AFREZZA™ is a novel, ultra rapid acting mealtime insulin therapy by Mannkind Corporation. Visit Mannkind's official website www.mannkindcorp.com for more information;
A fantastic & refreshing article on Diabetes, injections and Afrezza by Greg Johnstone
It is time to revisit the valuation of Afrezza (not the Mannkind corp). A lot has changed since I wrote the first post on valuation some 2 CRL’s ago. The share count has ballooned from 112MM to ~400MM. This valuation is going to use the Price to Sales ratio. The P/S ratio varies quite a bit. A higher ratio is given to a company that is growing faster than an average biotech firm.
I’m assuming a P/S of 10. This is an arbitrary number and there is nothing scientific about it. I’m assuming a range of peak sales scenario’s: from 500MM to 4,000MM. The resulting valuation is discounted in today’s dollars at 15% rate.
Take a look at peak sales of 2,000MM in year 5 in the model below. By discounting at 15%, the value of Afrezza today would be $9,943MM.
Given the valuation, how does it translate as stock price? As Mannkind doesn’t have the sales force to commercialize Afrezza, we can safely assume that a partner is needed. Given the fact that Mannkind owns the patent, process, manufacturing and raw materials, the partnership would be limited to selling the product.
I’m showing two scenarios. In scenario 1, 30% of the value of Afrezza is lost to dilutions and partners. The current diluted share count is assumed to be 400MM
Scenario 1: If you take the peak sales of 2000MM in Year 5, the valuation of Afrezza to current stockholders today at 15% discounted rate is $17.40/share.
Scenario 2: 40% of the value of Afrezza is lost to dilutions and partners. The current diluted share count is assumed to be 400MM.
You can see that the valuation of $17.40/share drops to $14.92/share if dilution due to partnership/stock issuance goes to 40%.
Of course, one should take any valuation of a biotech firm with a bag of salt. Greed and fear knows no bounds for a biotech investor. The P/S of 10 is conservative, but 15% discounting is aggressive. This model gives a framework to understand what is priced into the stock in terms of peak sales and years to peak sales.
I’ve uploaded the model to scribd, feel free to download and play with the scenarios http://www.scribd.com/doc/213991618/Mannkind-Valuation
Dated:September 24, 2013
UCSB Engineering researchers, in collaboration with the Sansum Diabetes Research Institute and Juvenile Diabetes Research Foundation, complete first clinical trial of ultra-rapid-acting inhaled insulin
Here is the link to the WSJ article that talks about delivering protein-based drugs directly to intestine.
If you combine this with Afrezza for prandial and Google’s new contact lens for monitoring blood glucose level, you are in diabetes nirvana.
I was intrigued by the superiority of Afrezza (study 171 results) in reducing Fasting blood glucose levels. Link
There was a significant difference in fasting blood glucose (FBG) levels in the AFREZZA-Gen2 group compared to the insulin aspart group. In the AFREZZA-Gen2 group, mean FBG levels decreased by 25.3 mg/dL by the end of the treatment period whereas the insulin aspart group experienced an increase of 10.2 mg/dL in FBG levels over the same period (p=0.0027). After the four-week follow-up period, during which all patients received insulin aspart and a basal insulin, there was no longer any difference in FBG levels between the treatment groups, demonstrating that this effect on FBG levels was attributable to AFREZZA therapy.
Al Mann provided an explanation in the Q1-2013 earnings call saying "Additionally, in our earlier studies, we have seen reductions in fasting glucose levels, which key opinion leaders say is because AFREZZA lowers insulin resistance."
The article titled “Glucose Toxicity” in Diabetes Care 13:610-30 by Luciano Rossetti, MD, Andrea Giaccari, MD
Ralph A. DeFronzo, MD provides a great explanation.
The abstract is given below.
Glucose toxicity is a well-established entity that has
been shown in animal models of diabetes to contribute
to development of insulin resistance and impaired
insulin secretion. In type II (non-insulin-dependent)
diabetes in humans, a considerable body of evidence
has accumulated indicating that a chronic physiological
increment in the plasma glucose concentration leads to
progressive impairment in insulin secretion and may
contribute to insulin resistance as well. The precise
biochemical mechanism(s) responsible for the
hyperglycemia-induced defect in insulin secretion
remains to be defined but may be related to a defect in
phosphoinositide metabolism. In animal models of
diabetes, development of insulin resistance is related to
down regulation of the glucose-transport system, and a
similar phenomenon is also likely to occur in humans.
In addition, hyperglycemia in humans may lead to a
defect in glycogen synthesis. In this respect, humans
may be different from rats. In type I (insulin-dependent)
diabetic patients who are poorly controlled, insulin
resistance is a characteristic feature and can be
ameliorated by tight glycemic control, suggesting that
hyperglycemia is responsible for the insulin resistance.
Evidence also has accumulated to implicate glucose
toxicity in the functional impairment in insulin secretion
that occurs during the initial presentation of patients
with type I diabetes, and this may explain the
honeymoon period so commonly observed after the
institution of insulin therapy.
Afrezza fits the bill perfectly by providing better PPG control. This in turn reduces glucose toxicity and insulin resistance. The increased glucose uptake reduces the fasting glucose levels.
This article “Role of Reduced Suppression of Glucose Production and Diminished Early Insulin Release in Impaired Glucose Tolerance” also makes similar conclusion.
In conclusion, in persons with impaired glucose tolerance the excessive increase in plasma glucose concentrations after the ingestion of glucose results primarily from excessive entry of glucose into the circulation. This is due to the failure of the liver to reduce its glucose output appropriately and can largely be accounted for by diminished early insulin release and diminished suppression of glucagon secretion. We therefore suggest that insulin resistance in people with more severe glucose intolerance7 , 9 , 10 , 51 may develop as a consequence of more prolonged hyperglycemia (glucose toxicity)5 6 7 , 52 and compensatory hyperinsulinemia.53 In susceptible people, a combination of these factors may ultimately cause further deterioration of beta-cell function and progression to NIDDM.
An interesting article that is very relevant to the Afrezza approval
Are the FDA’s Endocrinologic and Metabolic Drugs Advisory
Committee (EMDAC) and the Division of Metabolism and Endocrinology
Products (DMEP) in sync?
The article states that EMDAC & DMEP agree only 60% of the time. The article makes an interesting observation that “EMDAC members will spend considerably less time evaluating the available data in comparison with DMEP staff.”
Also if EMDAC was overwhelmingly positive, the FDA followed suit and approved the drug.