MannKind is mostly associated with its insulin drug Afrezza.
Investors' target prices were overly optimistic and driven by excitement over FDA approval.
My short thesis was spot on and investors following my advice to short the stock might want to consider taking profits off the table.
Since the market substantially re-priced MannKind, there may be an opportunity on the long side now.
MannKind's (NASDAQ:MNKD) stock has been in freefall since the end of June and the decline in share price was quite deserved. In fact, I can hardly imagine any other biopharmaceutical company that is as loved as MannKind, even though the development of its stock price lately has not exactly given reason for boundless optimism.
Quite the opposite is true: Soon after MannKind received approval for its inhaled insulin drug Afrezza from the U.S. Food and Drug Administration in June, the stock tanked. Investors have largely been betting their chips on a favorite FDA decision in the first six months of the year and MannKind's stock has done extremely well for shareholders until that point.
However, as the FDA decision date approached, I have pointed out how euphoric investors were (ALWAYS a bearish sign) in the article "MannKind: Does Greed Devour The Brain". I also pointed out, that investors were largely unwilling to adjust their overly optimistic expectations with respect to MannKind's Afrezza drug -- another bearish sign. At this point of time it was clear, that MannKind's stock price was solely running on hopes and extremely high expectations.
Specifically, I wrote:
Probably the best investment guidance I have ever heard relates to Warren Buffett's quote "Be fearful when others are greedy and be greedy when others are fearful". This investment advice cannot be repeated enough. Fear and greed are the two primary drivers of share prices, and MannKind's share price certainly runs high on hopes and greed.
Further, I mentioned the overwhelmingly positive reception of MannKind's Afrezza story:
While I acknowledge that Afrezza is an interesting drug and treating diabetes is an attractive market, I stand by my previous assertion that MannKind is a highly speculative play on FDA approval. One can easily see the existence of speculators by recognizing the amount of bullish articles on MannKind and the euphoric language used in such articles.
As you can imagine, telling euphoric investors that they are being carried away with an extremely optimistic outlook was not exactly a recipe for making friends. But it was a great way of making money: I have recommended to short MannKind at a price of $10.70 on June 12, 2014 (see original thesis here) and at a price of $10.52 on June 16, 2014.
MannKind now quotes at just $7.35 and investors who followed my advice to short the stock are looking at an approximately 30% gain over the course of just two months.
However, since shares have corrected that dramatically and are more reasonably priced, an opportunity on the long side is emerging.
A lot of speculators have exited MannKind
Now that MannKind has corrected substantially, the opportunity has come to look at the long side. One of the most fascinating things with respect to the stock market is, that it always swings between greed and fear -- almost as reliable as clockwork.
The period of greed was probably reached as MannKind's shares traded at about $11 per share and all warnings about caution were being dismissed right off the bat. Since then, investors have materially re-priced MannKind and reassessed Afrezza's partnership potential.
MannKind recently announced a partnership with Sanofi which sets the stage for some attractive cash inflows for MannKind if Afrezza meets certain sales and performance targets. As for the partnership deal, Sanofi will shell out $150 million as an upfront payment, but may fork over another $775 million in performance-based remuneration later on as certain milestones are achieved.
I think the global licensing agreement, which stipulates that MannKind will retain a 35% profit share, is a good way for MannKind to get the insulin drug off to a good start. It is also a good strategic fit for Sanofi which already has a strong position in the insulin market.
As you can see in the chart below, the buying frenzy in June pushed MannKind's stock meaningfully into overbought territory.
Since shares have moved down quite a bit since June, a contrarian purchase of MannKind's shares might be an interesting move for volatility-hardened investors now that Afrezza is backed by a strong commercial partner.
I know many bullish MannKind investors don't want to hear it, but euphoria is always a calamitous signal, especially since investors were unable to tell when a global licensing agreement would be announced and what the performance numbers would be.
Now that there is more clarity in the market about the MannKind/Sanofi global partnership and stock market prices are no longer determined by emotional investors chasing prices, the time for a contrarian Buy on the back of MannKind's global licensing agreement may have come. Contrarian Buy.