Mannkind: Of Bio Flash Crashes and Stop Limits

Jan.19.11 | About: MannKind Corporation (MNKD)

Earlier today, NASDAQ said it was investigating "potentially erroneous transactions" involving Mannkind (NASDAQ:MNKD) spanning a period of three minutes between 10:36 and 10:39 ET, during which time the stocks price fell from $9.35 to $6.05. The stock was trading over $9.00 again by 10:41 ET. Trading was eventually halted and shortly thereafter, NASDAQ announced that ALL trades will stand. Just after 3:30 ET, it was announced that Mannkind had received a CRL for its experimental diabetes device, Afrezza.

I would like to take a moment to focus on the "flash crash" portion of today's events.

This is the second time in as many months that highly unusual trading activity has been reported on Mannkind's stock. Some may recall a brief drop in PPS very similar to today's, albeit on a much smaller scale, on 12/15/10.

These "flash crash" events invariably begin with sudden and immense selling pressure that is generally accompanied by heavy call activity. Investors using "stop loss limits" are typically stripped of their shares in the blink of an eye and generally have no real recourse. The share price almost always bounces back sharply within minutes if not seconds of the sudden drop.

Perhaps the best documented of these events occurred on Dendreon's (NASDAQ:DNDN) stock on 04/28/09 when its stock tanked 65% in about 75 seconds. This happened just before positive clinical test results were released on Dendreon's cancer drug, Provenge.

More recently it seems to have happened on Avanir's (NASDAQ:AVNR) stock on 10/29/10, just hours before it was announced that the FDA had approved their first-in-class new drug, Nuedexta.

These "crashes" seem to happen more often on "battleground" bio stocks with heavy short interest and an upcoming potential catalyst or binary event and, in some of these cases, the event is never publicly addressed by the exchanges and/or the SEC.

Regardless of the reason(s) behind these occurrences, they hurt the investment world, as a whole, by alienating the all important retail investor. Is that something Wall Street can really afford at this juncture?

The important lesson to be learned here is that one should think twice (and then once more for good measure) before using stop limits on bio stocks.

Disclosure: I am long AVNR.