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Things are bad, but not nearly as bad as shorts claimed or some others think


Now that Hakan has stepped down and Al Mann took the position as interim CEO, this proves things are pretty bad at Mannkind. That also explains why some long term holders sold out in the last few days and some long term holders thought of writing to management (as evidenced by my post: Suggestions to Management and lorcan458’s post A Letter to Matt). But are things as bad as shorts claimed or some others think? Not nearly. My conviction remains the same that Afrezza will succeed and Mannkind will succeed. My basic points as laid out in my post Afrezza Will Succeed remain the same. Below are the main points of that post, but you can check it out for more details.

1. AFREZZA WORKS AND WORKS WONDERFULLY

2. WHY AFREZZA RAMP UP HAS BEEN SLOW

3. AT SOME POINT, AFREZZA’S SALES WILL RAMP UP SUBSTANTIALLY

4. MANNKIND CAN, BY ITSELF (IF NECESSARY), MAKE AFREZZA A SUCCESS

5. SANOFI HAS NO REASON TO GIVE UP AFREZZA

6. OTHER BIG PHARMAS WILL BE INTERESTED IN AFREZZA AND THE TS TECHNOLOGY.

Here are some additional thoughts to supplement my post Afrezza Will Succeed.

1. Is Afrezza’s launch a disaster or complete flop?

Exubera was considered a flop only because Pfizer dropped in $2.8 billion in it and then gave it up only after one and a half year’s in the market. If Pfizer did not spend that huge amount of money on Exubera or Pfizer stick around a few more years to at least make Exubera a niche product, then it wouldn’t have been considered a complete flop.

Shorts often argue that Afrezza’s ramp-up is much slower than Exubera. It actually is far from true. First Afrezza’s sale is not behind Exubera. It is wide quoted that Exubera’s sales’ in the first nine months of 2007 (the second year of its launch) is $12 million and that amount appears to be its global sales (which includes US and EU). See discussions here. Per Symphony, last week’s (November 13, 2015) Afrezza sales was $322,000, that is an annual run rate of $16.74 million and translates into about $12.55 million for nine month. Therefore, if Aferzza’s sales stays stagnant for the next nine months, Afrezza’s US sales for the next nine months will about equal to Exubera’s nine months’ sales in its second year of launch (and it appears Exubera’ sales includes sales in both US and EU).

And one also has to consider how much efforts Pfizer made in marketing Exubera. It was reported that Exubera cost Pfizer $775 million to manufacture and promote this year (2007) and Pfizer has spent in the region of USD 370m so far in 2007 to promote Exubera (in 2007). Remember Pfizer dropped Exubera in October 2007 and therefore Pfizer basically spent those amounts in the first three quarters of 2007 on Exubera. And how many people Pfizer put in to market Exubera? Bloomberg News reports that some 2,300 Pfizer sales representatives have been promoting Exubera to more than 5,000 doctors. But Pfizer has also hired approximately 900 additional, part-time diabetes educators to explain the product to doctors and patients. So in total, Pfizer put 3,000 + people promoting Exubera. For those numbers, see discussion in this thread.

As a comparison, how much did Sanofi spent on Afrezza so far this year (three quarters). We understand that the JV recorded total expenses about $122 million (based on the fact that Mannkind is sharing 35% of the expenses of the JV and at the end of the third quarter, the balance is around $43.7 million, with about $0.8 million paid-in-kind interest). And many in this board are in the view that this amount may be overstating the actual spending. And how many sales people did Sanofi put to work. We understand it to be around 200.

So basically, compared with Pfizer, Sanofi and Mannkind used a fraction of money and people to achieve about the same level of sales. In other words, Afrezza achieved about the same level of sales with a fraction of resources used for Exubera.

Then how about Afrezza’s launch compared with Minimed’s launch of insulin pumps? We know that for Minimed, they started to sell insulin pump in 1985 and in 1990, their sales were still at $12.5 million. So five years after launch, Minimed’s sales of insulin pump was $12.5 million. Yet, we know that, in the end, Al succeeded in turning insulin pump into a viable option for diabetics. It appears Afrezza’s first year of launch probably will achieve sales of around $10 million, about equal to Minimed’s sales of insulin pump in the sixth year into launch.

Therefore, looked in these contexts, is Afrezza’s launch a failure or flop? No, not at all. All I can say that Afrezza’s launch and ramp-up probably did not meet the expectations of Sanofi and Mannkind and most other people (including most members of this board). But probably those expectations were unreasonably high in the first place, especially in hindsight.

2. Will Mannkind be bankrupt if Afrezza’s sales does not pick up substantially very soon?

The shorts have claimed that Mannkind will most likely be bankrupt ultimately and some people here have claimed that Mannkind will be bankrupt if Afrezza’s sales does not pick up substantially very soon (i.e., have a hockey stick kind of growth curve).

I think neither of these situations is going to be the most likely situation. First, Mannkind will not be bankrupt because Mannkind and Al Mann will have ample ways to bridge the financial gap needed (about $200 million) to support Mannkind ramp up for the next two years.

Below is what I laid out in my post Afrezza Will Succeed regarding Mannkind’s financial situation:

Even if Mannkind uses the rest of the ATM ($37.5 million left as of now) to raise some money at close to the current PPS, they probably needs to sell around 15 or even 20 million shares. That kind of dilution is acceptable. That means, with the ATM proceeds and the Israel proceeds, they can buy two quarters of time.

If they can announce any kind of TS partnership arrangement within the next quarter or so, as Hakan remarked, the PPS will probably go up to some degree. They can then sell some additional shares to raise another $50 million or so (probably by selling another 15 to 20 million shares).

If there is indeed a $25 million milestone for Sanofi insulin certification, that will bridge Mannkind for another quarter. Based on Hakan's remark, there is some type development milestone that could come in either later this year or early 2016.

During this period of time, we probably will have some time period of upward movement of PPS, realistically to $3.5 or higher. Mannkind should take advantage and raise some money. If they can sell another 30 million shares at around $3.5, that will help.

So all these proceeds will be able to support Mannkind for two years, by selling a totally of 78/80 million share. That will bring the total outstanding shares to around 500 million. That's acceptable.

I believe in two years' time, Afrezza will have some sales (conservatively $100 + million a year run rate, see more discussions on this subject below) that will be able to at least contribute to the bottom-line of Mannkind (if not break even, then reducing the cash burn say by half, so that Mannkind needs an additional $50/60 million a year to support its operation).

Also I believe in two years' time, Sanofi (or another big pharma) will be able to recognize Afrezza's (and the TS technology's) value (as further discussed below).

Additionally, now that Mann has taken over the interim CEO role, it appears it will be easier for Mannkind to raise additional funds (than Hakan was running the company). Mannkind’s headquarter is still on sale for $20 million. And pursuant to this article, Al Mann sold some properties towards the end of 2014 for about $100 million. These could be additional resources Mannkind may be able to tap.

Per this article, former Sanofi CEO Chris Viehbacher just raised $600 million for his company. Therefore, given his demonstrated interest in Afrezza, it won’t be that unlikely if his company takes a minority (say 5% or even 10%) interest in Mannkind for some cash infusion (say $50 to 100 million) to Mannkind.

To summarize, given Al Mann’s past experience and reputation, it won’t be that difficult for Mannkind to raise $200 million or so and support Afrezza’s ramp for another two years.

If that is the case, Mannkind will not be bankrupt right now or in the near future. Nor does Afrezza need to grow with a hockey stick curve to avoid Mannkind being bankrupt.

3. What will be a realistic grown curve for Afrezza in the next five years?

Currently, at 42 weeks into launch, Symphony estimates the total prescriptions to be 16,263 and IMS estimates that number to be 13355. I think we can conservatively estimate that for all the existing users, each has had one new prescription and three refills and therefore each user currently has about 4 prescriptions. Dividing the total prescriptions by 4 and average the number we got from Symphony and IMS we can estimate that the current users of Afrezza is around 3,702.

Assuming refills at 90 days (13 weeks) for each of these users, we should get 284 refills weekly for these users. Since at least 1,000 users were added in the last 13 weeks, so we need to remove 1,000/13=77 from the weekly refills number. That will get us at 207 refills. Since we are getting about 240 refills at week 42, that seems to confirm my above rough estimate.

Since we are at week 42, that leaves 10 weeks to arrive at 52 weeks (one year into launch). Conservatively assume in the next 10 weeks we get 360 NRx per week and therefore 3,600 in total. Assuming a 50% conversion rate to refills, we can expect to add 1,800 new users. That will get us at 5,500 total Afrezza users at 52 weeks into launch. Dividing that by 13, we get 423 refills per week. So by the end of January 2016, the refills run rate should conservatively be at around 423 per week and TRx run rate should conservatively be at around 800 per week.  At $500 per script, that will be $400,000 per week and $20.8 million per year run rate. [Note, since we are talking about run rate, the data may be delayed by 13 weeks. That is to say, after 13 weeks of the dates referred to above, we should be expected to see these numbers].

As we are starting at such a small base, I think we can expect Afrezza’s sales to at least double for the next five or six years. Therefore at $20.8 million run rate in the end of one year, we probably can expect to see at least $50 million run rate in the end of the second year, $125 million run rate in the end of the third year, $250 million run rate in the end of the fourth year, $500 million run rate in the end of the fifth year, and $1 billion run rate in the end of the sixth year.

Per this article published in 2001, “for MiniMed, which has grown from $40 million in sales in 1994 to nearly $400 million anticipated for this year, Medtronic offers marketing muscle and distribution possibilities in the 120 countries where Medtronic is an established presence. It also opens the possibility for use of MiniMed's pumps to treat illness other than diabetes.”

Pursuant to this article published in 2013, “over the years, insulin pumps have continued to improve in terms of size/portability, ease of use, functionality and reliability. Today, pumps for CSII can fit in the palm-of-the-hand and are considered to be the gold standard therapy for type 1 diabetes (T1D) patients. Insulin pumps are a major medical device product segment generating $2.5 billion in annual global sales and growing at 15% per year—making this the second-fastest growth segment in diabetes products.”

Quoting the article, “it's hard to conceive of a more difficult product to develop and market: The pumps must be virtually flawless because their users' health depends on their reliability. But their sales are complicated by their cost--about $4,000 per pump--doctors' skepticism, and the reluctance of diabetics themselves to change their lifestyles.”

“Granted, MiniMed's annual sales have almost tripled to $36.3 million in 1994 from $12.5 million in 1990, but in 1994, MiniMed lost $900,000, compared to a loss of $1.6 million in 1993. However, in the second quarter ending June 30 of this year, the company reported a profit of $101,000.”

Comparing Afrezza to insulin pump, it is not unreasonable to expect Afrezza to ultimately attain the sales of the insulin pump industry today, i.e., $2.5 million per year.

Some have expressed the concern that because of novelty of Afrezza, Mankind, as the pioneer of the product, may in the end not be able to enjoy the rewards. I think what Al Mann did with insulin pump proves that, he as the pioneer of a paradigm-shifting product, will also be able to enjoy the rewards of the product.

4. Is Sanofi sandbagging Afrezza/Mannkind?

Many in this board have expressed distrust of Sanofi based on the slow uptick of Afrezza. However, on this issue, I mostly agree with cfield23 in his post: Why Sanofi's Marketing Strategy is Brilliant. Although I probably will not describe Sanofi’s marketing strategy as brilliant, I do agree with cfield23 in that we need to take the Afrezza marketing slowly and cautiously. As discussed previously, Pfizer spent $775 million mostly in the first 9 months of 2007 (while Sanofi and Mannkind spent $122 million in the first three quarters of 2015).

Let’s suppose Sanofi and Mannkind spent $775 million in the first three quarters of 2015. Where we would be right now? First, that would mean Mannkind would bear $271 million of the expenses. That would have used up all of the Sanofi’s $175 million facility to Mannkind and Mannkind would need to take out another $100 million out of its own pocket. And could we see a huge uptick in Afrezza sales based on such huge spending? Based on the actual sales of Exubera after such huge spending and the market barriers we have identified so far for Afrezza (insurance (formulary placement, prior authorization and the marketing agreement of the RAA producers had with the insurance companies), small prescribing base, conservative prescribing guideline, high price, conservative attitude of doctors and patients, and low awareness of Afrezza generally, etc.), it appears a huge uptick of Afrezza sales may not necessarily follow such a huge spending.

I also generally agree with dreamboatcruise in his recent posts that there is no clear evidence that Mannkind is sandbagging Afrezza and Mannkind.

As to the recent lawsuits against Sanofi, I am of the opinion that the big pharmas are generally at the same level in terms of integrity. I do not think Sanofi is better than the other big pharmas, but I do not think it is worse (or much worse) than the other big pharmas. And I do not think Sanofi is intentionally slowly ramping up Afrezza in order to get Mannkind cheaper or in order to kill Afrezza.

As stated in my post Afrezza Will Succeed, the fact that Afrezza works so well and Toujeo is being challenged by Tresiba means Sanofi will unlikely give up Afrezza. The fact that Sanofi chose to use Afrezza in this 500 person study involving Alirocumab (Efficacy and Safety of Alirocumab Versus Placebo on Top of Maximally Tolerated Lipid Lowering Therapy in Patients With Hypercholesterolemia Who Have Type 1 or Type 2 Diabetes and Are Treated With Insulin) also indicates that Sanofi has long term plan in place for Afrezza. The fact that Sanofi is not spending that much on Afrezza (Sanofi and Mannkind spent a total $122 million this year) means that Sanofi will be able to continue to spend such kind of money to slowly ramp up Afrezza in the next few years without too much a pressure.