Do MannKind Insiders Harbor Doubts? Three Authors Say 'Yes'; The Data Say 'No'

Jun.13.14 | About: MannKind Corporation (MNKD)


In three days, Seeking Alpha has published three articles on MannKind insiders selling their shares.

The articles imply that insiders have doubts about MannKind's future or about lining up a partner.

Analysis of the data in one of the articles directly undermines the insider doubt thesis.

The comments at the 6/12 Goldman Sachs' Healthcare Conference made by MannKind's CEO do not imply that there is a fly in the partnership ointment; there's a rational explanation.

MannKind is a solid long-term investment.

Starting June 9, Seeking Alpha has published three articles by, respectively, Markus Aarnio, Achilles Research, and Quoth the Raven highlighting insider selling of MannKind (NASDAQ:MNKD) shares. In the first, Markus Aarnio presents a table showing that in the months of May and June, 2014, four insiders sold 693,000 shares pursuant to a Rule 10b5-1 plan, and none of them bought any.

In the second article, Achilles Research stated "Approximately 392k shares have been sold by company executives since June 3, 2014, and according to Yahoo's insider transaction history for MannKind, insider sales have clearly accelerated." To back up his assertion, Achilles Research presented a table that literally copied several rows from the table published here. It looked like this, except that (1) I deleted the column that shows that each transaction displayed was "Direct," and (2) to save space, I deleted the insiders' first names and the fact that they were all company officers.

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Here is a modified version of that table: All the numbers in the table below are the same, but I (1) rearranged the rows so that the transactions are grouped by the insider involved, (2) added the highlighted row, which was the very next row in the original Yahoo table (At first glance, it seems to strengthen Achilles Research’s case), and, in order to simplify cell entries, (3) reorganized the columns, added two columns at the right of the table, and changed the column labels.

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Note that the "Acquisition" column proves that Aarnio was wrong when he asserted that there had been no insider buying in May and June, 2014. Also note that with the exception of 35,000 shares that were sold collectively by Juergen and Pfeffer, all shares sold had been bought the same day.

Below is a consolidated table that highlights the net impact of these transactions. Because I included an additional row in the first table (to show Juergen's normal acquisition-disposition pattern), the number of shares held by insiders decreased by 35,000 shares. If I had not included that row, it would have appeared as if there were a net increase of 41,899 shares.

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With the exception of the 35,000 shares that were sold without first being acquired at a lower price, the transactions did not change the number of shares held by insiders, but it did increase the wealth of the insiders, without drawing any money from their bank account.

If these insiders did not want to invest additional capital in MannKind, but wanted to increase their income while holding the same or nearly the same number of shares, they should have done exactly what they did. Yet, all three authors (1) implied that these transactions demonstrated that key these MannKind insiders had doubts about MannKind's future, and/or (2) stated that share institutional and retail holders of MannKind shares should take action to protect their investment. This is despite the fact that Aarnio mentioned that all shares were sold as part of Rule 10b5-1 plans, and Achilles Research labeled each share disposition transaction an automatic sale. In other words, both Aarnio and Achilles Research were fully aware that it was many months ago, when everyone expected that the FDA would render its decision on Afrezza by April 15, that these four insiders arranged to have these shares sold in May and June. Yet, both authors implied that these transactions demonstrated that these key MannKind insiders had doubts about MannKind's future.

Quoth the Raven insists that he is not a MannKind-basher: "I like the company and I like Afrezza, the company's inhaled insulin product. I'm wishing the company and its shareholders long-term success. However, I think there's going to be room for a short-term short play." He states that in the 6/12/14 Goldman Sachs Healthcare Conference, the comments by MannKind's CEO about future partnerships were bearish, because they implied that "MannKind is expecting partnerships to come to fruition 6 to 8 weeks out from FDA approval... What does this mean? Basically, it would seem the company doesn't have anyone lined up yet, and there doesn't seem to be any type of buyout offer on the table. If there was, why make these comments?"

I argue that it will probably take that long to (1) digest the label information, (2) calculate what will be involved in conducting the post-approval research that will be required, (3) select among the offers made by the most viable potential partners, (4) work out the final details, (5) get the lawyers in both companies to sign off, and (6) agree on how and when to announce the news to the public. But QTR argues that perhaps we should infer that there are no viable partners lined up to complete the above-described dance.

You can judge for yourself by reading the transcript here. If you read the full transcript, note that MannKind's CFO explicitly refrains from providing any time table for announcing a partnership agreement. But for my money, rather than communicating that he has doubts, he does so in a way that inspires confidence. For example, he made clear that they have enough cash on hands, so that they are not negotiating with their backs against the wall.

Returning to QTR's argument, the partnership comments constitute one component of his short-term short play. The other component is QTR's assertion that the articles about the insider sales "adds a little fuel to the short argument... [and] may prompt you to want to move your short up a bit, and not wait until FDA approval."

MannKind's shares have fluctuated substantially. At the close of trading on June 11, its price had dropped by more than a dollar from its intraday high on June 9. It will continue to be volatile. But I do not intend to offer any advice on when or how to hedge one's position. It is possible to make money doing so, but investors who count on their ability to estimate how and when shareholders will react to developments or the lack thereof incur their own set of risks.

My assertion is that the long-term outlook for MannKind's shares is highly favorable. My conviction is based on three predictions:

  • Because the fact that Afrezza acts faster and leaves the body sooner than any other insulin, future research studies will demonstrate that it reduces the likelihood or onset of long-term complications more than its competitors (as elaborated here);
  • MannKind will form a meaningful partnership with a major pharmaceutical company that will have terms that are highly favorable to MannKind and allow it pursue the R&D for other uses of its inhaler technology; and
  • Because of (1) the above mentioned long-term complication prevention feature, (2) its track record of reducing the frequency of severe hypoglycemic episodes, (3) its low cost, and (4) its user-friendly features, Afreeza will be eagerly embraced by patients, their physicians, and insurance companies.

Disclosure: The author is long MNKD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.