Sanofi terminates Afrezza partnership with MannKind; can it survive? – January 5, 2016

MannKind CFO Matthew Pfeffer led a brief seven-minute conference call this afternoon following news earlier today that Sanofi has terminated the Afrezza partnership. Mr. Pfeffer calmly informed listeners that MannKind will move forward with Afrezza on its own, and the terminated partnership presents an “opportunity” and “clean slate” to change the pricing, marketing, and education strategies. It was an optimistic front for sure, though he didn’t take any questions, and new CEO Duane DeSisto and Chairman Al Mann were not on the line. More specific details and future plans will come next week during MannKind’s JPM presentation, to be led by Mr. DeSisto. Notably, both the JPM presentation and Q&A breakout session will be webcast. Below, we include our key questions following this news, the top highlights from Mr. Pfeffer’s very short prepared remarks, and an Appendix with patient data Afrezza from the diabetes market research company dQ&A and thoughts from Dr. Irl Hirsch.

Top Five Highlights

1. MannKind received notice yesterday that Sanofi has terminated the Afrezza commercialization partnership following lower-than-expected 2015 sales, larger-than-expected market challenges, and no clear path to economic viability given Sanofi’s challenges. All rights to market and sell Afrezza will be returned to MannKind over the next 90-180 days. The goal is no patient interruption in therapy according to MannKind mangement.

2. CFO Matt Pfeffer assured listeners that the terminated partnership and slow 2015 sales are not the death of MannKind or Afrezza, but an opportunity. Mr. Pfeffer said that new CEO Duane DeSisto will champion a “new blueprint for success,” and we’ll hear him for the first time next week at JPM. Is he up to the host of challenges this product must overcome?

3. MannKind’s independent research has suggested that different marketing efforts and a new pricing strategy will be required to increase adoption of Afrezza. Management still has “tremendous confidence” in the product, however, based on the “overwhelmingly positive communications” from users (on social media and elsewhere). Can MannKind succeed on the marketing and payer fronts where Sanofi did not? 

4. MannKind expects to finish 2015 with ~$59-$60 million in cash, expected to last into 2H16 (based on historical burn rates) and potentially further. Is it enough to carry Afrezza solo, particularly given the $185 million in debt – though much of it to a friendly creditor (Mr. Al Mann, the chairman)?

5. Sanofi’s rights to Afrezza are now non-exclusive, allowing MannKind to explore alternative Afrezza distribution arrangements or other licensing arrangements. Will MannKind find another partner? Who would take on this challenge?

Close Concerns Questions

Here are the big questions MannKind will have to address in the coming weeks and months. We hope for more specific commentary and detailed plans next week at JPM.

• Can MannKind and Afrezza survive this news? MannKind has the financial resources to last until 2H16 (and perhaps longer), but we assume at least $100 million would be needed to reasonably commercialize Afrezza on its own. Is another commercial partner even remotely possible, and if so, who would take on this challenge? Other diabetes pharma players seem unlikely. Novo Nordisk is an unlikely candidate (they eschewed inhaled insulin years back), but perhaps Mylan would consider it? One key variable is how MannKind would be valued.
• Is Afrezza economically feasible for any company, given the current payer environment, the existing label, current financial resources, low volumes, the very expensive long-term pulmonary safety study, and Sanofi’s inability to make it profitable? How would value of this deal change this?
• Could Sanofi have executed better on the launch? To what degree did the near-simultaneous launch of Toujeo deplete resources for Afrezza? Why weren’t the insulins marketed together? How much did former Sanofi CEO Chris Viehbacher drive the Afrezza partnership? Once he departed, did internal enthusiasm wane? As we understand it, he made the deal happen, and presumably current CEO Olivier Brandicourt was much more likely to terminate the deal, given the failure of Pfizer’s Exubera under his leadership.  
• Will reimbursement improve? Could MannKind reduce the Afrezza price vs. other rapid-acting insulins to get volumes up, gather real-world data, and go back to the drawing board? Is there enough time to do this before financial resources run out?
• Does Afrezza need more time? It took Lantus four years to reach $1 billion in sales, while Humalog and Novolog took seven years. Novolog could provide a good analogy to Afrezza – it did ~$18 million its first year (albeit over only about four months) and ~$56 million in its second year. (As a sidenote, Novolog did $763 million in sales globally in 3Q15, on pace for nearly $3 billion for the year.) Afrezza did ~$5 million through three quarters in 2015, though it came to market in an even more competitive era (e.g., three rapid-acting analogs available, GLP-1 agonists on the rise, increasing popularity of SGLT-2 inhibitors). For context, Sanofi’s Toujeo (U300 insulin glargine) launched in March 2015 and did ~ $44 million in US sales, though 75% of that volume came from Lantus switchers.
• What is the true real-world patient experience with Afrezza, and is it positive enough to scale adoption? MannKind management provided a glowing take on patient experiences in today’s call, but as we understand it, nearly two-thirds of users don’t continue using Afrezza after the first prescription. If that is true, what’s driving the drop-off in uptake (reimbursement, cough, no incremental benefit, user experience), and can it be resolved? Which is the bigger problem with Afrezza – the funnel of patients getting on the product is not wide enough (awareness), or the number continuing on it is not high enough (user experience)?
• The composite challenges were significant, but which was the biggest? Which was the most addressable? And which should other companies learn from? What could have been done differently from an Afrezza product design perspective (smaller cartridges?), a clinical study perspective (different design or comparator groups?), a label perspective (a PK/PD study), a marketing perspective (a “no needles!” instead of “inhaled insulin!” messaging – we don’t think, by the way, the FDA would allow that – it has to approved all DTC), a reimbursement perspective (lower pricing or earlier negotiations with payers), and a leadership perspective? To what extent is baggage from Exubera impacting provider enthusiasm for Afrezza?
• What will be the messaging to providers and patients and how confident should they be about product supply over the short term? It sounds like supply won’t be issue for the next six months, but how will the partnership termination affect distribution and supply? Will the transition be smooth, or will the companies run into unexpected challenges? 
• Is there a “Hail Mary” outcome for Afrezza? Is new CEO Duane DeSisto equipped to handle the challenges? Would any company acquire the IP? From both a population as well as individual level, we certainly would love to see Afrezza continue, though it is hard to be optimistic long term given the slew, complexity, and intensity of the challenges.
• What are the unintended consequences for entrepreneurs and startups bringing innovative products to market? What can be learned from Afrezza’s story? How will this news impact the attractiveness of investing in diabetes? 

Top Five Investor Call Highlights

1. As many analysts had feared in 3Q15, MannKind received notice yesterday that Sanofi has terminated the Afrezza commercialization partnership following lower-than-expected 2015 sales, market challenges, and little path to economic viability. All rights to market and sell Afrezza will be returned to MannKind over the next 90-180 days. The companies’ goal is to ensure no interruption of therapy or coverage for patients – to what extent this is feasible remains unclear, though we assume MannKind will want to take back control as soon as possible. Sanofi can continue to sell Afrezza over the next three to six months, so long as it has usable inventory (not quantified). The 35% MannKind-65% Sanofi profit-loss sharing arrangements remains in effect, which presumably incentivizes Sanofi to further reduce spending and activities related to the drug.

• In a detailed call with Sanofi management this morning, we learned that based on experience to date with Afrezza, it would not be economically viable to proceed with commercialization. This stemmed from the composite challenges on the payer, market, and product investment fronts. As we understand it, nearly two-thirds of those starting Afrezza haven't continued, which no doubt stems from all of those concerns.

2. Management assured listeners that the terminated partnership and slow 2015 sales are not the death of MannKind or Afrezza, but an opportunity. Said Mr. Pfeffer, “I speak today with resolve to say that this is not the end of the line for Afrezza or MannKind by any means. In fact, we look forward into the new year now with a clean slate and with the freedom to pursue a new approach...” This sort of optimism was to be expected (anything negative would be devastating), though Mr. Pfeffer reminded listeners that MannKind has prevailed in the face of difficult situations before. The biggest example that comes to mind was getting Afrezza approved following two complete response letters in 2010 and 2011 – as we titled the approval piece, “a victory for indefatigable Al Mann.” That said, a dropped Big Pharma partnership, a slow launch ramp, and commercializing a drug alone are very significant challenges to overcome. 

• Mr. Pfeffer suggested new CEO Duane DeSisto will champion a “new blueprint for success.” But is he up to the challenge following his hasty and controversial departure from Insulet? Mr. DeSisto’s appointment was announced on December 24, and his first day on the job was January 5 (today). It was unfortunate he was not on today’s call, though given how new he is to MannKind – and how unscripted he was on many Insulet calls – this was not too big of a surprise. We’ll hear him for the first time as MannKind CEO next week at JPM. The board obviously made a fast choice in hiring Mr. DeSisto (following the resignation of CEO Hakan Edstrom on November 19), and the fact that Mr. DeSisto was available and has the diabetes experience he does likely checked many boxes. Mr. DeSisto brings more than a decade of diabetes experience as Insulet’s CEO, including launching a very successful first-to-market, first generation patch pump in 2005 and bringing profitability to an expensive business. That said, Mr. DeSisto is a very bold choice for MannKind, as he unexpectedly retired from Insulet in 2014, and following the appointment of current CEO Patrick Sullivan, was associated with confusing sales and growth numbers for Insulet’s OmniPod business. MannKind certainly needed, on Hakan Edstrom’s departure, an experienced leader up to the major challenges of marketing Afrezza. Can Mr. DeSisto do it?

3. MannKind’s independent research has suggested that different sales efforts and a new pricing strategy will be required to increase adoption of Afrezza. Management only talked vaguely about “redefining pricing and contracting tactics” to improve reimbursement and patient access; we assume this means a lower price, or at minimum, getting Afrezza reimbursement to the point where prior authorizations won’t be required. Management said future marketing plans must center on “educating patients and doctors about Afrezza's compelling value proposition and how to obtain maximum benefit from the product.” No specifics were provided, though marketing and education were certainly hampered by a label that didn’t allow some of the most compelling benefits to be shared (e.g., more rapid-acting, less hypoglycemia).

• We always thought “Surprise, It’s Inhaled Insulin” was not a good marketing message to run with – it brings the baggage of Exubera and brings to mind immediate concerns of lung delivery. Given the label handicaps, many believe (including us) that an “Insulin – no needles!” message would have been better, though presumably FDA would not allow that. Perhaps marketing could be improved with at least a PK/PD study (and label update) demonstrating an ultra rapid-acting profile.
• Management still has “tremendous confidence” in Afrezza based on the “overwhelmingly positive communications” from users in social media. Patients’ real world experience, said Mr. Pfeffer, “is everything we hoped it would be.” This is a challenge facing this insulin we have long acknowledged – while the clinical trials and label are not highly compelling, the real-world experience is often far better. Unfortunately, that may not sway prescribing doctors or payers quickly enough. Can word of mouth and patient demand carry a drug in this environment? See the dQ&A data below for some early (small n) real-world perspective on Afrezza.

4. MannKind expects to finish 2015 with ~$59-$60 million in cash, expected to last into 2H16 (based on historical burn rates) and potentially further. Is it enough to save Afrezza, particularly given MannKind’s $185 million in debt? Management is taking steps to extend the cash runway, though no specifics were offered. Current cash of ~$59-60 million is notably up from cash of $33 million as of September 30, presumably because MannKind listed on the Tel Aviv stock exchange in a confusing financial transaction. Still, the company is going to need a lot of capital to commercialize this drug on its own (we assume ~$100 million), and MannKind does have significant outstanding debt of $185 million that will mature between 2017 and 2024. Some analysts believe the company’s only option is bankruptcy. MannKind’s stock declined ~50% today to ~$0.75 per share (an all-time low), and the market cap is at just over $600 million.

• On the bright side (if there is one...), the partnership termination does not create any new financial obligations for MannKind (e.g., no requirement to repay Sanofi the $150 million upfront payment or the $75 million in manufacturing/development milestones). MannKind has access to the $175 million Sanofi loan facility until Afrezza rights transfer over the next 90-180 days. The Sanofi loan facility does not mature until August 2024 (as of 3Q15, $44 million had been used), and MannKind still has $30 million available under the existing borrowing arrangement with the Mann Group. Still, it’s hard to believe these cash resources will be enough.

5. Sanofi’s rights to Afrezza are now non-exclusive, allowing MannKind to explore alternative Afrezza distribution arrangements or other licensing arrangements, both domestically and internationally. While such a partnership – or even an acquisition – could save the drug or company, it’s challenging to imagine any established player with the necessary resources would be brave enough to take on this challenge. While Sanofi clearly could have improved the launch execution, the terminated partnership makes another pharma deal sound like a long shot at this stage.

• Consistent with prior calls, MannKind is working on “several” potential out-licensing transactions for additional products that leverage the Technosphere inhaled drug delivery platform. As of the 3Q15 call, a partnership agreement was optimistically expected to be announced before the end of 2015. The 3Q15 call suggested a “dozen” candidates were in the pipeline, though all were early stage (in the formulation stage and “months away” from entering the clinic). We wonder if any of these non-diabetes partnerships or asset sales would be lucrative enough to buy MannKind more time to scale Afrezza.

Appendix 1: Dr. Irl Hirsch’s Clinical Experience Prescribing Afrezza

• We spoke to Dr. Irl Hirsch in December about Afrezza, and he echoed the drug’s reimbursement challenges and prescribing hassles: “In my clinic since Afrezza was launched, out of ten prescribing clinicians (eight MDs and two ARNPs), we've had three patients try to get the drug, one flunked their PFTs, two were denied by insurance, and here we are at the end of 2015 and not a single patient of our over 3,000 are inhaling their insulin. In general, most physicians who write for a lot of insulin, including endocrinologists, are beaten up from all of the hassles, prior authorizations, patient complaints, etc. for the insulins we use now. And this has nothing to do with the cancer concerns which are a huge issue for many. Last year for the first three weeks in January we averaged 35 scripts per day we needed to send in due to changes in insurance coverage. And that was just for insulin. We anticipate it will be worse this year as this is a part of the diabetes business few think about, but it could at some point bury us. In reality, doctors can’t pick ANY drug, let alone patients picking them.”

Appendix 2: The Real-world Experience of Afrezza users in the dQ&A Patient Panel

• dQ&A, the diabetes research company, currently has a small sample of Afrezza patients in its panel and is busy recruiting more. The data they have already collected provides some early clues about the patient experience (60% of these patients have been on Afrezza for three months or more):
  
  • 42% are 'highly satisfied' with Afrezza (notably, this is comparable to the overall satisfaction score for Novolog at 45%);
  • 58% are highly satisfied with how quickly Afrezza works;
  • 68% are highly satisfied with how much hypoglycemia it causes and how easy it is to take; and
  • A high percentage have fewer concerns now about hypoglycemia and weight gain, and Afrezza got very favorable ratings on overall convenience.
  • Notably, just over half of users have seen an A1c improvement already.
  • As for areas in which patients would like to see improvements, dQ&A has very useful data on the percentage of patients who are satisfied with consistency, with how readily obtainable it is, and how much it costs. Please contact Richard.Wood@d-qa.com for more on these questions as well as patient thoughts on lung function and side effects.

-- by Adam Brown and Kelly Close