Dr. Paul Nunzio DeSantis

About the Author Dr. Paul Nunzio DeSantis

Earned a Doctorate in Pharmacy (Pharm.D.) in 2010 and Pre-Pharmacy/B.S. in Molecular Biology in 2006. Over six years of direct experience in translational research in oncology investigating the molecular/cellular mechanisms of carcinogenesis focused on biomarker identification and validation working in a multi-disciplinary matrix environment across academia, contract research organizations and industry.

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Insuline: Significant Upside, Alternative Diabetes Play With A Population Based Cost-Reduction Platform In Diabetes


Big Picture Thesis:

Since Afrezza’s approval MannKind’s (NASDAQ:MNKD) shares have declined more than 50% as enthusiasm for their partnership with Sanofi-Aventis (NYSE:SNY) has tempered enthusiasm for Afrezza’s commercial prospects on concerns that SNY will not aggressively co-market a competing product, and low visibility on physicians’ willingness to prescribe and try Afrezza before long term outcomes trials are completed. As MNKD shares are likely to remain static over the coming years, we surveyed the diabetes space for alternative pure play investments with better risk/reward setups that have multiple catalysts over the next couple of years while Afrezza’s outcomes study is completed as an alternative investment. Importantly, we take into consideration the epidemiology trends, and worrisome burden of costs in the diabetes population searching for a platform that is 1) clinical stage, 2) improves outcomes for patients, 3) reduces immediate and long-term costs for payors, and 4) is easy for both physicians and patients to integrate into their current insulin regimens (notably different than Afrezza). The objective of this report is to bring awareness to an important theme in healthcare going forward, population based tools that deliver cost-reductions, and to establish the potential fair value of a novel platform.

According to MedScape, patients with Type II Diabetes Mellitus (T2DM) with HbA1c levels ≥7.5% have a 2.5- to 5-fold relative risk of developing microvascular complications such as retinopathy, nephropathy, and neuropathy that have all been previously shown to correlate with the severity of hyperglycemia. As HbA1c increases over the recommended values, for every 1% increase in HbA1c, the risk of the progression of complications is 50% greater. We highlight for investors that these risks of complications include Diabetic Macular Edema (DME), the leading cause of blindness and according to Goldman Sachs there are 622,000 injections with costly anti-VEGF drugs (Avastin, Lucentis, and soon Eylea) representing a cost of ~$1B. DME is the best example of the “collateral costs” of poor glycemic control in diabetics. Thus, when examining the cost effectiveness in diabetes one must include the economic gains from better glycemic control and reduce microvascular disease progression among others.

Our search took us offshore to Insuline Medical (INSL) an Israel-based biopharmaceutical company that has been working toward developing a new approach to insulin therapy since 2007, and has developed two medical devices on the market in Germany, Canada, and Israel currently. InsuPad(designed for Insulin injection and Insulin Pens) and InsuPatch (designed for Insulin pumps) are considered “Skin Condition Stabilization” technologies that warm the skin surface of the insulin injection site which leads to a local increase of cutaneous blood flow enabling a more physiological-like insulin delivery from the subcutaneous site. Open label studies have demonstrated that InsuPad reduces required prandial insulin dose by 28%, achieves HbA1c goals similar to the Standard of Care and reduces hypoglycemia event rates by 46%.

Insuline received the CE Mark in the EU and demonstrated significant clinical benefits for patients, physicians and sick-funds in Germany, Canada, and Israel. Insuline has initiated commercialization in Germany in collaboration with J&J’s (NYSE:JNJ) LifeScan and at least 2,500 patients began using the InsuPad within the first 6 weeks of marketing in Germany. Insuline anticipates full reimbursement by 3Q2015. According to management,Insuline recently received breakthrough therapy designation from the FDA under a 510(K) de-novo submission and based upon commentary from management, investors can expect a U.S. launch in 2-3 years (3Q2016/3Q2017). We envisage a co-listing in the U.S. in 2015, and view it as a unique secular play on diabetes that has been dominated by large Pharma with little value unlocking potential for investors to capture. Insuline represents an investment vehicle to capture this significant value unlocking potential in diabetes. Insuline Medical currently trades at approximately 95 ILS per share, or $0.254 per share, with a market capitalization of only $30M USD and no debt. Our excessively risk-adjusted DCF model (see subsequent sections) yields a 627 ILS price target vs. 95 ILS, ~6x their current levels.

Looking out into the future, we see Insuline’s InsuPad as a unique, strategic asset that will generate long-term sustainable cash flows with significantly less risk than what is normally observed with new drug and medical device development. Insuline has a broad patent estate across geographies, with patents granted in Europe, USA, Australia, Russia, Israel, China, and Japan. InsuPad® has Medical Devices Directive (CE Mark) approval for the European Union, but we do caution that the U.S. regulatory process for devices under 510 de-novo application is more rigorous than the EU. We draw attention to Insuline now as it embodies several important secular themes and wanted to highlight for investors that it is important to grasp both the medical and economic utility InsuPad could fulfill for payors. We believe Insuline’s platform represents a population based cost-reduction tool for payors that improves outcomes, reduces total drug spend, and reduces long term costs for payors.

In our view, Insuline’s platform plays into at least five key secular themes in healthcare:

1. Drug therapy optimization,

  1. Population based approach to cost containment reducing the long term cost of care of a growing diabetic population by reducing the quantity of insulin required, while
  2. Improving clinical outcomes and quality of life by reducing the frequency of hyperglycemic and hypoglycemic episodes, and long-term improvement in HbA1C reducing both the cost of care and costs associated with complications.
  3. Provides a competitive advantage for a potential Insulin leader facing biosimilar insulin, or alternatively increase the cost-effectiveness of newer more expensive insulin formulations:
    1. According to Credit Suisse:
      1. “Physicians will be extremely receptive to biosimilar type products, particularly as there will be reasonable assurance of quality having gone through the regulatory process. The survey revealed that physicians would be willing to use biosimilar Lantus and appear to be broadly happy for a payor push in this direction, especially if the biosimilar comes from a known branded player. Doctors surveyed felt that a 10-40% discount vs. Lantus would drive use in new patients.”

2. Digitization of health care and transformation onto mobile devices

  1. The InsuPad3 Connect – regulates injection site, tracks injected insulin, measures daily activity, and automatically logs data that is uploaded onto a mobile App for diabetic therapy management.

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Valuation and Target Price

We value Insuline on a DCF, sum-of-the-parts scenario analysis weighting our Base (40%), Bull (20%), and Bear case (40%). We conservatively assume 60% probability of success in the U.S. and risk-adjust sales in both the U.S. and EU accordingly despite already being approved in Germany, Israel, and Canada. Additionally, we conservatively assume peak market share of only 15% of the “uncontrolled” insulin dependent diabetic market (~30% of total insulin patients, or 4.5% of total diabetes patients). And anticipate tiered royalty scheme with a larger partner paying Insuline 5-20% of net sales. We gain additional confidence in our numbers since we use a -100% terminal growth rate, and only model the U.S. and EU market despite the fact InsuPad is already approved in Canada and Israel, and will be available in Japan, Russia, and other markets, which we exclude entirely. Importantly, with regards to pricing, out of an abundance of conservatism we assume payors retain 10-20% of the cost-savings from reduced insulin dosing, and retain 100% of the long-term economic benefits from improved patient outcomes.Lastly, we model that the total share count will double from current levels of 137.5M fully diluted shares, to 275M diluted shares by 2017, and further discount our cash flows using the U.S. 35% corporate tax rate despite being domiciled in Israel with a 27% tax rate (see summary in table below).

Indeed, in spite of utilizing excessive layers of conservatism, our fully-risk adjusted DCF analysis yields a net present value of 627ILS vs. 95 ILS, ~6x their current levels. We reiterate that this price target assumes 100% dilution through secondary equity offerings. Finally, our model is amply conservative and provides plentiful sources of upside as InsuPad goes through the U.S. regulatory process, and approval. For example,every 10% increase in probability of success from our base case of 30% represents an additional +30% of upside in NPV.

Summary DCF Model:

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Defining the Role of Insuline’s platform (InsuPad):

Insulin dependent diabetics must constantly monitor their glucose levels and must adjust their insulin dose according to their food intake. As a result, there is significant variability amongst patients, with compliance, adherence, and dosing complications that translate to poor outcomes. As the figure below shows, eventually the majority of patients rely upon insulin to control their glucose levels. Insuline is initially targeting those patients with difficulty controlling glucose levels who are already on insulin therapy, which we estimate to be ~30% of patients on insulin or approximately 2 million patients in the U.S. and 4.2 million in the EU.

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How does it work?

The InsuPad works to heat the skin’s surface to 104 degrees Fahrenheit after injection with subcutaneous insulin with the objective to more closely mimic the endogenous release of insulin. The device cycles through three separate warming cycles of ten minutes, followed by a ten minute break in warming. The physiological effect this leads to an increase in local vasodilation, on cutaneous blood supply leading to a more efficient delivery of insulin into the blood stream from the injection site (see slides below) the pharmacological effect translates into a more endogenous like insulin response.

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Skin Condition Stabilization technology warms the skin surface of the insulin injection site, which leads to a local increase of cutaneous blood flow. Increased local blood flow enables controlled, consistent and efficient insulin delivery from the subcutaneous site. Insuline Medical has developed the InsuPad, composed of a disposable injection window part (Fenster) and usable rechargeable control unit, using the innovative Skin Condition Stabilization technology. InsuPad is non-invasive, safe, simple and easy to use.

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Clinical studies have shown that InsuPad improves the glycemic control with current mealtime insulin therapy, as follows:

InsuPad reduces required prandial insulin dose by 28% and achieves HbA1c goal similar to Standard of Care, although over extended periods of time improved glycemic control is seen, with fewer trough and peaks that should lead to a superior HbA1c profile with the InsuPad device.

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InsuPad reduces hypoglycemia event rate by 46% in a randomized, parallel, open-label observational study.

In the Barmer long term follow up study, the InsuPad maintained or further reduced HbA1c levels over 18 months of use. InsuPad users reduced their daily prandial insulin dose by 32% and total insulin dose by 25% over 18 months of use.

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While the meal tolerance tests (MTT) study has shown that InsuPad reduces significantly post-prandial blood glucose deviations. The data below shows the MTT result in 17 Type-II diabetic patients with a standardized liquid meal after an overnight fast. Patients injected 0.2 units of either insulin Aspart or Insulin Lispro subcutaneously on both days. One day was with InsuPad (blue line), the other day without InsuPad (red line).

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In summary, based on clinical data and clinical experience InsuPad can provide better glycemic control, with ~40% fewer episodes of hypoglycemia, lower post-prandial glucose peaks and troughs and/or lower insulin doses.Consequently, it is in these subgroups of patients that InsuPad is uniquely suited for addressing a significant unmet medical need. Physician surveys confirm that hypoglycemic episodes are the #1 factor for determining therapy selection in diabetics (see below). Importantly, Insuline’s “De-Novo” 510 submission with the FDA is well supported with data showing improvement in safety.

 

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Therapeutic Objective

  • Therapeutic Need: Insulin dependent diabetics (IDDM) live with significant uncertainty on how much dosing is required to safely and effectively lower blood sugars after meal consumption.
    • Significant inter-variability among patients with regard to dosing.
    • For example: 20 units does not lower blood sugar equivalently amongst patients or meals
  • Therapeutic Goal: To facilitate a closer match to endogenous insulin kinetics resulting in fewer hypoglycemic and hyperglycemic episodes. This translates into clinical benefit and ultimately cost savings for the healthcare system. Thus we summarize the 3 main value drivers Insuline provides for both patients and payors below:
  1. More stable pre and postprandial blood sugars results in improved glycosylated hemoglobin (HgbsAg), which is correlated with improving clinical outcomes.
  2. Fewer episodes of hyperglycemia and hypoglycemia reduces overall collateral costs of care in diabetes patients, such as fewer hospitalizations.
    1. Long-term complications from high blood sugar can include heart disease, strokes, diabetic retinopathy where eyesight is affected, kidney failure which may require dialysis, and poor blood flow in the limbs leading to amputations.
  3. The ability to deliver insulin more expediently into the blood before meals reduces the cumulative dosing required per patient, per meal daily thereby reducing the annual treatment costs per patient. While the savings estimated to be 20-30% per patient may seem miniscule upon first evaluation, the long term value driver is driven by the fact that there are hundreds of millions of patients WW with IDDM.
  • Pricing in Germany:
    • Insuline’s business objective is to capture the cost-savings from reducing the annual insulin consumption for payors and allowing the payors to retain the long-term health benefits and the cost-savings from improved clinical outcomes and reduced hospitalizations.
      • In essence, Insuline’s approach is a population-based strategy, focusing on the collective improvement in overall health of payors diabetic population that results in substantial long term cost savings to treat these patients.
      • The largest investigation in Germany is the Disease-Management-Programme, Nordrhein with more than 450,000 surveyed DM patients. These researches show good comparability with most analyses respective to the prevalence of diabetic comorbidities in Germany. Patients with DM2 have a mean Hba1c of 7 % and patients with DM1 of 7.9 %. In patients with DM2 the prevalence of retinopathy is 11 %, nephropathy 10 % and neuropathy 20 %. Co-morbidities are more common in patients with long diabetes duration and high HbA1c. In patients with DM1, the prevalence of retinopathy is 25 %, of nephropathy 15 % and neuropathy 27 %.
      • In summary, the long-term impact on improving clinical outcomes and cost savings from better glycemic control are numerous and builds a strong case for Insuline’s platform with payors.
  • In Germany, studies showed a 30% reduction in hyperglycemia and required daily insulin.
    • This served as the basis for approval and is under review by Germany’s health agency for cost effectiveness rating. However, their product has been launched without broad reimbursement.
    • German decision for “Sick Fund” is expected within the next 12 months (~4Q2015) after which broad reimbursement will be accepted.
    • We model full launch in 2016.
  • Diabetes is a very Competitive Space, how does Insuline fit into the treatment paradigms amidst strong competition?
    • Essentially, Insuline’s products are drug delivery devices, that enhance the effective delivery of Insulin into the blood that more closely mimics endogenous insulin kinetics, and direct competition is not a direct threat from more convenient basal insulin formulations, GLP-1 inhibitors among many other new drugs that have entered the market to treat diabetes. In summary, Insuline’s approach is uniquely suited not to directly compete with the broad assortment of anti-hyperglycemic drugs. As long as insulin is used in diabetes their platform will have utility in the market representing a rare source of sustainability.

Insuline’s Target Population:

Late Stage Type I and Type II Diabetes Mellitus patients already on insulin therapy who have poorly controlled blood sugars, high body mass index (BMI).

  • High prandial insulin requirements
  • Increased risk of hypoglycemia
  • High glucose variability
  • High postprandial glucose excursions
  • 12M IDDM in the U.S., EU, and Japan.
  • Model only the EU and U.S. markets or 6M total patients defined as our Total Addressable Market (NYSE:TAM).
    • Future Development/Label expansion potential to at least double Insuline’s market opportunity not in our model currently:
      • Young children (<12years)- enable flexible injection timing
      • Hospitalized patients – better glycemic control
      • Basal Insulin

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Building the Case of Medical Necessity for InsuPad/InsuPatch

We describe in subsequent sections of this report that Insuline has strategic value in the diabetes market with larger, more established players as a potential partner or acquisition target by providing them with a population based tool for cost reductions. In our view, Insuline is likely to license their technology for commercialization in the U.S. with a major, established Diabetes leader (Novo Nordisk, Sanofi-Aventis, Eli Lilly) for high single digit or low double digit royalties or become a potential acquisition target, which we would anticipate post-approval by the FDA in late 2016. In the slide below, the NPV from diabetes drug sales are depicted and clearly establishes that Novo-Nordisk (NOVO) and Sanofi have the most NPV tied to diabetes branded insulin when facing biosimilar insulin, thus one solution would be to begin studies with their next-generation proprietary insulin formulations in conjunction with InsuPad that could reduce total insulin consumption, while maintaining pricing power enabling them to more effectively compete on total cost-effectiveness. Alternatively, the proverbial “underdog” is Eli Lilly (NYSE:LLY), developing a robust diabetes franchise with novel formulations of insulin and insulin alternatives. The second slide below shows that only 3 of 10 diabetes companies have insulin products approved or in Phase 3.

 

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One of our primary reservations we had on Insuline’s future prospects when we first initiated research was the growing selection of anti-hyperglycemic drugs approved that were intended to reduce the dependence on insulin in Type II diabetes. Much to our surprise, the facts have not confirmed this, and in fact proved the opposite conclusion, insulin use is being used in earlier stages of treatment and doctors expect this trend to continue. Physician surveys show that in Type II Diabetics insulin is mainly reserved as 3rd or 4thline therapy, however ~50% of physicians stated that they are “trying to move to insulin therapy faster in Type II diabetes patients.” This is somewhat a surprising finding given that pharmaceutical companies have invested billions to develop multiple alternative therapies to insulin such as GLP-1 agonists, DPP-4 and SGLT-2 inhibitors.

Insuline initially is targeting the prandial (meal time) insulin market that is forecasted to grow close to a 8% CAGR through 2020 with sales of prandial insulin growing from $5B in 2012 to over $8B by 2020E, an incremental burden of costs to the system of $3B. Current data suggests that Insuline’s patch and pad, reduce the cumulative dosing by at least 20%, and could reduce the expected $3B in increased costs by $600M-$1B annually by 2020E. According to Leerink, “With national healthcare expenditures expected to reach nearly ~20% of GDP over the next decade, the pressure on payors to more stringently manage utilization in order to keep down costs continues to incentivize them to actively engage with providers to more effectively manage overall patient outcomes.” We also note that there is increasing pressure to link reimbursement to performance measures based on clinical outcomes.

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Despite the recent drug approvals, it is clear that diabetics are having a very difficult time controlling blood sugars despite multiple new drugs available, and insulin will remain a mainstay for the foreseeable future in Type I and II diabetes. One notion is that this can be attributed to the obesity pandemic plaguing America’s youth, thus the population is getting sicker, quicker. Surprisingly, physicians noted that they would expect insulin to be prescribed in 30% of their next 10 Type 2 diabetes patients in the 2nd line setting, which was greater than both GLP-1 agonists and SGLT-2 inhibitors.

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Importantly, lower hypoglycemia was consistently listed as the primary determinant of prescription preferences with new agents, with at least 282,000 Emergency Department visits from hypoglycemic events in 2012; physicians are clearly searching for new tools to reduce the risks of hypoglycemia. We note that InsuPad reduced hypoglycemia event rates by 46% in a randomized, parallel, open-label observational study. Additionally, over 30% of physicians intend on increasing their insulin prescriptions, and only 3% intend on decreasing insulin therapy.

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Recalling our thesis that Insuline will be able to deliver a population-based approach to cost reduction, consequently we turn investors’ attention to epidemiology trends that currently forecast that diabetes will grow at a 4% CAGR vs. only 1% population growth through 2020. Based on the survey data there will likely be at least another 5 million patients requiring insulin therapy by 2020 than in 2010. Again, we reiterate that this is a sustainable secular trend, and payors will require cost-control tools to cope with this level of patient growth, as the healthcare system must also bear the burden of rising costs from hepatitis B & C, and NASH as these untreated populations will increasingly become treatable. Insuline’s Insupad/Insupatch fulfills this requirement.

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In 1993, the Diabetes Control and Complications Trial (DCCT), conducted by the NIH, showed for those under intensive management of blood glucose levels or intensive therapy (which included multi daily injections or the use of an insulin pump) reduced complications in people with type 1 diabetes. In the trial, intensive therapy reduced the risk of complications in patients with type-1 diabetes by 47%-76% for eye disease, about 50% for kidney disease, and about 60% for nerve disease. Thus, aggressive glycemic control reduces collateral health consequences of diabetes, and therefore reducing the long-term costs.

We believe Insuline’s InsuPad will become an important tool to manage costs while improving outcomes in the post-Affordable Care Act era in the United States where both obesity and diabetes are an increasingly burdensome source of costs. Payors and PBMs could in fact mandate measures requiring devices like InsuPad for reimbursement to effectively manage costs of newer insulin formulations and/or to capture additional cost savings from biosimilar insulin. Recall, global health systems will be burdened with rising hepatitis-C and immuno-oncology costs. In order to cure these patients, it will be imperative to maximize cost savings in other disease states on a whole population basis. We view InsuPad as uniquely suited to deliver 20-30% cost savings from payors diabetes population not including savings from biosimilar insulin that collectively could represent 50-60% savings on total insulin drug spend.

Goldman Sachs estimates that “PBMs capture about 15% of the savings that they generate for clients, meaning that Specialty drug management represents a significant opportunity to drive incremental EBITDA for the PBMs.” Thus, we expect strong support and financial incentives for PBM’s to encourage patients to use InsuPad/InsuPatch by CVS, and Express Scripts (NASDAQ:ESRX) as it could help offset the rising HCV and immuno-oncology costs. We note that ESRX removed Victoza from its National Formulary on January 1, 2014, directing patients instead to use Bydureon or Byetta. ESRX has 28% of the specialty market share, followed by CVS with 25%.

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Eli Lilly is developing insulin glargine and is expected to be approved in the US and EU in 2014, and launched in 2015 post Lantus loss of exclusivity and is considered a biosimilar in EU, and a branded alternative in the US. With over 50% of physicians willing to prescribe Insulin, biosimilars investors can view Insuline’s InsuPad in two ways that is agnostic in this debate:

  1. It can be used in conjunction with biosimilars to deliver additional cost savings.
  2. It can be used with branded insulins that reduce the long-term costs of therapy.

In our view, Sanofi-Aventis facing biosimilar competition of Lantus has the potential launch of U300 (high concentration Lantus) from 2016E and LixiLan (GLP-1 + basal insulin) in 2017E, that will be faced with a difficult price reimbursement negotiation process in the U.S.

Furthermore, at the ADA 2014 conference, SNY’s U300 Lantus formulation showed that higher doses were required to achieve the same glucose control: Physicians also noted that the end of study insulin dose was 17% higher with U300 than with Lantus at the end of the study to achieve the same HbA1c reduction, with difference in dosing only appearing after 8 weeks (i.e. after initial dose titration complete). One potential solution would be engaging in clinical trials using InsuPad that if current clinical trial data holds would reduce total requirement for insulin by 20-30% and ultimately represent a competitive advantage for Sanofi, assuming they exclusively licensed InsuPad or acquire Insuline entirely. Essentially, SNY could use InsuPad to “normalize” U300 to Lantus that would help protect its $7B basal insulin market share; key caveat of course is this would require additional clinical studies.

In essence, there are multiple avenues to commercial success for InsuPad and InsuPatch in our view. Moreover, one “known, unknown” is that PBMs facing rising specialty drug spend are increasingly hesitant to use costly new drugs, and it is possible that PBMs implement floodgates to costly new diabetes therapies such as SGLT-2, DPP-4s or GLP-1 agonists in favor of biosimilar insulin’s + InsuPad/InsuPatch to drive savings. While the absolute costs of new diabetes medications range between $3-$4,000 annually, annual price increases are growing at a 13-17% rate (average for specialty drugs is 13%) a rate at which would double the annual costs of care by 2020 to >$9,000 per year, per patient (see slides below).

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In order to evaluate the marketability of InsuPad/InsuPatch, we use Afrezza from Mannkind as a surrogate. Similar to Insuline, MNKD developed a insulin delivery device, although MNKD altered the route of administration to oral inhalation of Insulin from injection. Afrezza is inferior to mealtime insulins with respect to HbA1c reductions and increased risks of hypoglycemia; two critical endpoints Insuline’s products thus far have been shown to be superior or non-inferior. Despite these shortcomings, MNKD secured $150m upfront, and $775m in sales milestones, and 35% profit share. MNKD’s market cap reaching $4.15B is a demonstration of the potential value creation with Insuline, although three distinguishing qualities are apparent that favor Insuline’s approach:

  1. Thus far, InsuPad data has shown reduced risk of hypoglycemia, versus an increased risk of hypoglycemia observed with Afrezza (inhalation insulin) patients that exhibited 5.1% experiencing severe hypoglycemia (v. 1.7% for placebo) and 67% experiencing non-severe hypoglycemia (v. 30%).
    1. By comparison, Lantus resulted in a 1.7% rate of severe hypoglycemia in the 52-week study in a similar oral-failure patient population. In a separate supportive Phase 3 Trial 009, severe hypoglycemia rates trended favorable for Afrezza over Novolog in type 1 diabetics (33% v. 38%). Although not included on the label, these supportive trials suggest that Afrezza may offer considerable advantages in hypoglycemia rates over conventional mealtime insulin’s such as Novolog.
    2. Moreover, when compared to conventional mealtime insulin Novolog, Afrezza did not show a favorable benefit in efficacy as measured by A1c, and indeed in several trials, Novolog showed superiority. A key differentiating factor for Afrezza is its rapid time to onset as compared with standard mealtime insulins like Novolog. With absorption occurring within 12-14 minutes of inhalation rather than an hour to peak, Afrezza more closely replicates the first phase of mealtime insulin release. Therefore, Insuline’s technology may enable meal-time insulin manufacturers to deliver the same rapid insulin delivery as Afrezza to normalize the competitive field.
  2. InsuPad showed non-inferiority on HbA1c at 12 weeks, and patients still receive the standard of care with InsuPad, thus we see broad adoption of such a device over Afrezza largely due to the reality that Afrezza does not replace injectable insulin for patients, only supplements it; hence we question the long-term viability for Afrezza if they still require some daily injections.
  3. Moreover, according to physician surveys from Goldman Sachs with 50 endocrinologists and 50 diabetes educators to assess the commercial potential and rate of uptake for Afrezza have shown that doctors largely have a “wait-and-see” attitude and “payers who are relatively more concerned with safety than convenience and must be influenced by patients.” This substantiates at least partially our claim that payers are keenly focused on safety in diabetes due to the significant costs of side effects of poor glycemic control. Clarifying, it is expected that caregivers will wait for long-term safety data from an FDA mandated post-marketing study looking at lung and CV safety.
    1. Pfizer removed Exubera from the market in Oct. 2007 with no apparent safety or efficacy problems despite the hype surrounding Exubera as the first and only inhaled insulin NRx’s and TRx’s never accelerated or gained wide patient acceptance.
    2. Afrezza does have important advantages over Exubera, it is smaller and more convenient, and may offer certain clinical advantages when compared to rapid acting insulin analogs because of its faster onset and offset that more closely emulates the physiological effects of the pancreas.

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  1. Injection is still the preferred route of delivery for insulin, but InsuPad reduces overall insulin drug spend for payors and is targeting the obese (BMI>30) diabetic population ~20% of total diabetics.

Key Timelines:

  • Launched in Germany, Canada, and Israel in 2014, but full reimbursement expected by 3-4Q2015.
    • Launch in U.S. by 2017.

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Only about 25% of patients are able to control type 2 diabetes for 3 years with diet and exercise alone, and one large study demonstrated that after two years of treatment only 50% of patients were able to maintain HbA1c levels below 8%. We note that HbA1c is frequently used as a surrogate for diabetes control as it measures the amount of hemoglobin that has been glycated by excess, highly reactive glucose in the patient’s plasma.

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This excessive glucose in the plasma is not without risk, if left unchecked, high plasma glucose levels can lead to kidney failure, diabetic neuropathies, and blindness. We note that insulin resistance, one of the key factors in diabetes, is thought to be reversible to some degree if diabetes is controlled in the early stages of the disease; however, over time insulin resistance leads to irreversible beta-cell burn out toward the later phases of the disease.

Insulin is currently the largest class of diabetes treatments by sales with $20B in 2013 or 64% of the $32B total market for diabetes treatments thus InsuPad represents an attractive cost-containment tool for payors to offset the rising costs in diabetes. Goldman Sachs forecasts insulin sales to reach $35B in 2020E or 62% of the $56B total market. NOVO is expected to have over 50% insulin market share by 2020 with basal and prandial accounting for over 90% of sales.

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At the time of Afrezza’s approval, the FDA required 4 post-marketing clinical studies for Afrezza, including a clinical trial for pediatric patients, a trial to PK study to characterize dose response, as well as an interpatient variability study and lastly, a trial to evaluate long-term safety with pulmonary and cardiovascular outcomes. Analysts estimate that these trials will cost $200mn with some additional studies required afterwards to further characterize the benefits of Afrezza and establish points of differentiation. We do not anticipate such large regulatory hurdles for Insuline’s devices.

Based on the limited expected sales from InsuPad in Germany and Israel until 2016, we value Insuline through a SOTP DCF model, with a 10-20% annual discount rate through 2030, and conservatively use an 40% risk-adjustment (60% probability of success) to our sales forecasts, and model only the U.S. and EU with the ROW as a tailwind buffer to our estimates.

Finally, as a logic check, we compared our estimated fair value to comps with similar initial periods of low revenues and negative earnings (see table below).Our sales model, assuming a tiered royalty schedule on InsuPad sales of 5-20% on risk-adjusted net product revenues >$275M USD ($51M in royalties) shows a 2020E Enterprise Value to royalty revenues (EV/Revenues) of only 0.25 relative to MNKD with a EV/Revs of ~5, and peer group average of 3.5x 2020 revenues.

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Model Assumptions:

  • <$2 per day per patient, or approximately $700 per IDDM patient. Cost Savings modeled using pricing data from Merrill Lynch (see below).
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  • 60% probability of approval in U.S.
    • Heavily discount our forecasted cash flows by 20% per annum.
      • Model until patent expiration in 2027 (U.S./EU/Australia).
      • 1H2016 Full German/EU Launch
      • 1Q2017 U.S. launch.
  • We conservatively model only the EU and U.S. markets or 6M total patients defined as our Total Addressable Market .

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  • Our forecasts only estimate 15% peak penetration of the target market (high BMI, IDDM).
  • We use a 60% probability adjustment to our U.S./EU sales estimates.
  • Japan and WW sales are tailwinds and potential upside drivers to our estimates.

Insuline Sales Model

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InsuPad/InsuPatch 510 “De Novo” Submission

According to the FDA’s Draft Guidance for Industry and Food and Drug Administration, the process for the submission and review of a request (hereafter a “de novo”) occurs under section 513(f)(2) of the Federal Food, Drug, and Cosmetic Act (the FD&C Act), also known as the de novoclassification process. This process provides a pathway to Class I or Class II classification (low to moderate risk) for medical devices for which general controls or general and special controls provide a reasonable assurance of safety and effectiveness, but for which there is no legally marketed predicate device.

If the FDA agrees with Insuline that the InsuPad/Patch poses little risk, then FDA must make a classification determination for the device that is the subject of the de novo by written order within 120 days of the request that the criteria at section 513(1)(A) or (B) of the FD&C Act are met, we will grant the de novo, in which case the specific device and device type is classified in class I or class II. The device may then be marketed immediately and serve as a predicate device. The device should be low to moderate risk and should appear, based on what is known about the device, to meet the statutory standards for classification into class I or class II under section 513(1) of the FD&C Act, i.e., general controls or general and special controls would provide reasonable assurance of the safety and effectiveness of the device.

Insuline is proceeding with the FDA under “A Pre-Sub” that is not required in order to obtain FDA review of a de novo, but is a useful way for submitters to facilitate early feedback from FDA. The primary advantage of a Pre-Sub is that it provides an opportunity to gauge the FDA’s preliminary perspective on the likely regulatory controls necessary to provide a “reasonable assurance of safety and effectiveness as well as feedback on the evidence, including performance and/or clinical data, that will likely be necessary to support thede novo.” This regulatory pathway optimizes resources in collecting safety and effectiveness data required by the FDA to support a de novo application,without the need to perform additional tests. If the data and information demonstrates that general controls and special controls are adequate demonstrations or “assurances” of safety and effectiveness, the FDA will grant the de novo specifying the classification of the device into either class I or class II and whether the device is exempt from premarket notification requirements. For class II devices, the FDA will identify special controls and allow marketing the device.

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Appendices

KOL’s:

  • Dr. Barry Ginsberg MD, Ph.D, Prof. Dr. Thomas Haak, MD, Prof. Dr. Lutz Heinemann, Prof. David C. Klonoff, MD, FACP, Prof. Lawrence A. Leiter MD FRCPC FACP FAHA, Prof. Dr. Andreas Pfützner MD, Ph.D., Prof. ItamarRaz MD, Dr. Astrid Tombek, Prof. William Tamborlane, MD, Prof. Julio Winstein, MD.

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