When Two World’s Collide

When Two World’s Collide

According to a report from the Pharmaceutical Research and Manufacturers of America (PhRMA), US biopharmaceutical research companies are currently developing 180 new medicines for diabetes. This really isn’t shocking given the epidemic growth rate of the disease as this same report notes that today one in 10 US adults has diabetes and as many as one in three could be facing the disease by 2050. Yet lost in these numbers is just how difficult it is not just to get these drugs from development stage to market but once on the market how difficult it is get these drugs to the patients who need them.

A perfect example is AFREZZA from MannKind (NASDAQ:MNKD) which is currently before the FDA. Many seem to believe that Diabetic Investor does not believe in the drug or that we don’t see a place for the drug in the diabetes paradigm. Nothing could be further from the truth based on all available data AFREZZA appears to be a good drug. No our problems are with MannKind management and how they have consistently over-promised and under-delivered.

But let’s take a look at AFREZZA and the world it will enter should it receive FDA approval. As we eluded to in yesterday’s post the drug will face several structural hurdles that have nothing at all to do with whether the drug works or not. It’s important to note that 80% of diabetes patients are treated by a primary care physician (PCP) and not an endocrinologist. Reaching the PCP is a herculean task made even more difficult by the fact that many PCP’s are limiting contact with sales reps. Without a partner with very deep pockets MannKind simply cannot afford to build a sales team large enough for AFREZZA to be commercially successful. Keep in mind that according to industry executives it cost nearly $250,000 per year to keep a rep in the field.

Yet even with a well-heeled partner who comes with a built in sales organization this is no guarantee of success. Here’s why, even if the physician and patient want to use the drug the patients insurance may not pay for it; or should they pay for it the patients out of pocket expense is substantially higher than existing treatment options. Now there may be a small percentage of patients who will pay this higher price but the majority will not. Diabetic Investor has talked with several leading PCP’s and notable endocrinologists who consistently state that while they would like to use some of the newer treatment options available their patients simply cannot afford them or they aren’t covered by the patients insurance plan. A common compliant among these physicians is that the insurance companies are basically dictating how a patient should be treated, rather than having the ability to prescribe the proper regimen they are handcuffed by the insurers quest to control costs.

This is one reason we found it remarkable that MannKind would state that they believe that if approved AFREZZA would command a premium price to existing treatments. This may have been true in the past but it is not true today. Like it or not insurance companies aren’t interested in the best treatment options they are interested in cost containment and making a profit. Yes everyone talks about better outcomes but truth be told when it comes to patients with diabetes insurers want to limit their exposure until the patient moves to Medicare.  Insurers are also aware that if taken as prescribed the existing treatment options available work just fine.  Even if AFREZZA is a better short-acting insulin the fact is there is nothing really wrong with the existing injectable short-acting insulin’s. As we have noted before in this new environment insurers are not going to pay a premium just because the patient will no longer have to inject their insulin.

This is one of the reasons Lilly (NYSE:LLY) has changed their diabetes strategy developing a comprehensive portfolio me-too copycat drugs; drugs which have a clear regulatory path and board expectance in the medical community. As we have noted on numerous occasions while there are some very minor differences between the various short-acting insulin’s, DPP4’s or GLP-1”s all these drugs do basically the same thing the same way. Given the demand for lower overall costs Lilly’s strategy makes perfect sense as they can offer insurers a complete portfolio of diabetes drug at a lower overall price point. If anyone doubts this consider how insurers have played Lilly against Novo Nordisk (NYSE:NVO) in the short-acting insulin space, they know that it really doesn’t matter which short-acting insulin a patient uses and that preferred formulary placement determines valuable market share.

This is another problem that AFREZZA will face when it comes to market, the existing players will use their scale to fight back. The competition for the diabetes patient is fierce with each share point making a difference, there is no way Lilly and Novo won’t use whatever means possible to protect their turf. Nor do we believe that it’s likely for either company to buy MannKind as quite frankly they don’t see inhaled insulin as a competitive advantage, at least not in this environment.

The harsh reality is that when it comes to new diabetes treatments there are clear and distinct world’s which often times are on a collision course. There is the science side which concentrates on whether a drug is safe and efficacious, and then there is business side which concentrates on making the drug commercially successful. Each side has its share of structural hurdles. For a drug like AFREZZA which again based on all available data appears to be safe and efficacious, it has cleared the science hurdle. Yet when it comes to being a commercial success Diabetic Investor is skeptical it can clear the business hurdle, the hurdles are just too high.