This summer brings with it many blockbusters including Iron Man 3, Star Trek Into Darkness, and Man of Steel. In the stock market, however, investors may still be seeking the big blockbuster of the 2013 summer. MannKind Corporation (MNKD) could be that blockbuster, and this article explains why this stock could be a solid performer in the near future and an excellent performer by the end of 2013.
MannKind is led by a billionaire, Alfred Mann, and is currently researching a key diabetes drug, Afrezza, which is wrapping up Phase 3 clinical studies. Afrezza is a rapid acting insulin delivered through a convenient and easy-to-use inhaler. According to MannKind Corporation's website, trials have indicated that the drug should help patients lower the risk of hypoglycemia (very low blood sugar) which causes health issues to those suffering from diabetes and even reduce the weight gain often noticed when using traditional insulins.
The company has previously been rejected by the U.S. Food and Drug Administration (FDA). The FDA indicated concerns when MannKind switched from its first general inhaler, known as MedTone, to a smaller inhaler known as Dreamboat, and the FDA wanted MannKind to demonstrate the new inhaler was equally effective. A visual comparison of the inhalers can be found here. Two Phase 3 studies were being conducted by MannKind and are now being wrapped-up. The first study, Study 171, was focused on patients with type 1 diabetes. The second study, Study 175, was focused on patients with type 2 diabetes which represents an even more critical market for potential revenues.
Shares of MannKind have been hot during 2013. On January 2, 2013, shares traded at a price of $2.39. On June 7, 2013, shares closed at a price of $7.46. For those doing the math, that's a gain of 212%!!! Seeking Alpha contributor Joe Springer predicted this possibility back in March when he stated that MannKind could be the "best performing stock of 2013." Thank you, Joe!
Are the gains complete and is the run by MannKind done? Not likely. There are numerous catalysts for MannKind during 2013 that could serve to make the gain to date look small. I'm going to start by describing the short-term potential for those considering a possibly quick, lower risk gain. On May 31, 2013, MannKind announced the completion of Phase 3 trials related to Study 171 for type 1 diabetics. Results of these studies will be released in August according to management of MannKind. Completion of Phase 3 studies for Type 1 diabetics was expected, and this news was released on a Friday (5/31) after the 4:00 p.m. market close. The markets reacted on Monday morning (6/3) and investors jumped on MannKind shares by increasing the stock price from $6.66 to $7.63 on volume of over 19 million shares! The good news for investors is that MannKind should soon be announcing completion of Study 175 for type 2 diabetics. Results, like Study 171, will not be announced until August, but MannKind will likely release a similar press announcement soon to note the completion of Study 175 as was done with Study 171. Will investors see a similar gain in the short-term? There are no guarantees, but revenue potential in the type 2 market is much more appealing than the type 1 market. Assuming the market reacts similarly, a short-term investment in MannKind should be considered.
Despite a series of negative articles over the past four months that would make the Game of Thrones Red Wedding scene seem sunny, including those from writers on Seeking Alpha (you know who you are) as well as downgrades from analysts such as the Bank of America downgrade to Neutral last Friday (6/7/13), the stock has continued a steady rise with investors expecting but never quite seeing a significant pullback in price. It touched a 52-week high just last week. It's worth noting that even in its downgrade, Bank of America stressed a new price target of $8 (up from $5), an increase of over 7% from the current price of $7.46.
When trial data is released in August, this is obviously a huge binary event for MannKind shares. Investors in general do realize that the FDA concerns were more about the delivery device and not about the drug itself. This could mean positive results in a few months' time, and shares will likely benefit as additional investors get on-board. Positive trial results mean that MannKind will be ready to submit a New Drug Application (NDA) for Afrezza by October. Positive results also mean that MannKind will be open to a partnership or, as Seeking Alpha contributor George Rho recently suggested, a buyout from a major pharmaceutical looking to position itself for the next generation of diabetes care around the world. Mr. Rho suggested MannKind could go for $27.50 a share based on his analysis. Whether MannKind were to partner with a major pharmaceutical such as Sanofi or be the subject of a buyout, shareholders should benefit either way.
FDA approval could ultimately be the largest catalyst for shares of MannKind. Given that the diabetes market is estimated to be around $55 billion (with a B) by 2017, FDA approval would help MannKind take a share of the $55 billion pie. Even with the current market cap of around $2 billion, there is room to grow! If the drug delivers on ease of use, cost, and as a non-injectable alternative, users and insurance companies alike may be willing to consider Afrezza.
One last element that is worth considering as part of a potential summer blockbuster is the level of short interest in the stock. Back in December 2010, just before receiving a rejection from the FDA, short interest in MannKind shares was at 28% of regularly traded shares or 21.5 million shares. Short traders guessed right, and MannKind shares dropped after FDA rejection. The table is again getting set for a struggle between those with short positions and those with long positions. According to Yahoo, as of the last reported date in May, 47 million shares were held short out of 280 million shares outstanding. Short investors appear to either believe that Afrezza will fail to produce good trial results despite having favorable testing results in prior trials or they believe that the FDA would again reject MannKind's Afrezza after having discussions about conducting new trials about the device. Both those bets seem risky, and if wrong, MannKind shares could witness a short squeeze that would contribute to a potentially great story.
In conclusion, yes, there are risks in investing in a speculative biotech company. If your reading this article, you are likely not investing in Google, Apple, or Disney because you're looking for a blockbuster investment. No one knows the future for certain. However, as Seeking Alpha says, one should "Read. Decide. Invest." I have proposed one month and six month trading opportunities for MannKind within this article, and I've cited information to educate you on the history of MannKind Corporation. The decision to invest is yours. By the end of 2013, MannKind may be the best performing stock of the year... we're already half way there and it's definitely in the running! A blockbuster summer may become an incredible 2013, and MannKind is an excellent story. Afrezza, if the test results and FDA agree, could potentially help many diabetics around the world and offer the next generation of diabetes treatment. Consumers and investors can both win this time.
Additional disclosure: I currently have a Long position in MNKD shares, and I will consider adding more shares over the course of the coming months, including within the next 72 hours.