Memorandum

MannKind 1Q17 – Afrezza sales fall 8% sequentially to $1.2 million; Pediatric study to start in June; Dose optimization study to start in July/August – May 12, 2017

Executive Highlights

  • Afrezza sales in 1Q17 declined 8% sequentially to $1.2 million, from a base of $1.3 million in 4Q16. This is only the second full quarter that Afrezza has been on the market since relaunch, and we’re somewhat disappointed in this sluggish performance.
  • Management discussed a robust clinical trial program for Afrezza, with a pediatric study to start ~June 15. The ADD-1 dose optimization study is expected to start in July or August 2017, with a possible completion date in 4Q17. We’re also excited about the investigator-initiated STAT trial which will compare time-in-range between Afrezza and Novo Nordisk’s NovoRapid (insulin aspart), and about a long-term safety study which will address lingering concerns surrounding Afrezza and lung cancer risk.
  • MannKind had $48 million in cash and cash equivalents remaining as of March 31, 2017.

MannKind provided its 1Q17 update in a call earlier this week led by CEO Mr. Matthew Pfeffer. Management maintained an optimistic outlook for inhaled insulin Afrezza, despite the company’s tenuous financial position and despite sluggish product sales to-date. That said, fine-tuned marketing strategies, improved reimbursement prospects, upcoming clinical studies, and a possible label change for Afrezza in 3Q17 could all boost the insulin franchise going forward. We’ll be watching closely to see how each of these moves impact Afrezza prescriptions and sales. In our view, this product expands patient choice for mealtime insulin and offers a faster-acting bolusing option that reduces risk for hypoglycemia – we’d love to see greater uptake and commercial success. Although MannKind likely faces a long road ahead to establish Afrezza within the marketplace for prandial insulin, we continue to believe there are far more people who could benefit from prandial insulin and we see this as a positive option, particularly given many HCP’s reluctance.

See below for our top five highlights on MannKind’s 1Q17, followed by relevant Q&A.

Top Five Highlights                                                

1. Afrezza sales totaled $1.2 million in 1Q17, down 8% sequentially from $1.3 million in 4Q16.

2. Management provided more detail on the pending FDA label change for Afrezza. The agency’s decision is expected by September 30. If approved, the new label will offer more clarity on recommended starting dose and dose adjustments, and will reflect the latest PK/PD data showing Afrezza’s much faster onset/offset vs. existing rapid-acting insulin analogs. Management emphasized that Afrezza’s PK/PD profile warrants an ultra-rapid-acting designation, which would move MannKind’s product into a new class of insulins.

3. Management outlined concrete timing for four clinical trials, each of which plays into the overarching commercial strategy to promote Afrezza’s faster-acting nature and lung-related safety: (i) a pediatric study, (ii) a long-term safety study, (iii) the ADD-1 study for dose optimization, and (iv) the STAT study to show how Afrezza increases time-in-range (lowering hyperglycemia as well as hypoglycemia).

4. In an overview of the commercial strategy surrounding Afrezza, management highlighted the just-announced collaboration with One Drop, MannKind’s expanded sales force, improved reimbursement prospects, social media activity, and the reality TV show slated to air this summer.

5. As of March 31, the company had $48 million in cash remaining. This is a notable increase from $23 million remaining at the end of 2016 and $28 million remaining at the end of 1Q16, which management highlighted as a sign of MannKind’s steadily improving financial position. That said, the company’s immediate goal is simply to extend its financial runway as far as possible.

Top Five Highlights

1. Afrezza Sales Fall 8% to $1.2 Million in Second Full Quarter on the Market

Afrezza sales were down 8% sequentially, totaling $1.2 million in 1Q17 vs. $1.3 million in 4Q16. MannKind relaunched Afrezza in late July 2016 (after termination of its licensing partnership with Sanofi), meaning the therapy was only on the market for part of 3Q16, when it posted $600,000 in sales. This revenue rose substantially to $1.3 million for Afrezza’s first full quarter on the market, and we’re disappointed that Afrezza did not experience a second consecutive quarter of sequential growth in 1Q17 (the product will have to show stronger growth margins in future quarters to inspire greater confidence). Notably, MannKind recognizes revenue when a prescription is dispensed to the patient, rather than when it is shipped to a wholesaler. The company thus has an additional $1.8 million of deferred revenue for 1Q17, reflecting product that has been shipped to wholesalers but that hasn’t yet been dispensed or recorded as official revenue. MannKind also reported $1.7 million in deferred revenue for 4Q16, however, confirming little-to-no sequential growth for the Afrezza franchise in 1Q17.

  • There are also notable challenges confronting the rapid-acting insulin market as a whole. Pooled sales from all major rapid-acting insulin products fell 5% YOY in 2016 to $6 billion, which we attribute to the tough pricing environment for insulin (among other diabetes drugs) in the US and to intense competition from GLP-1 agonists, SGLT-2 inhibitors, and basal insulin/GLP-1 agonist combinations (all of which address postprandial excursions and thereby reduce the need for bolus insulin doses). Quarterly revenue from Afrezza has been too small so far to meaningfully influence our pooled class analysis, but we imagine the drug is facing some of these same commercial challenges that affect Novo Nordisk’s NovoRapid, Lilly’s Humalog, and Sanofi’s Apidra. Unfortunately, this only adds another obstacle that Afrezza must overcome to gain commercial traction, although MannKind’s product may benefit from its faster onset/ offset compared to existing mealtime insulins (more on this below).

2. Regulatory Updates: Details on FDA Filing and Planned Afrezza Filings Ex-US

Management provided more detail on the pending FDA label change for Afrezza. The agency’s decision is expected by September 30. If approved, the new label will offer more clarity on recommended starting dose and dose adjustments, and will reflect the latest PK/PD data showing Afrezza’s much faster onset/offset vs. existing rapid-acting insulin analogs. Each of these changes comes with its own distinct advantages. Retaining patients is critical to growing prescription volume, and management explained how improper titration directly interferes with this goal by causing patient frustration. A product label that more clearly recommends starting dose and dose adjustments will enhance a patient’s chances for early success on Afrezza, and could thus improve retention numbers. On the second change, management emphasized that Afrezza’s PK/PD profile warrants an ultra-rapid-acting designation, which would move MannKind’s product into a new class of insulins. This would be a tremendous win (and our fingers are crossed for an FDA approval). An ultra-rapid-acting label claim would highlight some of Afrezza’s most important benefits in plain view for busy providers/patients – with faster onset (as quick as five minutes) and faster offset (~three hours) vs. existing rapid-acting analogs, Afrezza reduces risk of hypoglycemia and can make for a better patient experience. This designation would allow MannKind to promote the ultra-rapid-acting nature of Afrezza even more explicitly, and could also sway more payers to reimburse the inhaled insulin because of the enormous health economic costs associated with hypoglycemia.

  • Management suggested that additional regulatory filings in ex-US jurisdictions are planned for the near-term future. This includes one filing in an unspecified Middle Eastern country, and according to management, MannKind is also engaged in late-stage negotiations with a number of other regulatory agencies around the globe.

3. Four Clinical Trial Updates

Management outlined concrete timing for four clinical trials, each of which plays into the overarching commercial strategy to promote Afrezza’s faster-acting nature and lung-related safety: (i) a pediatric study, (ii) a long-term safety study, (iii) the ADD-1 study for dose optimization, and (iv) the STAT study to show how Afrezza increases time-in-range (lowering hyperglycemia as well as hypoglycemia). Management presented each of these clinical projects as a careful, thoughtful investment that will showcase Afrezza’s “key differentiating attributes.”

  • (i) The pediatric study is expected to start ~June 15. This is delayed from previous timing, when MannKind planned to open enrollment in 1Q17, but management explained that the company will capitalize on summer months to recruit pediatric patients. JDRF is collaborating with MannKind on the trial protocol and other details. During MannKind’s 4Q16 update, management discussed the possibility of an expedited FDA review process for a pediatric indication – there was no mention of this on the 1Q17 call, but we’re hopeful for an expedited review – even an accelerated timeline to expand Afrezza to a pediatric population by a few months would be a great boost to the Afrezza franchise.
  • (ii) Management shared that the protocol for a long-term safety study of Afrezza has been finalized. The company is “aggressively managing costs” associated with the trial, while also driving the project forward to meet FDA timelines – conversations with the agency are ongoing. Management acknowledged that concerns over lung safety, and specifically lung cancer, are a major barrier to uptake for Afrezza, even though many of these worries are based in misinformation. We heard this concern firsthand from an endocrinologist at CDTM 2017 last month. Results from a long-term study insulin could provide some reassurance on this front, and we think it’s smart that MannKind is making a concerted effort to demonstrate with empirical data how the benefits to Afrezza outweigh the risks. We hope that MannKind has enough financial runway to successfully complete this very important and FDA-required study – a long-term outcomes study certainly would have been easier to conduct with Sanofi’s resources from a cash standpoint.
  • (iii) The ADD-1 trial for dose optimization is scheduled to start in July or August of this year, with a possible 4Q17 completion. Management suggested that the results would read out soon after that, most likely in early 2018. We certainly hope MannKind can meet this ambitious timeline. In the same vein as the label update with clear starting dose and dose adjustment recommendations, dose optimization findings could help enhance early success on Afrezza and might promote better patient retention.
  • (iv) STAT is an investigator-initiated trial that will compare time-in-range between Afrezza and Novo Nordisk’s NovoRapid (insulin aspart). The study will be conducted by highly-respected diabetes thought leaders, including Drs. Satish Garg, Bruce Bode, and Anne Peters. This underscores management’s argument that Afrezza has a lot of “top-tier” support from the diabetes community, with endorsements from leading thought leaders (Dr. Bode spoke to the advantages of Afrezza at ENDO 2016) and immense positive feedback from patients in-the-know. Management didn’t share specific timing for the STAT trial, but we’re incredibly eager to see this clinical project progress and to eventually see the data.

4. Buzzing Commercial Activity Leads to Management’s Optimistic Outlook for Afrezza

In an overview of the commercial strategy surrounding Afrezza, management highlighted the just-announced collaboration with One Drop, MannKind’s expanded sales force, improved reimbursement prospects, social media activity, and the reality TV show slated to air this summer. Management described One Drop as “an aligned partner who sees the complexity of diabetes care.” One Drop’s “fantastic” platform will be ideal to train patients on Afrezza use, help people titrate the drug precisely, and answer patient questions. Specific details on the partnership remain scarce, but MannKind is clearly excited, and so are we – we see an upside for both companies, plus we’re always glad to see more overlap between pharma and digital diabetes care. Management shared that 65% of prior authorizations for Afrezza are now granted through the MannKind Cares hub. Payer negotiations will continue throughout 2017. Controversy surrounding skyrocketing insulin prices has reached a boiling point in the US, and in this context, it’ll be particularly important for Afrezza to be backed by strong reimbursement that keeps out-of-pocket expenses low. Social media will be another near-term focus for the commercial team – management mentioned that Facebook is up and running, and remarked that Tumblr and Twitter will be the next priorities. Given that overwhelmingly positive patient feedback – particularly in the diabetes online community – is one of the selling points for Afrezza, we think a larger social media presence for the therapy could go a long way. And of course, we’re keenly interested in the MannKind-sponsored REVERSED series about living with diabetes, which will air this summer on the Discovery Life Channel.

5. Financial Position Improves, but Still Shaky

As of March 31, 2017, MannKind had $48 million in cash remaining. This is a notable increase from $23 million remaining at the end of 2016 and $28 million remaining at the end of 1Q16, which management highlighted as a sign of the company’s steadily improving financial position. Total net revenue in 1Q17 was $3 million, which includes $1.8 million from the sale of surplus bulk insulin to a third party and $1.2 million of recorded Afrezza revenue. MannKind additionally received $30.6 million from Sanofi in 1Q17 as part of the settlement of an insulin put option, and received $16.7 million from sale of property in Valencia, CA. Management mentioned that $30.1 million remains available for borrowing from The Mann Group. The overarching message from CEO Mr. Matthew Pfeffer was that MannKind is “improving its financial position on a daily basis,” with concerted efforts to reduce cash burn and expenses even with a fairly robust clinical trial program ongoing for Afrezza. That said, the company’s immediate goal is simply to extend its financial runway as far as possible.

Questions and Answers

Q: Can you comment on the recently-filed change of control agreements?

Mr. Pfeffer: These agreements are quite common for senior executives, within MannKind as well as our peer companies. I, and other tenured executives at MannKind, have had these in place for many years, and we simply extended them to newer members of the leadership team. These agreements will only be triggered if the company is both acquired, and the executive loses his/her job as a result. Nothing should be inferred from the existence of timing of this particular action.

Q: Would you consider a co-promotion arrangement for Afrezza in the future?

A: There’s a large type 2 diabetes market that sits within primary care. One of the barriers to Afrezza is payer coverage, and as we simplify that, it’ll make sense to target a primary care base. We’ll have to evaluate options over pursuing that population on our own, or pursuing it with a partner. It doesn’t always make sense to take on extra reps to call PCPs if there’s capacity that exists within the marketplace. But as of today, we continue to focus on near-term performance of Afrezza.

-- by Payal Marathe, Helen Gao, and Kelly Close