among the doctors and public and sparing insurance coverage, slow pick-up in scripts is both reasonable and expected.
As Kanak Kanti De pointed out in his note, in fact, Schimmer adds in his research note that checks with specialists indicate an increase in the use of Afrezza. Although Schimmer further notes that the increase is not dramatic, it is still an encouraging sign in my opinion.
Kanak Kanti De further noted that as he discussed in his Forbes
piece recently, the key for MNKD and its partner Sanofi will be to reach directly to patients, as they will be more willing to switch from SoC to Afrezza, given that inhalers will be more convenient to use than a needle. The DTC campaign will help in this regard but the campaign has only just started so it will be sometime before we see results.
“NICHE” PRODUCT?
Schimmer pointed out that physicians were viewing Afrezza as a “niche” product that is mainly beneficial only to a small group of “needlephobic” patients.
Here is problem of the sample size. Has Schimmer spoke with any of the leading/high volume prescriber of Afrezza? As one Afrezza user commented:
My endocrinologist writes Afrezza scripts for over 30 patients. He is an Afrezza believer. Why would he be the exception and not the rule?
In terms of “small group of “needlephobic” patients”, see comment by Robert Sacher in
this article to get an idea of how large the population of the diabetic community who are needle phobic and needle averse.
And why should Afrezza be only limited to the diabetic community who are needle phobic and needle averse. What percentage of the current Afrezza users who are needle phobic and needle averse?
Below are quotes from the discussion:
How to bolus for a mid-meal decision to eat more than planned in Tudiabetes.org.
Here is the main question posed in that thread:
"If I pre-bolus for my intended meal and then begin eating, but somewhere during that meal, I decide i want to eat more (carbs,etc.), do I need to pre-bolus (and wait again before eating the extra food) or can I just bolus and continue eating the additional food intake?
please share your experiences. thanks."
Here is a comment in that thread:
"I follow the KISS protocol. (Keep it simple, stupid) lol. Just add the appropriate amount additional insulin and enjoy your meal. If you're getting off into unfamiliar territory with foods you're not sure about, do an additional bg test or two after eating just to make sure you're on track and adjust if necessary.
Btw this is where afrezza REALLY shines because I don't take afrezza until 20-25 minutes after eating. With a big meal I'll take one dose at 20 minutes and the second at 40. The ability to eat now and dose later and still have great control is very liberating to me."
HASSLES OF PFT MONITORING AND REPEATED CARTRIDGE ADMINISTRATION?
“The hassles of PFT monitoring and repeated cartridge administration were seen as drawbacks unlikely to abate any time soon” the report said.
PFT is done at the initial appointment to get the Afrezza prescribed and then after six months and then once a year. The whole test typically takes a few minutes. Is that a big hassle? Repeated cartridge administration a big hassle. Come on Mr. Schimmer, take a look at
this video and let me know which is a bigger hassle, taking Afrezza or taking an insulin injection. And we are not even talking about carb calculation and insulin on board issues here yet.
DEVICE THAT IS “VERY CHALLENGING” TO USE AND TAKES A LOT OF TIME TO LEARN?The patient blogs, on the other hand, describe “good” glucose control but view the drug as a device that is “very challenging” to use and takes a lot of time to learn.
Mr. Schimmer, take a look at
this video,
this video, and
this video, let me know what you think? How about Afrezza compared with injection, take a look at
this video, Mr. Schimmer what do you think?
SKEPTICAL THAT MNKD WILL FIND ATTRACTIVE COMMERCIAL OPPORTUNITIES WHERE THE TI PROFILE CAN COMMAND PREMIUM PRICING AND BE DIFFERENTIATED VERSUS ALTERNATIVE EASY-TO-USE INJECTIBLES?
“While the unmet need for glucose control is high, we are skeptical that MNKD will find attractive commercial opportunities where the TI profile can command premium pricing and be differentiated versus alternative easy-to-use injectibles,” Schimmer added.
In terms of pricing, the main issue is the insurance coverage. Generally insurance company takes six months to one year before it starts to cover a new drug. As insurance coverage improves, Afrezza will be comparable to injectables in pricing.
As for differentiation,
this article and
this article provide ample reasons that Afrezza can be differentiated from injectable in many ways.
STRUGGLING WITH ITS CONVERTIBLE NOTES, HIGH EXPENSES AND ITS OBLIGATION TO SANOFI SA UNDER THE 35/65 SPLIT FOR AFREZZA?In addition, MannKind has been struggling with its convertible notes, high expenses and its obligation to Sanofi SA under the 35/65 split for Afrezza. Schimmer also expressed concern regarding Afrezza weak sales dragging the stock down further.
Per Mannkind’s last conference call, Mannkind has $107 million cash, $30 million credit line with Al Mann, $147 million available under the credit line with Sanofi, totally $284 million. According to
this article, Mannkind will like receive $25 million manufacturing milestone this year. It is also expected that Mannkind will get $50 million in total approval milestone for approval in EU and Japan. Adding this to the $284 million, that’s $359 million. Mannkind’s quarterly loss was $28.9 million last quarter. So at this rate, Mannkind has enough cash to go through the next three years without capital raise. Even if we assume Mannkind does not refinance some of the notes that were due in 2015 (say $60 million) and pay that part off with available cash, Mann still have enough cash to go through two and half years without raising cash. This does not take into account sales ramp, additional milestone payments from Sanofi and potential partner payments for other Technosphere applications.
CONCLUSION
In the end, I am in total agreement with Kanak Kanti De that
Piper Jaffray Overly Bearish On MannKind. And I am in agreement with Kanak Kanti De in his observations in
MannKind And Afrezza: Can The Drug Cure The Company? Except that, in terms of valuation of Mannkind, Kanak Kanti De assumes a profit margin of 20% and then Mannkind getting 35%. So it's kind of like assuming Mannkind is getting about a 7% royalty. I recall Mannkind has always maintained that the Sanofi-Mannkind deal is equivalent to Mannkind getting about a mid-20 percentage (i.e., around 25%) royalty. So if Mannkind is correct about the actual profit margin, the actual valuation may be about 3.5 times of Kanak Kanti De calculation/estimate. Since Kanak Kanti De has a $10.50 valuation for Mannkind, 3.5 times of that will be $36.75.
