Pulling the wrong trigger

Pulling the wrong trigger

In what smacks as a desperate act by a desperate company Sanofi (NYSE:SNY) announced this morning they have entered into a global licensing agreement with MannKind (NASDAQ:MNKD). According to a joint press release;

“Under the collaboration and license agreement, Sanofi will be responsible for global commercial, regulatory and development activities. Under a separate supply agreement, MannKind will manufacture Afrezza at its manufacturing facility in Danbury, Connecticut. In addition, the companies are planning to collaborate to expand manufacturing capacity to meet global demand as necessary.

Under the terms of the agreement, MannKind Corporation will receive an upfront payment of $150 million and potential milestone payments of up to $775 million. The milestone payments are dependent upon specific regulatory and development targets as well as sales thresholds. Sanofi and MannKind will share profits and losses on a global basis, with Sanofi retaining 65% and MannKind receiving 35%.Sanofi has agreed to advance to MannKind its share of the collaboration’s expenses up to a limit of $175 million.”

Still this is, excuse the play on words here, a sweet deal for MannKind and its stakeholders as shares will definitely get a nice boost today. The company gets $325 million in cash which it desperately needs and has the potential to reap almost a billion in milestone payments. The fact is without this deal there were serious questions whether MannKind could commercialize Afrezza.

To Diabetic Investor this deal proves that Al Mann, MannKind’s founder and biggest investor, hasn’t lost his touch for selling ice cubes to Eskimos. Mann knew that Sanofi was desperate to do something, anything that would make the company look relevant in diabetes. He knew that Toujeo® the insulin that’s supposed to replace Lantus wouldn’t come close to replacing the revenue that will be lost when a generic hits the market. He knew that Apidra has been one huge failure and that other Lantus, Sanofi has the reverse Midas touch when it comes to diabetes.

As we have noted in previous posts if Sanofi truly believes that Afrezza is the answer to their problems then there in worse shape than we thought. Diabetic Investor has long maintained that Afrezza is not a bad drug but it isn’t the blockbuster product many believe it is. Afrezza is nothing more than a niche product that will reach peak sales in the hundreds of millions at best.  The reality is Afrezza is also guilty of very poor timing as payors are in no mode to provide premium reimbursement for this unproven new insulin.

Quite frankly Diabetic Investor could care less how the profits are divided as given the high cost to make Afrezza and the huge marketing expenses coming up, we doubt there will be any profits to split. This is especially true as Sanofi is responsible for the post approval studies which came with the Afrezza approval. Studies which will like add another $600 million to the cost of this deal.

Honestly if Sanofi truly believes they can use their existing sales force and marketing infrastructure to sell Afrezza we want whatever they are inhaling because it sure isn’t Afrezza. Just because Afrezza is inhaled rather injected does not make it an easy sale, quite the contrary. Unlike conventional short-acting insulin which is delivered via syringe or pen, dosing Afrezza properly isn’t easy. Yes the Afrezza delivery device is a huge improvement over the Exubera bong, but it’s a new delivery system nonetheless which requires greater patient training.

The real problem selling Afrezza will likely come from payors.  Given that cost containment is the order of the day Diabetic Investor can’t imagine a scenario where payors put Afrezza on par with the current crop of short-acting insulin’s which just happen to be cheaper than Afrezza. Yes Afrezza will get coverage but will carry a higher out of pocket expense for the patient. The question is will patients pay this difference just so they don’t have to inject? Diabetic Investor thinks some will but the vast majority excuse the play on words here, will stick with what they have already.  Perhaps patients new to insulin therapy will pay the difference it all depends on how big the difference in cost is.

We further doubt that Afrezza will expand the insulin market or make physicians initiate insulin therapy sooner just because Afrezza is inhaled rather than injected. The fact is insulin use has been increasing over the years as physicians have become more aggressive treating diabetes.  It should also be noted that insulin delivery systems have also improved over the years. While injecting insulin isn’t necessarily pleasant it isn’t the major painful experience many seem to believe it is.

The reason insulin therapy isn’t used more has little to do with the fact, until Afrezza came along, insulin had to be injected. The fact is Type 2 patients see insulin therapy as an admission of failure, not as an improvement in diabetes management. To these people, the target market for Afrezza, it doesn’t matter how the insulin is delivered.

Looked at realistically MannKind was the real winner here, while Sanofi is grasping at straws. It will take years, if ever, for Afrezza to achieve any significant sales results. Sanofi is also on the hook for millions in additional costs.

The sad reality here is that Sanofi, a company who once was very public about how they would supplant Novo Nordisk (NYSE:NVO) as the most dominate global diabetes company, has become desperate.  What makes this truly pathetic is Sanofi isn’t exactly known for being able to pull the trigger on any deal. As we have noted before this is a company who analyzes a deal, then analyzes some more and then after all this analysis they analyze even more. Perhaps the company felt it necessary to prove their manhood, which in our humble opinion is never a good sign. Quite frankly this is one time Sanofi should have walked away. As the old poker saying goes; “You can’t lose chips you don’t put in the pot.”

Yet the company desperate to do something in diabetes goes out and pulls the trigger on the wrong deal. One has to wonder if this stray bullet will end up costing Sanofi the $4 billion it cost Pfizer (NYSE:PFE) when they finally gave up on Exubera. Yes Afrezza is much better than Exubera but that fact alone does not mean it will do any better than Exubera.

Perhaps the most damning aspect of this deal is Sanofi’s history in diabetes, a history which is full of missed opportunities, poor execution and up until this very bad deal, an inability to make a decision. Just how management sees this as working out in the long run proves to Diabetic Investor the company has become desperate.  One has to wonder when this is all said and done whether someone will pull the trigger on the diabetes management team who made this deal.