MannKind (NASDAQ:MNKD) investors saw the formal announcement of the full return of Afrezza effective April 5th this week. The news is, in many ways, bittersweet. On one hand, MannKind can now gain control of what it feels is a compelling product, but on the other hand, the company must step up to the plate and initiate its own marketing efforts, or identify a new partner.
Over the past weeks, the equity has traded below $1 per share and risen as high as somewhere over $2 per share. The bulls and the bears have traded barbs back and forth during the peaks and valleys, but the reality is that the stock currently sits at a price point closer to $1 than $2. Long-term longs have not really made up substantial losses, and those that shorted after the news of the termination of the deal with Sanofi (NYSE:SNY) have not fared as well either. It is active traders that have made bank on this stock, while the vocal bills and bears seem to fight out their respective stances in comment sections of articles.
The press release contained a critical item that investors need to understand as they assess this equity:
"Under terms of the transfer agreement, Sanofi will continue to distribute Afrezza from its existing inventory until MannKind begins to distribute Afrezza during the third quarter."
We have just now started the second quarter. This essentially means Sanofi will have some involvement for at least 12 more weeks, and potentially as long as 24 weeks. The reason this is critical information for investors is simple. Marketing efforts will not likely go full scale until Sanofi is out of the equation. While MannKind could certainly ink a deal at any time, the efforts of any players, inclusive of MannKind, will likely be smaller than what some investors would like to see. Simply stated, why should MannKind spend money marketing a drug when Sanofi is still in the picture? Yes, that thought process may be short-sighted, but the reality is that the company needs to be careful with any expenditure of cash, and spending cash to benefit others at this juncture may not be the best proposition.
As I have indicated in past articles, MannKind is in a tough situation. The company will proceed with marketing Afrezza itself if it needs to, but likely wants to bring in a new partner instead. That means the next few months are critical to this company, and investors may get frustrated with that process.
Sometimes, it is more simple to grasp these dynamics with a real-world example. In this case, I will use home values, because many people can relate to that situation.
If you own a house that you are putting on the market, but home values are decreasing, do you spend money to upgrade the property in order to sell for a better price, or do you preserve cash and sell the property without the upgrades in hopes that a buyer will come in sooner?
This is the situation MannKind finds itself in. The reason this is bad for investors is that the prudence of whatever decision management makes can be called into question by either the bulls or the bears.
Let's assume MannKind does not yet have a partner, is in early discussion with a potential candidate, and we are beginning Q3. Sanofi is wrapping up its involvement, and MannKind must decide whether to engage in a marketing campaign at substantial costs or try to get the potential partner to the table. If the company spends money to market, and a month later, inks a deal, then the money spent may not have been wise. However, if it does not spend money and the partner negotiations drag on, time is being lost and the drug sales are not where they need to be. It is a bit of a Catch-22 situation, and investors need to be aware of this, because uncertainty is typically not rewarded in the price of the equity, but is also where speculators make some of their best scores.
Here is the bottom line. With MannKind at $1.30 or so, the downside risk is that the company is unable to partner and unable to effectively market the drug with the cash it has. The upside potential is that a partner is announced in the next month or so, and a seamless transition happens as Sanofi fades out of the picture and the new partner comes in. Investors should remember that one of the dynamic excuses applied to poor early sales was that Sanofi partnered late, and the teams of MannKind and Sanofi did not really have time to prime the marketplace and lay the strategic groundwork for a smooth launch.
In my opinion, the MannKind story is not about whether Afrezza works, or whether or not there are amazing testimonials. The current MannKind story is about whether the company itself can partner this drug or effectively market it on its own. MannKind speaks about differing marketing strategies that are not as expensive, but is competing with huge pharma players with seemingly endless budgets to plaster advertising everywhere. Twitter is cool, but it should not be the central focus of a marketing campaign that delivers the levels of sales needed. As an investor, I never like to hear the words "innovative new approach to marketing" when the real issue is low cash that cannot afford a tried and true marketing method. Innovative marketing campaigns are oft hit and miss, and the number of misses is usually much higher than the number of hits.
What we have with MannKind stock are three distinct camps:
- Perma-Bulls that bought the idea of Afrezza from the beginning and invested in a vision that has yet to become real. This group is likely under water on their investment, and has actually shifted their hopes from buying a new house with the profits from MannKind stock to simply breaking even.
- Perma-Bears that never bought into Afrezza and are convinced that the company will fail. This group's best opportunity at massive profit may well have past, and these people run the risk of seeing profits erode on positive news or positive traction.
- Active traders that keep emotion out of the equation and profit by knowing the behavior of the Perma-Bulls and Perma-Bears. This group does not really care if the drug works or not, and does not really care if the company is a success or failure. These traders are savvy and know that uncertainty means volatility, and will play the swings at every given opportunity.
The stance of investors or potential investors in this equity will differ greatly. Some Perma-Bulls will actually increase risk by "averaging down". Some Perma-Bears will increase risk by shorting more or not closing short positions at profits. The savvy traders will simply watch the news wire and make safer bets by playing continued uncertainty.
I look at MannKind this way: uncertainty will tend to see the price of the equity trend downward until a certain foundation is reached. In my opinion, the foundation will be somewhere around $1.00-1.10. Speculation will allow the equity to spike as high as about $1.75-2.00, but unless confirmed, will return to the median trading area in the $1.30s or so. Savvy active traders will look for bottoms to form and rises to peak, both with a second day of confirmation, to make their plays, and will likely cap risk by only absorbing a certain level of loss before moving onto the sidelines again.
In my opinion, this company has about 6 more weeks to outline a definitive path with a partner before it needs to commit to marketing Afrezza on its own and begin expending the marketing dollars for label printing, print ads, web ad design, print ads, television ads, etc. Even at that, the time frame that the company will try to accomplish this in will be severely compressed.
My belief is that a favorable partnership may not be available until Afrezza is proven in the market and demonstrates that it can garner meaningful market share in a highly competitive space. I believe MannKind should take a public stance of removing partnership speculation from the public eye and march forward with a plan to self-promote and market. This will remove a certain level of uncertainty in the market, will establish a feeling of a concrete plan in the market, and will perhaps allow the company to look for paths to raise the required capital needed to finance such an operation. If MannKind can demonstrate success, it will then be able to entertain any Big Pharma proposals with much more leverage and stability. I feel the company is progressing down the path of self-marketing, but has yet to really close the door on the idea of a partner (perhaps in hopes of keeping the stock price stable). Sometimes, taking yourself off of the market exhibits the most confidence and actually increases your chances of being approached.
I feel MannKind's Afrezza is probably best handled by a Big Pharma partner, but getting the right deal in the current situation is far from ideal. I feel investors may be in for several weeks of frustration, and that active traders will be the real winners. Yes, the equity will cycle on uncertainty, speculation, and at any given moment, bulls and bears will claim victory. Victory is not a momentary thing. Victory is making the correct play at the correct time to realize profit. Hollow victory is making the correct play at the correct time to minimize losses. Stay tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.