Crunch time is essentially here for all of the believers and nonbelievers in MannKind Corporation (NASDAQ:MNKD) as the developer of Afrezza has a date with destiny in 21 days. (Apologies to all for the phraseology but the company's name makes it difficult to resist.) On April 1st, the Endocrinologic and Metabolic Drugs Advisory Committee (AdCom) will convene to discuss and vote on whether to recommend that the Food & Drug Administration (FDA) approve the small biotechnology concern's NDA (New Drug Application) to market the inhaled insulin product for the treatment of adult patients with type 1 or type 2 diabetes mellitus. Time is running short for the many short sellers of MNKD stock who are undoubtedly extremely nervous about maintaining their positions through the AdCom vote and being exposed to potentially devastating losses. By the same token, longs and prospective longs are clearly also anxious about the implications of an unfavorable decision. Considering the huge amount of money at stake, plus the freely available public platform afforded by the Internet, the arguments, for and against, are likely to intensify further over the next three weeks. This article represents my effort to provide some hopefully unemotional perspective to those still on the fence.
Credibility and honesty have become major variables in the public deliberations and both are major themes in this article. As such, I will first make the following disclosures about myself, all of which are already in the public domain. I started off with a relatively small interest in MNKD in the second half of 2012, consisting of equity, warrants, and options. Not a single share or warrant has been sold, nor have the option positions been closed. Given the stock's appreciation, that interest is no longer small or insignificant. As for my credentials, I have a bachelor's degree in psychology and a master's in international finance. My professional career includes 25 years as a stock analyst/picker, with the last five as the founder and executive editor of 3DiminensionalResearch.com (3DR) for which I issue one stock and one event driven special situations recommendation each month. Every single recommendation I've made over the past 25 years has been published and is part of the public record. My target audience has always been the retail investor. A quick glance at the 3DR website will reveal my track record, at least for the last five years; more than 90% are up, as of last Friday's close. Although not detailed on the home page, my success rate for the event driven special situations is equally good. It should be noted, however, that the stock market has been in bull mode the past five years, giving me a welcome tailwind. With that said…..
I don't know about you, but I like to make my investment decisions based on facts, probabilities, and an objective assessment of what's known rather than on a fear of the unknown, a contrived narrative, and a subjective evaluation of the possibilities. Following this approach, I prepared several lengthy reports for Seeking Alpha in which the science and clinical data that underpins MannKind's NDA for Afrezza was reviewed. Also discussed in some depth were both the history of inhaled insulin and the commercial potential of Afrezza. Several other SA contributors, including Joe Springer and Maredin Capital Advisors, prepared and published equally comprehensive reviews that are largely consistent with my optimism about the innovative inhaled insulin product.
Making the public argument for the other side are the "pessimists," as labeled by author and member, Scrying Biotech, in a recent article. This group includes several SA authors, plus the opinionated Adam Feuerstein of The Street; I think it's wonderful that Seeking Alpha provides a level forum for both sides of the debate. Sadly, what started off as just a very weak, in my opinion, short thesis that evolved from two CRLs (complete response letters), poor balance sheets, three failed inhaled insulin programs, and predictions of a failed phase 3 clinical trial to poor commercial prospects, has degenerated into what amounts to a reprehensible campaign that impugns the integrity and veracity of Alfred Mann, MannKind's 88-year-old founder and chief executive officer who has spent most of his extraordinary successful and exemplary life improving the health of millions and millions of people around the world. The ongoing campaign uses half-truths, innuendo, manufactured scenarios, misdirection, and outright lies to sow doubt, continuing a strategy that Summer Street, which certainly belongs in the "pessimists" camp, began on the very day that MannKind reported top-line data on the pivotal phase3 Affinity studies. On that day, Summer Street used arguably inflammatory language, saying the data released was "suspicious" and "unprecedented," ignoring, for one, the definition of "top line," and, equally important, not even bothering to make any effort to alleviate those suspicions before publicly announcing its concerns; MNKD shares plunged following the dissemination of those headline concerns.
The shorts' thesis since that initial missive last August has focused almost exclusively on data MannKind didn't publicly report, accusing management implicitly and explicitly of supposedly hiding potentially damaging information, while completely ignoring two important facts: the company reported all of the relevant facts that are part and parcel of top line results; the missing data, even if disclosed, aren't relevant. The "pessimists'" tactics are readily discernible in the many articles they have published, as interested readers can confirm for themselves in the articles linked above. Investors will undoubtedly also find illuminating a recent exchange between Mr. Feuerstein and Kathleen, a commenter to the latest of his many attacks on MannKind. The debate between the optimists and pessimists, notwithstanding, which is being waged with incomplete information and our respective biases, it should be noted that there is yet a third group, consisting of folks with far more information at their disposal and considerably more at risk (in terms of both money and reputation) than us "bloggers."
The Smart Money
As far as we know, there are four parties that have access to all of the data accumulated from the Affinity phase 3 clinical trials: MannKind Corporation, Deerfield Management Company, Greenhill & Co., and the Food & Drug Administration. So what can we learn from their actions?
Knowing more than anybody else involved in this long-running saga, including all the data from the Affinity studies, the company has invested $2.3 billion in the development of Afrezza, including $361 million in the two years since the second CRL was received. Since the results were reported last August, the company has retained an investment bank to secure a marketing partner, compiled and filed an extensive New Drug Application, and millions of dollars building its workforce and scaling up manufacturing operations in preparation for commercialization. It seems inconceivable that Alfred Mann and his executive and scientific teams would do all of the above if there were some damaging information that would lead to an FDA rejection of the NDA. The shorts' thesis would have you believe that Mr. Mann is setting himself up to conclude his long and illustrious career in abject humiliation and perhaps subject to criminal charges and civil litigation. At the end of the day, the only party that needs all of the data relative to Afrezza is the FDA, they have it, and there is zero benefit to MannKind to hide information that will come out in very short order.
The investment management firm has lent MannKind $120 million (in three equal tranches) thus far, with the second $40 disbursed after its independent experts had examined the phase 3 date. It subsequently converted $40 million of the debt into equity, as provided for in its initial agreement. Significantly, too, as disclosed earlier this month, the two companies amended the agreement, allowing Deerfield to convert another $60 million of debt to equity. The language detailing the amendment is difficult-to-understand legalese, but when all is said and done, in return for the conversion feature, MannKind will be able to borrow as much as $90 more, assuming FDA approval, meaning the company could get $130 million post approval. In sum, if Deerfield converts the maximum amount, the FDA approves, and MannKind exercises its option, Deerfield will have invested a total of $250 million essentially in Afrezza's potential. (Note: I would appreciate a correction if my reading of the amendment is in error.) Again, the shorts' thesis would have you believe that Deerfield and its experts are either incompetent or have been badly duped by MannKind's management.
The investment bank has now been working with MannKind for almost seven months in trying to find a marketing partner. Although never explicitly announced, MannKind clearly had to provide all of the information that would be necessary to conduct a search and negotiate an agreement. This undoubtedly included all of the relevant phase 3 data. We can only speculate on the status of the search/negotiations but the odds of Greenhill having spent all these many months on the process if there were something fishy in the data set is remote, at best.
The Scientific Community
Beyond the three parties discussed above, a large number of physicians and experts in the field of diabetes have endorsed Afrezza and expressed their expectations of its approval. They include John LaMattina, who was the president of Pfizer Global Research and Development at the time the drug giant launch Exubera, an inhaled insulin product that was approved for marketing in 2006. Also included is Dr. Jay Skylar, a world renowned expert on diabetes and the lead investigator in one of Pfizer's clinical trials for Exubera; in a September 10, 2013 Youtube video, Dr. Skylar states that he would be willing to prescribe the drug to almost all of his diabetic patients.
The Final Word
In 25 years of dealing regularly with corporate executives, it's been my experience that the overwhelming majority don't deliberately mislead the investment community. The ones that do mislead quickly lose the trust of Wall Street and don't survive long in the corner suite. As well, although some might like to paint advisory committees members as a bunch of ethically challenged corporate cronies looking to protect one big pharmaceutical interest or another, most are experts in their fields who are highly protective of their long-term reputations.
All that said, all of the opinions expressed above are mine. Like them or not, the opinions of authors like myself will most likely affect how investors will view a stock. This is especially true of small stocks that have little institutional research coverage and retail investors have precious few sources of information. This reality is evident in the number of page views generated by some of my articles on MannKind; the first one, for example, had almost 39 thousand and the last one more than 27 thousand. I've made every effort to be as objective as possible but the reader has to keep in mind that I have a vested interest in the stock doing well. The objective of the article is to help undecided investors decide what to do in the 21 days prior to AdCom. In my opinion, a review of third-party assessments and opinions should be part of an investor's due diligence. The due diligence should also include an evaluation of that third party's credentials and credibility.
Disclosure: I am long MNKD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.