As an advocate, observer, and proponent of behavioral finance theory, few stocks in recent history have provided me with as fertile a platform for observation and analysis as the Valencia, California-based biotechnology company, MannKind (NASDAQ:MNKD). Like most developmental stage biotechnology entities, MannKind has traveled a road riddled with obstacles, setbacks, capital raises and criticisms for the better part of a decade. Moreover, and more specific to the company's recently approved diabetes drug Afrezza, the company has navigated the tumultuous waters of FDA scrutiny, the creative strategies of accomplished hedge fund managers and their own interests, and the unrelenting pressure of remorseless short sellers who never run out of subjective points of citation capable of creating a thinly veiled illusion of validity. It is the elaborate combination of all of these factors which have provided a foundation for MannKind to evolve into what is, arguably, the ultimate "battleground stock."
For the purposes of this article, in order to ensure clarity, a battleground stock is simply defined as one which is in possession of considerable and fervent positions on both sides, in which either side is operating at maximum conviction. In other words, there is noteworthy long and institutional interest as well as substantial and steadfast short interest. Both sides are utterly convinced of their inevitable victory, and they each function with all the civility and conciliation of two Rottweiler's fighting over a steak. It can be a fascinating site to behold, but it can also be a gut-wrenching investment to maintain. Depending on one's investment acumen, such positions, on either side, have the potential to bring about either celebratory gains or devastating losses. Battleground stocks are not only fought between longs and shorts, but also between each individual investor and their own patience, composure, and strategies. One must be willing to endure in order to profit.
In the case of MannKind, revenue projections, trading strategies, and partnership/buyout speculations have been covered here on Seeking Alpha ad nauseam. However, that isn't to say that those contributions haven't been insightful, well presented, and profoundly helpful to a significant number of readers and investors. Many contributors, including but not limited to, the likes of George Rho, Jeff Eiseman, Quoth the Raven, and Psycho Analyst, have published multiple MannKind articles ripe with thought provoking insight and even handed analysis. Each contributor, having proven the value of their contributions regardless of which side of the fence they represent, should be applauded and appreciated for their offerings. However, this article will focus largely on a segment of the discussion which has been generally omitted from the majority of previous analysis; the role of patient/consumer sentiment, and/or behavior, in the commercial success or failure of Afrezza, especially in America.
The Anatomy of a Short
Unlike the arguments often employed by long investors, the short argument is regularly changing and evolving. That is not a criticism of shorts; it is simply an acknowledgement of the fundamental differences in opposing perspectives. Longs, for example, tend to initiate positions in biotechnology companies predicated largely on science and technology, addressable markets, managerial leadership, innovation, and potential marketability. These decisions tend to be made earlier than later, and are largely based on long-term commitment and individual conviction. Their investment horizon is generally further out. In regards to shorts, the reason for initiation of a position tends to vary predicated on time and circumstance. For example, a short may enter an equity at a time of temporarily inflated valuation, the probability of impending dilution, the likelihood of failure at a binary event, or any imminent occurrence which they feel confident will depress or ruin share price from current levels. Thus, as time continues onward, the reason or cause for initiation of a short position is ever evolving and in a constant state of re-evaluation. In some instances, shorts maintain ulterior motives and simply believe they will find a better entry point in order to transition to a long position. Hence, as a short position is in a state of constant metamorphosis, it can change at any moment. Thus, in the vast majority of instances, short positions tend to be shorter term, albeit subject to repeated re-entry. In other words, longs tend to be more concerned with winning the war, whereas shorts tend to be committed to simply winning the next battle.
For example, holders of short positions in MannKind have cited various motivations disguised as substantiations throughout this process. They forecasted failure at AdCom citing "hidden data" and "lung cancer concerns." They predicted a third CRL would be issued (despite an overwhelming positive AdCom vote) citing that the FDA would "not be fooled by the charade at AdCom", more "lung cancer concerns", and "the FDA's unhappiness with dosage changes." They have cited everything from concerns about the delivery device to their erroneous declaration of Afrezza only addressing a "niche market." The list, quite frankly, goes on and on. In fairness, the short arguments to date have not been completely unfounded. MannKind's failure to procure approval for Afrezza until recently, and continuous dilution over the years, did provide them with factual history which they, in return, used as a predictor for future outcomes. However, a moderate amount of due diligence, into both the evolution of the drug and the increased probability of success in front of the FDA on one's third attempt, would have shown probable cause for altering their expectations.
Nonetheless, here MannKind stands again, on the cusp of another event. Impending now, post approval, is the marketing and commercialization strategy moving forward. Having been presented with a new impending catalyst, the short argument has changed again. Now short positions are predicated on beliefs that dilution is more probable than either a partnership or a buyout, and that in any event the label awarded to Afrezza alongside its approval is not congruent with commercial success. Further substantiating this position is that MannKind has yet to speak publicly regarding its post approval plans, and the shorts have declared that this silence is an unequivocal sign that the company is disorganized, disoriented, and unable to fulfill its partnership intentions. All of that - all of it - is shortsighted.
First of all, even if dilution does come to pass (which is highly unlikely), as a replacement for partnership or buyout agreements, such funds would be used to enable the company to procure, train, educate, and execute a sales force capable of saturating the market with Afrezza education, availability, and usage. Even in this scenario, the long-term revenue prospects for shareholders would remain in possession of tremendous upside from current levels well into upcoming years. However, if the company was intent on an offering, it would have likely been made at peak share price in order to minimize the impact on the outstanding share count. Secondly, the contention that the label is a massive obstacle to commercial success is absurd. By nearly any reasonable standard of expectation the label was in-line with what most competent shareholders expected. The label will be covered further in the following segment. Lastly, silence, as the saying goes, is golden. Competent people only say things when there is something worth saying. Otherwise, they risk the very competence that makes them someone worth listening to. MannKind is, undoubtedly, working diligently behind the scenes to organize their strategy moving forward in whatever direction they elect to take. Given the complexities associated with partnership agreements or buyout terms, the roles of regulators, attorneys, executives, and consultants must all be considered prior to any announcement that could violate processes, non-disclosure agreements, or bring about penalties. Thus, silence is, in fact, representative of progress, not stagnancy. Wars are won with patience, strategy, education, and execution; not impatience, excitement, desperation, and recklessness.
Why Label Concerns Are Obsolete
Direct-To-Consumer Advertising, or DTC Advertising, is largely an American mechanism. We are the only country in the world that saturates instruments of mass media with the marketing of pharmaceutical products. Granted, there are some other civilized countries around the globe where an occasional new drug advertisement can be found, but those are largely in medical journals delivered directly to physicians' offices. No other country on the planet manages to advertise new transvaginal mesh products during American Idol. Nowhere but in America will one see an advertisement for an erectile dysfunction drug during a mid-afternoon Seinfeld re-run. As a result, Americans are the only people in the world who regularly walk into a doctor's office asking for information about a treatment and wanting to find out if they can try it. If one were to do that in Italy, Germany, Russia, South Africa, or anywhere in between, they would likely be looked at as if they had just asked for fairy dust. The patient/consumer pursuit of drug treatments is about as American as baseball or apple pie. We (Americans) like to be in control, and if our doctor isn't willing to prescribe us what we want, we can, undoubtedly, find one who will. Some may argue it isn't right, but that doesn't change the reality. In capitalist America, the consumer is in control, and in the pharmaceutical space the consumers are the patients.
Consider for a moment the context of some DTC ads which we, as Americans, see every day. The commercial itself may show a family in a park, throwing a Frisbee with grandpa, and we think how great it would be to live that kind of life. Oh my, wouldn't it be great if grandpa could come out to the park with us again. We get intoxicated by the idea that a drug could potentially give us life back, give us our family back, and give us a few more memories worth holding onto. Sure, at the end of the commercial it says something about anal leakage, stroke, and loss of sensation in limbs, but did you see grandpa smiling when he watched his grandson catch the Frisbee? Ah, to be an American. So, a phone call is made to grandpa from his family after they see the commercial, he is accompanied to his doctor by his family, and grandpa gets on the new drug. Of course it's not that easy, but you get the idea. Label concerns in America are more important to investors than they are to patients, as distorted as that may be.
Look at the list seen below. It identifies the top ten selling drugs in America for 2013.
Let's take a cursory view of the top three.
The first one is the magnificently popular antidepressant Abilify. Here you can see the drug's label. Abilify has a monumental number of users in America, and its position atop this list is well established. It supports the mental health and functional welfare of millions of people, including patients and their families. It also has a laundry list of side effects, warnings, and reasons for discontinuation. Hyperpyrexia, muscle rigidity, and autonomic instability are all warning signs of Neuroleptic Malignant Syndrome, or NMS. This ailment can bring about pneumonia, systemic infection, and primary central nervous system pathologies. Abilify could lead to NMS in some patients. In others, the drug may lead to Tardive Dyskinesia, a syndrome of involuntary and irreversible sporadic movements which can compromise one's ability to function day to day due to the inability to perform common tasks such as cooking, driving, or even using the bathroom. Other side effects include hypotension, seizure, cognitive and motor impairment, suicidal urges, dizziness, randomized pains, and blurred vision. None of that stopped the drug from generating billions in revenue.
As to Nexium, the list of side effects and warnings include headache, diarrhea, abdominal pain, allergic reactions, hypertension, fibromyalgia, menstrual disorders and conjunctivitis. In more serious cases it could cause erosion of the esophagus and serious hypersensitivity. The latter of which could be fatal in people with certain allergic profiles. Again, AstraZeneca (NYSE:AZN) appears to be doing pretty well in the marketplace with Nexium.
Then there is Humira, which carries a Black Box Warning for "Risk of Serious Infection." In addition, the drug has been known to bring about a considerable list of side effects and warnings. This list includes lymphoma, anaphylaxis, a reactivation of Hepatitis B in patients who previously transmitted the virus, heart failure and a "lupus-like syndrome." Take a moment and read that again - I'll wait. The point here is that despite all of these warnings, all of these side effects, and all of these potential pitfalls, patients are perfectly comfortable taking these drugs for the opportunity to improve their lives. Also, and perhaps more importantly, doctors have been proven, obviously, to be willing to prescribe them.
The label, in the case of Afrezza, despite its "Black Box Warning" and its need for regular testing and follow up studies will not, in any way, prevent the drug from being a commercial success. The theory that a restrictive label proves to be a substantial obstacle to triumph on the open market has been disproven time and time again. What drives drug sales, especially in America, is patient demand and physician compliance. Maybe it shouldn't be that way, but it's the way nonetheless.
The Shortsightedness of the Shorts
It has been said before, and it shall be said again herein; shorts are not stupid. A savvy short seller can earn a significant fortune by adjusting with a stock's momentum, entering at the right point, and exiting at the right point. The majority of short sellers are highly competent, decidedly capable, and accomplished. However, in the case of MannKind, and the commercialization of Afrezza, the short thesis is flawed.
Sure, shorting the stock post approval around $11.00 per share was a judicious decision. History tells us it's a near surefire way to make money. However, one mustn't be greedy. At some point in the near future, there will likely be an announcement of a partnership from MannKind. When that comes, shorts will be best served to have already exited the stock. Granted, some will declare that the partnership agreement isn't advantageous to MannKind, and they will proclaim that sharing revenues or earning royalties can't justify the market cap, and they will continue to pry about post approval studies and misguided comparisons to Pfizer's failed drug Exubera. However, these will be the same people that loudly declared, with absolute certainty, that the AdCom vote would be a disaster for MannKind. We all saw how that went.
Admittedly, investors who intend to short the stock again, at post announcement peaks, following partnership news, may make a few dollars thereafter short term. However, for those shorts currently holding shares, who shorted anywhere between $8.00 and $11.00, the future will not be forgiving. The best bet is to exit now, regardless of plans thereafter, in order to minimize losses or lock in small gains. Afrezza may or may not become the next Abilify, Nexium, or Humira, but it doesn't have to. Shorts who hold for too long will lose regardless. Shorts can win some battles along the way, but Al Mann will win the war. Afrezza will get to market. Patients will demand the drug. Doctors will comply. Time is not on the side of the shorts.
Behavior is a funny thing. It is cultural, it is ever evolving, and it is both a product of inherited disposition and developed via experience and exposure. This cannot be overlooked. As stated previously, there are plenty of articles here on Seeking Alpha which detail the company fundamentals, which project future revenues, and which itemize specific risks. This article is not one of them. It didn't have to be. That job has been done. This article strives to point out to readers that there is more to evaluating MannKind than what has been previously stated. There is more to launching a drug successfully than capital and resources. There are patients, there are lives at stake, and there are families in need. One can never underestimate the strength and influence of a human population. One can never forget about one's willingness to try something new in an effort to improve livability. That is what Afrezza offers more than anything else; the opportunity for a patient to better control a disease as opposed to the disease controlling the patient. No statistic can quantify that. No value can be put on compliance.
Pessimists, skeptics, shorts, and critics will argue the other side. That is their right. They can focus on insider sales, black box warnings, label restrictions, and big pharma conspiracy theories, but it is all for not. As the great Peter Lynch once said, "there are many reasons why insiders sell, but only one reason insiders buy." In other words, focusing on insiders selling right now is irrelevant compared to the fact that all but one insider has increased their positions over the last year. Someone may sell because they need money, because they are on their way out of the company, or for any reason in between. But increasing positions is done because time is on the side of the accumulator. Such is the case here. As to black box warnings and label restrictions; Abilify, Nexium, and Humira have proven that is nonsense, as have nearly all other top selling drugs in America. Patients drive drug markets, and one cannot lose sight of that, especially in the United States. As to conspiracy theories regarding no partnership interest and no buyout proposals, it is ridiculous. Silence is golden, and if no partnership comes to pass, it will be because Al Mann wants it that way, not because big pharma wasn't interested. Al is the captain of this ship, and he has successfully navigated these waters many times before.
At the end of the day, longs focus on the war, and shorts focus on the battles. Right now, both are in the trenches. The nature of investing dictates that longs are always a little nervous and suspicious of the shorts, and that shorts are always aggressive and loud. However, as the saying goes, "the loudest one in the room is the weakest one in the room." Right now Al Mann is silent, and that is a testament to his strength. The shorts are, on the other hand, quite loud, and that is proof of their anxiety. Nonetheless, the battle shall continue. Some will provide pump pieces, and others will provide hit pieces. In the long run, none of it matters. Afrezza is going to get to market, one way or the other. When it does, patients will respond. Once that happens, all bets are off, and with each moment that passes that day grows nearer. Whether at this moment the shorts are in control or not doesn't matter, because when the dust settles the control will sit with the patients and their families. Once Afrezza hits the market, we'll all just be spectators. The fate of Afrezza lies in the hands of diabetics, and that does not bode well for the shorts.
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.