MannKind Corp. (MNKD)

[Phaeton]

Another MannKind Update from Nate's Notes

After intentionally not talking about MannKind in the most recent Inter-Issue Commentary, I was quickly reminded by a number of you that until the stock finally kicks into gear for us, you would appreciate updates and pep-talks as frequently as possible… and though I can’t promise I will write about it every month, the current situation certainly represents a good time to step back and look at the big picture to make sure everyone understands the possible outcomes from here (based on your emails, I worry that some of you may have forgotten that there is still some risk in owning the stock).

Starting with the optimistic side of things (before heading to pessimism and back to optimism again), it is my belief (and it is a point that I think gets overlooked far too often in discussions about “inhalable insulin”) that Afrezza is quite a bit more than just a clever repackaging of the existing insulins that are on the market, and while “no needles” is a benefit in and of itself, the fact of the matter is that what really sets Afrezza apart from the competition is the that it represents a significant step forward in the goal to develop “ideal” insulin (i.e. insulin that behaves as if it were produced naturally in the body).

This is a big deal because it allows patients to more easily monitor and control their blood sugar levels, and this, in turn, should lead to better patient outcomes… and, while each of them has a different motivation for achieving that goal, what patients, doctors, and insurance companies are all looking for is patient well-being.

Since I often get asked “why would insurance companies care if a patient is happy – all they want is money, right?,” I wanted to take a moment to point out to those of you who may not have thought about it before that whereas the cost of providing insulin to a patient pool can be estimated with a very high degree of accuracy, the costs associated with treating the complications of poorly-managed diabetes are a) much harder to predict, and b) much more expensive than simply providing insulin and hoping it gets used correctly.

If I am right about Afrezza, I believe it has the potential to become the mealtime insulin of choice over the next several years… and if it manages to do so, the product would likely be considered a “blockbuster” by even the most reluctant of skeptics.

Of course, there is a chance that I am wrong and Afrezza will end up struggling to gain traction in the highly competitive world of diabetes drugs (please read that sentence again, and keep re-reading until you really believe it… then you may proceed).

Working against the company are:

• the fact that its partner for the product, Sanofi (SNY – $45.16), is currently struggling with personnel and PR issues;

• the last inhalable insulin that was introduced to the market (Exubera) flopped big-time;

• there is a very significant short interest in the stock that a) is keeping a lid on the share price (which, in turn, makes it more difficult for the company to raise capital on favorable terms if/when it needs to), and b) may turn out to be right (though, ironically, when all of those shorts start to cover, it may end up causing a higher floor to be put under the stock than many of them are counting on – i.e. their upside may not be as big as they think it is);

• while the company has expressed confidence that it will be able to meet all of its cash flow needs going forward, there are still a lot of variables in play that might make this a challenge;

• as it stands, the labeling for Afrezza is less favorable than the company would like (though this variable can change over time as more studies are done);

• and, finally, while there have not been any flags raised based on the studies that have been done so far, the possibility of Afrezza being a lung cancer risk still gets a lot of airtime and may cause a number of potential users to hold off trying Afrezza (and, of course, there is a chance that lung cancer might actually be identified as a risk after more studies are done).

All of that being said, if you had told me in January that the stock was going to finish the year basically right where it started after having the uncertainty regarding both approval and a partnership removed from the equation, I would not have believed you… however, that’s exactly what we’re looking at today.

Given the nature of the products being developed, the biotech sector is notorious for having “market inefficiencies” in which stocks become radically mis-priced based on what turns out to be a misinterpretation of the data that is available to investors… and in my 26 years of following the sector, I believe this may represent one of the most inefficient markets I have ever seen for a stock.

While I do not claim to know for sure what has been going through their minds (and I freely acknowledge that a portion of the large short position may simply be a hedge put on by folks who own MannKind’s convertible debt), the initial batch of short sales were put in place based on the idea that Afrezza was going to fail its clinical trials.

When that investment thesis didn’t work out, it appeared that instead taking a step back and wondering if perhaps they were wrong, many of those shorts simply doubled-down on their position and changed their mantra to “despite passing clinical trials, it will never be approved… and I’ll cash in when that event occurs.

Given human nature, it should come as no surprise that this same group of people did the same thing again after the product was, in fact, approved, and they started pinning their hopes on the idea that “they’ll never find a partner.”

Of course, not only did MannKind find a partner, they found a great partner (assuming Sanofi can weather the PR storm that erupted a few months after they signed up with MannKind)… and they got a great deal to boot.

To be sure, the shorts may still prevail if Afrezza fails to sell (I will be the first to admit that the old adage “Q. What do you call a man who is right for all the wrong reasons? A. Right.” could come into play here), but the situation sure looks to me like a case in which a group of investors have fallen in love with an idea (“MannKind is going to $0 because _____”), and they’ve stuck with it despite the fact that MannKind has – on a number of occasions now – managed to clear the hurdles they were planning on seeing the company stumble over.

Please note that MannKind is still just a moderately-sized position in the Model Portfolio (and thus it should be around that size too in your own portfolio if you are more risk-averse), but is definitely one of our largest positions in the aptly named Aggressive Portfolio. This is on purpose, but I want you to notice that our MannKind position (my favorite speculative stock) is being matched by an equally large position in Apple (one of my favorite conservative ideas), and if you are also “going big” on MannKind with me, you are encouraged to make sure a sizable chunk of your other money is parked in some of the less risky stocks as well.

Some Recognition…

As some of you may have noticed, Nate’s Notes was lucky enough to be written up in an article Forbes magazine

Finally, I want to personally wish you and your loved ones a wonderful holiday season and a very prosperous and healthy new year! Cheers!


Read more: http://mnkd.proboards.com/thread/970/articles-media-spots-on-mnkd?page=36#ixzz3MBUrUwEI