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Manoj Madhavan
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Manoj Madhavan, CFA, is a Principal at Oxford Chase Advisors LLC, a Dunwoody, Georgia based Registered Investment Advisory (RIA) firm. His investment philosophy is loosely based on Warren Buffet’s principles of value investing. Manoj was born in Tiruchirapalli (Trichy), India. He has a... More
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  • It Is Not Advisable For Retail Investors To Short Mannkind

    This is not an article about AFREZZA. As Mannkind's website states "AFREZZA® (pronounced uh-FREZZ-uh) is a first-in-class, ultra rapid-acting mealtime insulin therapy being developed to improve glycemic control in adults with Type 1 and Type 2 diabetes mellitus. It is a drug-device combination product, consisting of AFREZZA Inhalation Powder single use dose cartridges, and the small, discreet and easy-to-use AFREZZA inhaler."

    Many of the medical aspects of AFREZZA have been covered in excellent articles by George Rho, Maredin Capital Advisors, Jeff Eiseman, and at afresa.blogspot.com among other places.

    This article is simply an attempt to warn retail investors about the risks of shorting a biotech stock such as Mannkind. Whether you are long or short, we can all agree on a few things:

    1) Nobody knows whether the Adcom panel will vote for or against approval of AFREZZA on April 1, 2014

    2) Nobody can say with 100% certainty that a majority Yes vote by the Adcom panel means that FDA will approve AFREZZA on April 15, 2014 (yes I am making an assumption that the PDUFA date will be April 15, 2014 because at this time we do not have any information otherwise.)

    3) Nobody can say with 100% certainty that a majority No vote by the Adcom panel means that FDA will reject AFREZZA on April 15, 2014

    Given the above, it would be unwise to invest a large portion of your portfolio in MNKD stock or calls. That said, going long by buying shares or calls of Mannkind means that the maximum you stand to lose is your investment. This is not the case when you short shares of MNKD. When you short shares of a stock your risk of loss is greater than 100%. Many brokerage firms out there today will let retail investors sell shares of a security that they do not own. This is, in my opinion, a tragedy. Many retail investors lose a lot of their hard earned money this way. I believe that shorting should be permitted only for accredited investors. But that is the topic of another discussion.

    In the case of Mannkind, if you are a hedge fund or big institutional investor you may have many reasons to short shares of Mannkind. Some of these could be

    1) You have a convertible bond position in Mannkind and you wish to offset (hedge) some or all of the underlying long position in Mannkind shares by shorting shares of Mannkind stock

    2) You have entered into a long position in another biotech stock or in a biotech ETF such as IBB and the Mannkind short position is one part of a complicated long-short strategy

    3) You have arranged short position trades for one or more clients of your firm and you stand to benefit in fees and commissions from arranging this transaction

    The list goes on and on. But as a retail investor, you are not able to participate in, or directly profit from, any of the above transactions. So in other words, as a retail investor, you should not be shorting shares of Mannkind.

    Here are some other very good reasons why you should not short shares of Mannkind:

    1) Rumors, if any, of a partnership deal could send the stock price up quickly before you have a chance to cover. It is no secret that Mannkind has engaged the services of advisory firm Greenhill & Co to identify and secure a partnership to market AFREZZA after FDA approval.

    2) Actual news, if any, of a partnership deal could send the stock price up quickly before you have a chance to cover.

    3) Rumors, if any, of Mannkind's plans to apply to other markets (outside US) for approval could send the stock price up quickly before you have a chance to cover. This is nothing new or unusual. Many medical devices and drugs have been approved in other countries even though the FDA has rejected them. Sanofi's Lemtrada (NASDAQ:GCVRZ) is an excellent example. The FDA has rejected Lemtrada but it has been approved in over 30 developed nations including Canada, Australia and Germany.

    4) Actual news, if any, of Mannkind's plans to apply to other markets (outside US) for approval could send the stock price up quickly before you have a chance to cover.

    5) A run-up to Adcom, and the PDUFA soon after, could send the stock price up quickly before you have a chance to cover. Many biotech stocks have been known to rise as a significant FDA event approaches such as an Adcom date or a PDUFA date. In this particular case, Mannkind has faced two "rejections" in the form of Complete Response Letters (NYSE:CRL). There is literature that indicates that this actually increases the odds of a company's chance for approval a third time. This make sense because, with each CRL, the company spends millions of dollars to further test the device or the drug and makes sure that all the I's are dotted and the T's crossed before the next submission. Mannkind's Adcom date is expected to be April 1, 2014. This means that the stock could go up quickly in price as April 1 approaches, before you have a chance to cover.

    6) Any number of other news, rumors or just random short covering could send the stock price up quickly before you have a chance to cover. As of 1/15/2014, 51.45 million shares of stock have been sold short according to NASDAQ.

    I look at it another way. If I am long Mannkind and the FDA does not approve a third time, Mannkind has the option to apply for approval in the rest of the world. Mannkind's Chairman, CEO and primary investor, Dr Alfred E Mann has many different ventures that he is involved with. He is not out of money as some people have been saying. Dr. Mann is Chairman of Second Sight which recently got approval for its Argus II Retinal Prosthesis System (bionic eye). The Alfred E. Mann Foundation for Scientific Research recently won a patent infringement lawsuit against Cochlear Ltd that awarded it $131.2 million. Suffice it to say that Dr. Mann does not have all his eggs in one basket or all his net worth tied up in Mannkind and he has the resources and the connections needed to put more money in this company if he has to. So as a long, I can sleep at night.

    Maybe it is just me, but if I were short, I would be unable to sleep tight. I would be terrified of incurring unlimited losses due to one or more of the possible events outlined above. I am biased towards Mannkind and AFREZZA but I am even more biased towards Dr. Mann. I really believe that Dr. Mann is an amazing human being, successful entrepreneur and investor and genuine philanthropist. Due your own due diligence and I hope you do well with your investments.

    Disclosure: I am long MNKD.

    Feb 14 11:07 AM | Link | 6 Comments
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