This is the second part in this series. The first part covered the barriers to entry.
Force 2: Supplier Power – Low
The basic ingredients to the Afrezza (drug/inhaler device combo) are the FDKP (fumaryl diketopiperazine), insulin & plastic. The drug is basically FDKP+Monomeric Insulin. All these three are commodities. The inhaler itself has no moving parts and is breath activated. Mannkind owns the patents for FDKP, which is a proprietary compound. Mannkind has secured cheap insulin from Pfizer. In many of the Mannkind conference calls, you can hear the management saying that they have enough insulin for $10 billion dollar worth of sales and have an option to buy some more insulin for another $8 billion dollar of sales. The insulin that is used as an ingredient is recombinant human insulin.
Why does it matter if the ingredients are commodities? A simple answer is, given a fixed quality, the manufacturers of commodity products compete purely on the price. When they do that, the returns on their investment gets closer to their cost of capital. Given the fact that many manufacturers produce these raw materials, the prices of raw materials remain low.
Dreamboat will be a use and throw inhaler. Mannkind will be establishing a long term relationship with the patients to provide supplies. This forward integration will give Mannkind good barriers to entry. One good example that I can think of is Polymedica. I owned this publicly traded company till it got bought out. They own the Liberty healthcare that provides diabetic supplies to the patients. All the patient has to do is to call them, Liberty takes care of billing medicare and handles the patients needs. A long term relationship with the patient helps the company fine tune their product.
Force 3: Degree of Rivalry – Low
The existing market for prandial insulin is essentially a duopoly (humalog & novolog). In many ways, Afrezza doesn’t compete with other rapid acting analogs due to its unique kinetics. The existing RAA’s took a while to dislodge the regular human insulin given during meal time. Now the advantages of existing RAA over RHI are very apparent. Afrezza is another technological leap from existing RAA’s. If Afrezza is approved, there will not be another product with such superior kinetics (that happens to be inhaled). The users of Afrezza will quickly learn the advantages (easier to take correctional doses, no need for accurate titration, virtually no hypos, less weight gain etc). The cost of Afrezza is matched with RAA.
Force 4: Buyer power – High
In most countries where the medical care is socialized, the buyer is a government organization that procures the product. Even in US, medicare has a lot of clout. The buyer power is very high and it works against the manufacturer.
The market grows and shrinks according to Medicare and insurance reimbursement policies, but policies to date have been favorable. To the extent the existing RAA’s are viewed as alternatives, the buying power increases even more.
The product differentiation reduces the buyer power. Mannkind is doing additional studies to show the superiority of Afrezza. If their efforts are successful, then the incremental costs the buyer incurs will be more than compensated by the benefits (reduction in long term complications, et al).
Afrezza also has some distinct advantages like better compliancy that reduces the buyer power.
Force 5: Threat of substitutes – Low
Unlike a pill, a device involves user training. One of the reasons for Exubera’s failure (Pfizer’s inhaled insulin) was the amount of time that the PCP/endocrinologist had to spend training the patient on how to use the Exubera inhaler. Such training increases the switching costs. Mannkind management seems to have learnt some important lessons from the Exubera debacle.
a) The dreamboat inhaler is made very user friendly, has no moving parts. There is very little training needed.
b) The inhaler itself is use and throw, which obviates the need for cleaning.
The challenges that Mannkind faces are in the following areas
1) Patient education - explaining that there is no lung damage (given the trial results)
2) Patient education - explaining that there is no need for complex meal titration. Many diabetes forum members cite this as an issue for Afrezza.
This concludes the Porter’s analysis.
Drivers of the market size for Afrezza.
(borrowed from an MIT article for insulin pumps)