The following is a reply I wrote to a reader who asked a question in the comment section of a Seeking Alpha article related to MannKind (NASDAQ:MNKD), but because of its length, I was told my reply had to be made in the form of an "instablog" instead... so here it is!
I would argue it (Deefield's decision to convert the maximum allowable portion of their debt into MannKind equity) IS a big deal, for either of the following reasons (you can decide which one you think is most likely):
A) If Deerfield intends on holding the shares (i.e. they converted debt to equity in order to establish a bona fide long position), one would assume they did so AFTER seeing all the data… and, having seen the data, they decided it made more sense to establish a position pre-FDA ruling (and despite the lack of a partnership announcement yet) rather than wait and risk having to pay anywhere from 20% to 300% more for their shares post-ruling, depending how quickly the situation moves against the shorts (and, of course, assuming things work out in the longs' favor at the FDA).
Despite what the author of this article seems to believe about how due diligence works, I can pretty much guarantee you that Deerfield got to see as much data as they wanted to see prior to making their original investment and/or making the decision to convert the maximum amount allowed into equity.
B) if, as you wonder, Deerfield instead chose to make a large debt investment in MannKind, but then, after thinking about it, decided they'd rather not have such a large chunk of change tied up "waiting for 2019" and so instead converted it to equity so that they could sell it on the open market and get that capital back after all, then I would suggest to you the shorts are REALLY in trouble for the simple reason that IF Deerfield decided to convert and then turn around and liquidate, word would spread pretty quickly among market makers about where the selling was coming from… and the fact that this has not sent the stock down (the opposite is happening, actually) strongly suggests that there is PLENTY of institutional interest in this stock right now (and history suggests that we're just seeing the tip of the ice berg, as the folks with "really big money" in their funds tend to be quite conservative… and their buying power won't hit the market until another layer of uncertainty has been removed).
In addition, having followed the biotech sector for a little over 25 years now, I can assure that pretty much the only reason large investors ever convert debt to equity is because they see an opportunity to make significantly more money without taking on significantly more risk… and I believe it is very unlikely that Deerfield converted for the sole purpose of then having to go through the exercise of figuring out a fancy hedging strategy for that chunk of capital (a strategy that, for all practical purposes, would most likely cost almost as much to implement as it would gain in "insurance," I might add)… it just wouldn't make sense from a risk-reward standpoint.
There is no doubt that there could still be a "black swan" event that ends up getting in the way of approval between now and May (and thus I've been encouraging my subscribers to not invest more than they can afford to lose in its entirety)… but at this point in time, from where I sit, it is looking more and more like the smart shorts have covered their positions and moved on to easier pickings, whereas the greedy shorts are continuing to pile on based on an investment thesis that I believe essentially evaporated when the company announced that both Phase III trials successfully met their endpoints last fall (and I'm sure you're familiar with the old Wall Street adage "bulls and bears make money, but pigs get slaughtered," yes?)
With regards to the partnership question (the other straw the shorts are still grasping at), in case you're interested, I wrote the following for my subscribers awhile back (January 10, 2014):
As it stands, if this were just about any other development stage drug company, I would agree with the idea that "no partnership yet" means that nobody is terribly interested in the product. However, given that the company is not being run by some brash 35-year old hot shot hoping to score his or her first big biotech deal as a CEO (and thus willing to accept lesser terms in order to get the deal done), but is instead being run by Al Mann, a serial entrepreneur who has been starting companies (and then selling them for tidy profits) since the 1950s, I believe there probably couldn't be anyone better sitting in the CEO seat and working to get the best deal he possibly can for shareholders (especially since he owns 46% of the company and has invested close to $1 billion of his own money in the situation thus far!).
And, looking at the situation from the standpoint of a big pharma CEO, it seems reasonable to me to assume that there is a giant game of chicken going on behind the scenes right now - Al Mann probably wants an arm and a leg for a piece of what some are suggesting could be the largest selling drug of all-time… and folks on both sides of the table know that IF the drug does get approved (and is as good as Al Mann thinks it is), the price will go up to "three arms and two legs" after the uncertainty of approval is removed.
On the flip side, however, any CEO that pays the aforementioned arm and leg ahead of approval is running the risk that their career will be over in a big way if the FDA turns the drug down for a third (and likely final) time… and thus it is completely understandable that they are probably playing hardball themselves. That being said (and as mentioned above), my money is on Al Mann - and, as far as I am concerned, he can take as long as his experience suggests he needs to take in order to get the *right* deal done.
Anyhow, I hope that helps as you attempt to figure out what to make of the actions being taken by "the big dogs" sitting around the table, as I believe Deerfield's decision to convert is the biggest clue we've been given so far about what's really going on behind the scenes.
Nate Pile, CEO
Disclosure: I am long MNKD.
Additional disclosure: I publish two investment newsletters and manage a small hedge fund, and all three entities are currently long MNKD.