MannKind: The Gambler's Creed - Let It Ride

| About: MannKind Corporation (MNKD)


In my previous article, we examined the obstacles to approval that Mannkind faces at its upcoming FDA advisory committee meeting by expanding our definition of what an adcom is.

In this article, we'll suss out the risks for long-term investors that attend to holding through this or any other high-profile event in the absence of using options.

Are adcoms really approved 82% of the time as MannKind's fervent supporters suggest? I'll demonstrate why it's better to read a document with quiet discernment than with partisan zeal.

And finally, we'll address the role that bloggers play in clarifying important issues surrounding investment in the sector, especially as this applies to binary events and to adcoms in particular.

In review.

My last article on Mannkind (MNKD) was a blockbuster in its own right smashing personal records for desktop page views and number of comments received. Though the ideas were challenging, the thesis was fairly simple: MannKind's application for the approval of Afrezza would be rejected at adcom due to an intrinsic and natural bias on the part of FDA representatives in favor of large-cap companies with decades long personal relationships within the agency.

Further, MannKind executives were evincing some strange and self-defeating behaviors consistent with the pressures of seeking entrance into a lucrative global market without a partner and stout competing interests.

This was mistakenly interpreted by some as suggestive of cronyism on the part of the FDA or worse, corruption, which it isn't! In order to avoid this faulty interpretation, I advanced a metaphor by mythologist, Joseph Campbell known as the pedagogical stunt. I'll not be discussing this any further, so please go back and read the first article now if you haven't already done so.

Before proceeding to the thesis of this article however, which is the complete dismantling of the statistical argument in favor of adcom approval rates offered in defence of MannKind's Afrezza by her advocates, I want to provide you with an alternative allegory. This will be my last attempt to explain a natural phenomenon, common to all of us that is both good and difficult to supersede.

Consider if you will, a mother and her child of say thirteen years old. Now imagine that this mother exits the store where she's been shopping only to find her child in a parking lot melee involving a half-dozen other children. Two of these children are in extreme life-threatening situations, while her child is not.

Which child will she move out of harms way? Of course, she will remove her own. Why? Because it's the natural, instinctive and right thing to do. Her child is familiar to her, friend to her, significant to her and true to her signals, she will protect her.

Now, I would like to think that she would understand that every child is her own in some universal way. And in fact, it might be wrong for her not to prioritize those children most in harms way for immediate extraction, but that's not going to happen unless she elevates above her basic instinct.

Moving on.

The central bit of madness - and there was so much madness swirling about the responses to my last article that it was difficult for me to isolate that one singular central bit, but were I to try - and try, try, try is what I did, I would suggest that it was this shared assertion that adcoms were in fact "approved 82%" of the time. Sure, some suggested 73%, others as high as 92%, but most eagerly latched on to that 82% figure and referenced this article as justification for having done so.

Please bear in mind, that my article was specifically about "high profile" adcoms where the petitioning party was entering a blockbuster market, with established large-cap competition and was doing so without a partner.

Therefore, this assertion was little more than a distraction, bringing dissipating light to bear on the subject at hand. It did however demonstrate that we are all subject to bias which acts as a filter discarding pertinent facts while allowing conformational distortions to pass through.

The #1 enemy of the biotechnology investor - reading without discernment.

So let's talk about Cyril Carrere's work in assessing the impact of FDA advisory committee votes noting that this isn't an official FDA document and therefore is subjective analysis. It would be great if you could open up that document and place it in a window right here beside ours.

According to Mr. Carrere, there were 169 adcoms between 2008 and 2012 resulting in 121 product approvals. This gives us our first winning percentage of 71.59%. Alright, we're looking good, yes? Well, maybe. Let's read on a bit.

He then tells us that there are three review types that the FDA assigns to an application - standard, priority and orphan. And of these 169 adcoms, 77 applications received the default "standard" status. And though it might be mistaken to describe MannKind's Afrezza application as "standard" having twice been rejected before, we certainly can't describe it as orphan either, nor priority at this time.

Moving further downstream, we discover that standard applications didn't do nearly as well as their sister designates did. Here's a screen grab for those of you on smarty phones.

Click to enlarge

Notice now, and I've highlighted it for your convenience, that 45 of the 77 standard applications received a "Yes" vote at adcom. I know you're launching your Windows calculator and once you divide 45 by 77 you'll get 58.4%.

Here's where it gets interesting. If we move to the right we see that the FDA approved those applications receiving 'Yes" votes 82% of the time. And this is where we get the misinformation glommed onto and perpetuated by those with an unhealthy stake in the outcome of the process.

82% represents the number of applications approved by the FDA after having received a positive vote at adcom. In other words, it's a quotient derived to assess the predictive power of applications approved by committee.

Click to enlarge

So what then is the approval rate for standard applications?

According to Cyril Carrere, not so good. Once we remove the imbalance of the disproportionately high approval rates associated with orphan and priority applications, we sink to the level of something akin to a coin toss or worse. For we already know that 45 of the 77 applications received a "Yes" vote and that of these, 37 went on to approval. Therefore the chance that any standard application will be approved after a bout with the FDA adcom committee is 48%.

However, that isn't even the reality that MannKind faces, is it? That "day of reckoning" is far more bleak, gauged not by a percentage of less than a coin toss, but by a walk through the wreckage of Amarin, Aveo, Delcath and Dynavax.

This misunderstanding on the part of MannKind's supporters could have been alleviated had they read the first line beneath figure 1 of Cyril's document.

Of the 121 products that received FDA approval, 88% (99/121) of committee votes were positive. Of the 48 products the were not approved (not shown), 30 (62.5%) had negative committee votes.

However, when our minds are prejudiced in favor of a certain belief, our faculty for reasoning is reduced to a surface glance and our analysis of any document is selective at best.

Note for instance, that upon closer inspection of Cyril's work, he fails to follow his own methodology. In his "Focus on the Oncologic Drugs Advisory Committee" breakout box, he gives percentages beneath the ODAC "Yes" Votes column that reflect the proportion of one review type to another. In other words, 5 is 22.7% of 22, 15 is 68.2% of 22, and 2 is 9.1% of 22. Adding these up we arrive at 100%. This isn't the same proportion of yes to no votes that were encompassed in the first breakout box.

He also starts out above the box with an easily recognizable error.

Of the 21 products that received FDA approval, 90% (20/21) of ODAC votes were positive.

Even if he had his own numbers right, this would be wrong as 20 of 21 is 95%. However, the correct numbers are 21 of 22 - still 95%. Because of the mistake made in giving percentages in relationship to other categories instead of percentages in relationship to ODAC "No" Votes, we are left to wonder what the real percentages of approval are.

We only know that 6 oncology products, according to Mr. Carrere had negative committee votes of the 8 that went unapproved, but are left to wonder which types - standard, priority or orphan those fell into.

In the end, we realize that once we read with discernment, official looking documents with fancy names like the "Cortellis Regulatory Intelligence Analytics" take on human proportion. In other words, they're not perfect.

My greatest argument for FDA adcom bias is you.

It's unfortunate that the process of investing creates so much attachment that our view of reality becomes completely distorted. This happens in part, because we naturally develop a bond with each other as investors in the company. We then add to our "holdings" - think about that word for a minute. We see ourselves as part of a new method of care for patients suffering horrible and sometimes life-threatening diseases.

Corporate executives, first and foremost barons of business, transform into father figures offering reassurance and appreciation of our support. Anyone who shares our enthusiasm is welcomed into the family. Anyone critical is banished and ridiculed.

I've actually had investors tell me that they can't afford to give to charity so they invest in biotechnology instead. That notion is so patently absurd I can't begin to take it seriously, but to the person that believes it - beware! From that vantage point, anyone that challenges our perception is an enemy of mankind and a traitor to our lofty cause. Opponents are obviously in collusion and up to some contrivance to deprive us of our just reward. The FDA is corrupt and everyone that speaks a word in opposition is working for some hedge fund, cleverly and always obscured from our view.

Are FDA panel members any different than we are? What about actually taking the time to read a document that you wave around like a banner in your defense? Perhaps we should expect an FDA panelist to read the Afrezza trial results and application with the same degree of interest?

I do.

I'm offering you an alternative approach to the madness you're experiencing. MannKind shareholders, above all should realize, having twice been deprived before, that binary events have real and lasting impact on an investor's wealth.

And that's exactly what resonated with shareholders in the wake of my missive.

Let's take a look back now at what happened last time around, shall we? Here's the annotated 9-month chart courtesy of ShareBuilder.

Click to enlarge

As you can see, MannKind closed at a peak price of $8.29 on August 2nd as investors rallied around press releases from Cowen, Brinson Patrick, Summer Street and the company itself regarding optimism surrounding the Phase III Affinity Trial results.

Then on August 16th, Summer Street broke ranks with the optimists and wondered allowed about trial results from arm-C being withheld from view.

Three days later, a trusted Seeking Alpha contributor then claimed that progress towards FDA approval would continue unabated.

On August 27th, MannKind declared Summer Streets commentary "alarmist" saying the performance between the Medtone and Gen2 devices was comparable.

The rightful and definitive last word however, came from Summer Street's Bart Classen who predicted that there was a real chance the FDA would not accept ManKind's NDA for approval.

Now, let's take a look at the chart following the publication of my article highlighting the dangers involved in not risk adjusting your position.

Click to enlarge

Since the publication of my article on February 26th, shares have traded steadily lower as demonstrated on the 1-month chart provided courtesy of ShareBuilder. Though there can be no direct correlation between my article and the performance of the stock, conversely, there can be no denial of a possible impact either. I'm aware of no other author to have constructed a persuasive model of FDA adcom outcomes relative to MannKind's predicament that encompass the framework I detailed no matter how incomplete or flawed that construct might be.

This stock chart pattern is inconsistent with the normal behavior of biotech stock run-ups prior to adcom events. I believe the cause of this is that investors are wising up to the coin toss nature of these events and at last managing their risk exposure.

The #1 ally of the biotechnology investor - asking good questions.

There seems to be an eagerness amongst investors to be impressed by credentials. That's too bad. It is however, a great way to lose money.

On the road to Aveo's Tivozanib adcom, I read a raft of endorsements of the company and product on Seeking Alpha without one person asking a challenging question. So, when this article appeared a mere 8 days from the ODAC panel convening, I'd had enough.

I wondered aloud how it was that Tivozanib's trial was seeking frontline approval while going head-to-head against a second line therapy. Here I am, the tarot card wielding, bus driving mystic from Seattle Washington, with less than a year investing in the sector, and I'm challenging the medical doctor on staff at PropThink.

MannKind supporter, Dr. Aafia Chaudhry disagreed with me, stating that it would be "unprecedented" for the FDA to make such a requirement.

The FDA disagreed with Dr. Chaudhry.

All articles on Seeking Alpha, or any other financial website are opinion pieces only.

When you read an article, it's someone's opinion and nothing more. Anyone pretending to offer more than that is in violation of the law. It doesn't matter that they have medical degrees, or decades of experience in the financial community. Their opinion is no more valid than yours. Need another example?

When I first arrived in the sector in late 2012, I became enamored of Sunshine Heart's C-Pulse Heart assist device which had just completed its 20-patient feasibility study. I read an article by Bret Jensen who happens to have 2,097 followers in addition to having had a career in finance since 2008. I admire Bret very much.

And so I asked him how long he thought the 388-patient pivotal trial would take. This was his reply.

Given 20 patient study had six months of data, the 388 patient study should be of similar duration. The company should then have pretty good idea of whether trial will be successful I would say by end of 1st quarter and hopefully FDA approval by second or third quarter.

Again, here is a person who exudes competency and credibility predicting that the trial should have completed this year. It has enrolled 3 of the 388 patients it needs to gather data and likely wont be completed until 2018 or more.

Everybody makes mistakes, therefore no one's credibility should be measured by any other yardstick than performance.

A situational strategy based upon adcom approval rates from 2008 - 2012.

Click to enlarge

On the basis of Cyril Carrere's work, I've developed a strategy that no doubt will be refined over the years ahead based upon many factors starting with experience. Essentially what I've done, is to measure the risk revealed in his document and make a proportional map regarding how much of my investment I'll take off the table a month or so before an advisory committee date.

If I had a better idea of just how many oncology adcoms were "Yes" votes, compared to "No" votes, I'd be able to formulate a more exact allotment but alas, will have to wait for Cyril's response to my inquiry. In lieu of that, and considering that there were only 6 "No" votes across the 3 categories, I'm inclined to think my assignments are conservative.

So let's see how this would have played out for Aveo for instance. Had I left my $50,000 on the table going into adcom on the good doctor's advice, I'd be holding $15,000 now. However, with my strategy, I would have taken $30,000 off the table. Adcom would have removed $14,000 of my holdings but I would have consoled myself by walking away with $36,000.

In one instance I lose big. In another, I keep most of what I've earned along the way. If adcom were to have been a success, I probably would have lost out on a $50,000 windfall, but I could still celebrate the addition of a $20,000 doubling of the portion left at risk for a total winner's take of, $70,000.

As a result, if I win - I win. And if I lose, I still win. I like that because it's sensible.

The last word is always yours, but here are a few of mine.

I make no pretense about who or what I am. I'm a blogger and nothing more. I enjoy molding what I believe to be an entertaining and hopefully informative article into something that spurs thought and conversation.

Since arriving in the sector, I've been extremely fortunate in authoring articles about stocks that have gone on to perform successfully nearly 100% of the time.

Click to enlarge

In addition, I've made five predictions, and five predictions only, verifiable right here on Seeking Alpha regarding binary event outcomes. All five have now have come to pass.

Click to enlarge

My credentials are my record. And my hope is to be wrong this time. Not just to get my feet back on the ground, but to have all of you celebrate a well deserved victory at my expense.

Till that day I wish all of you peace.

And always be well...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Any information or opinion expressed herein may not be true, accurate or correct and it does not constitute any suggestion to buy, sell, hold or adopt any investment strategy for this stock or any stock that may be mentioned. Reliance upon information in this article is at the sole discretion of the reader. The sole purpose of my article is to entertain by providing information, the accuracy of which is as good as the public sources it was derived from. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. I sometimes make mistakes. There are a myriad of things, which can happen in lieu of any forward-looking statement I have made. Any stock featured or mentioned in an article I compose is subject to all manner of influences, which can change its value in dramatic fashion upwards or downwards. These events can be of a wide variety not limited to news-related occurrences, managerial decisions, trial failures, stock manipulations and so on. I make every effort to declare positions I have in stocks I cover or mention in an article but reserve the right to move in and out of said investments at my own discretion based upon the wisdom of doing so. I implore you to do your own due diligence, invest at your own considerable risk attaining the just reward your efforts have wrought.