My MannKind Short - A Response To Critics

| About: MannKind Corporation (MNKD)

Summary

Last week I wrote an article enumerating the reasons for which I was short MNKD.

There were a number of objections to my article and thesis.

I endeavor to respond to those objections herein.

Last week I wrote an article explaining why I thought that after a "dead cat bounce" MannKind (NASDAQ:MNKD) was an enticing short. The article generated a number of comments presenting dissenting views as well as prompting one author to write a whole article cautioning against being short the stock.

In this piece, I'd like to address the salient points made in the comments and responding article, but before doing so I'd like to thank everyone who offered an opposing opinion, and particularly Mr. Rho whose cordial and professional tone I truly appreciate. Indeed one of the main reasons that I publish at SA is to obtain this kind of feedback.

With that said, let me quote specific opposing views and then present my rejoinders (the first three objections are from Mr. Rho's article, the remainder are from comments to my article, including one comment that mirrors a point made by Mr. Rho):

"On the other hand, if the investment adviser is recommending the shorting of a $2 stock, he is doing a huge disservice if he doesn't also present the other side of the story - or potential risk on the upside. Why? Because the person(s) following Mr. Ghate's recommendation is assuming the risk of potentially unlimited losses to make a maximum of $2."

First off, any article I write should not be construed as a recommendation to buy or sell any securities. I'm not a registered financial adviser and have no intention of becoming one. Instead, all of my articles should be read as they are written, viz. to outline an investment case as I see it, typically highlighting aspects that I believe are being missed by the market as a whole, whether due to some emotional over-reaction (as in this case) or due to a difference of opinion regarding structural issues (see e.g. several of my articles highlighting egregious stock-based compensation practices to which analysts were turning a blind eye). Typically I will have a position consistent with my view -- as I believe in putting my money where my mouth is. But readers must come to their own decisions.

Second, the name of the hosting website is "Seeking Alpha" so pointing out potential opportunities, whether from the long or short side has to be within the site's mission. In my opinion there should be no a priori rules trumping sound analysis, or to put it another way: no avenue should be left unexplored when looking for alpha.

Third, the issue of shorting a $2 stock is irrelevant. Any short sale has a maximum profit potential of 100% and potentially unlimited losses no matter what the stock price is at the time it is shorted. That's just simple math. The merits of shorting MNKD if it reverse splits 10 for 1, or forward splits 100 for 1 would remain unchanged. The key is to think in terms of market cap and/or enterprise value - not in terms of stock price. At the time I wrote my original article, MNKD sported a market cap of $900M and an enterprise value of $1B - numbers which were completely unjustifiable in my estimation. Hence my verdict that a short sale was enticing (and my congruent short position).

In MannKind's most recent conference call, the company's chief executive displayed no concern about its cash position.

Please show me a single case where a company official says on a conference call "we're desperate for cash". Obviously this wouldn't put the company in a good negotiating position and might even generate some shareholder lawsuits! I know Mr. Rho is a highly seasoned and successful investor, so I can only assume he included this point to provide rhetorical flourish.

MannKind signed a collaboration deal with an outfit named Receptor Life Science earlier that could generate milestone and royalty payments.

In and of itself, this is neither a positive nor a negative. However this article argues persuasively that it might constitute a material negative as far as MNKD shareholders are concerned. (See section entitled "Receptor Life Sciences - An Empty Shell Created For MannKind Executives To Transfer To?")

no mention of April 5th (you got the date wrong - both MNKD and SNY have agreed to terminate on April 4th), or the Receptor Life Sciences deal and the players behind it ?

As cited in the original article, here's the text from the PR announcing the termination:

The parties will promptly commence transition discussions in order to effect a smooth and orderly transition in the development and commercialization of Afrezza from Sanofi to MannKind over the next 90 - 180 days. In any event, termination of the license agreement in its entirety will be effective no later than six months from the effective date of Sanofi's notice of termination, or July 4, 2016.

The date I gave was the "in any event" date.

Capital Investor

Comments (12) |+ Follow |Send Message

Of course you submitted it on Sunday right after you conspired with some other shorts to bear raid the stock on Monday just before your hit piece got published. Good strategy! But did you know conspiring with others to manipulate a stock is criminal?

Robert Sacher, Contributor

Comments (2292) |+ Follow |Send Message

My guess is that this latest bear raid is a "cowboy" outsider raid and not connected to the Goldman Sachs raids and no Cramer connection.

Perhaps, this one is a Martin Shkreli device thought up as a means to raise money for his mounting legal bills. In any event, without GS behind this raid, it will probably peter out quickly.

First of all, these conspiracy allegations seem a bit delusional to me. Why does it surprise people that a stock that has been in the bear-bull spotlight for years now would draw attention from a short-seller when - after a year of unremittingly bad news - the stock bounces 100% off its lows and sports an enterprise value >$1B. Does it really take Goldman Sachs to notice this?

Second, falsely accusing people of criminal activity is considered libel, but I'll let the Seeking Alpha moderators determine the propriety and legality of such comments and then take appropriate actions.

Great up to date research!!??

"ALL IT's EFFORT"???? Sanofi tried to bury Afrezza! That was Sanofi's ONLY effort!

Then you quote Matt from a 2013 statement! Like it is current...

Wake up bud, It is 2016!

GLTA TRUE MNKD LONGS!

Another theory that I can't quite understand is why Sanofi (NYSE:SNY) would spend on the order of $300M (upfront payments + development and commercialization costs) to "bury" a drug that it now has a commercial interest in? Maybe I need to start thinking in ALL CAPS???

Since MNKD borrow rate is 150% (if you can get it) and author's 12-month target is "only" 60% drop from the current level, you will be about 90% under water, if he is right.

This comment is also mirrored by one Mr. Rho makes:

It costs somewhere around 100% for investors to borrow MNKD shares for shorting purposes.

These are sensible objections, so let me elaborate. First off, I was careful to say "I'm short the stock (or proxies of the stock) with anticipation that its price will once again drop below $1". This statement obviously includes options strategies to mimic a fall to $1 and thereby avoid the borrow costs. For example one can short in the money calls, hoping that they won't be exercised (and re-establishing them if they are) to capture any fall to $1. One can also short at the money and out of the money calls to capture premium. And there are any number of paired option trades that would also benefit from a bearish move in the stock. On top of that, the one year target is a worst case scenario intended to comply with SA's submission form -- obviously if I thought it would take a whole year to drop that far, I'd wait to establish the short.

I hope this addresses some concerns, and I look forward to future comments and rejoinders.

Disclosure: I am/we are short MNKD.

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: I actively trade around core positions.