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I grew up in Healdsburg, California, a small town roughly 60 miles north of San Francisco, and still live there today with my wife and two daughters. While earning my bachelor's degree in Mathematics at U.C. Berkeley in the early '90s, I was lucky enough to meet and begin working for legendary... More
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  • MannKind: Cautiously Optimistic Ahead Of AdCom Meeting

    My latest thoughts on MannKind (MNKD - $4.83)

    ***The following is an excerpted and expanded upon selection from material published on the website for subscribers of Nate's Notes and The Wagmore Advisory Letter on 3/28/14***

    After opening strong this morning following the release of the briefing documents associated with the upcoming FDA Advisory Committee meeting, I am afraid that MannKind's stock spent the rest of the trading session sliding on very heavy volume (though it is worth noting that it did manage to close off the low on heavy volume in the last 15 minutes).

    Unfortunately, while I personally did not find anything unexpected in the briefing documents (the panel appears to be set to discuss all the questions you would expect them to be asking as part of a thorough evaluation of Afrezza), I would be lying if I said I wasn't concerned that the stock broke $5 in today's trading session.

    On the one hand, from the perspective of someone hoping to see a bullish chart pattern remain intact, the stock "should" have held at $5… and the fact that it did not implies that at least one of the patient buyers who was willing to soak up stock at that price in the past is no longer there to absorb the selling pressure this time around.

    On the other hand, however, these same buyers were probably well aware of the fact that if the stock broke $5, it would trigger another round of panic selling (and probably entice short sellers to become even more aggressive with their selling)… and, of course, if their goal is to load up on the stock at the lowest price possible, it is hard to fault them for playing their hand in this manner.

    That being said, I want to remind you of the following as we head into the panel meeting next Tuesday…

    As mentioned above, after reading through the briefing documents released this morning, it appears the panel is scheduled to spend its time debating all the questions one would expect them to discuss based on what we know about Afrezza at this stage of the game.

    Yes, some of those questions on the agenda sound quite ominous (and members of the press are jumping all over them), but just because the panel is slated to discuss the topics of lung cancer and pulmonary risks, for example, it does not mean they have already reached a negative conclusion on those issues - it simply means that they will be discussing them to make sure they have been adequately analyzed, scrutinized, and evaluated as part of the review process (as a side note, my favorite headline of the day - which was both completely unbiased and completely "loaded" at the same time - was from Reuters, which titled its article in response to the release of the briefing documents "FDA staff review raises questions about MannKind diabetes device"… well, duh - that's what Advisory Committees do!).

    As it stands, based on the data that has been made available to us, I continue to believe the odds suggest that the panel will likely come to the conclusion that the potential risks ofAfezza are not significant enough to justify a "no" vote with regards to the issue of safety, especially when they are stacked up against the far worse safety profiles found in a plethora of other widely used drugs already on the market (but again, the panel may reach a different conclusion than I have!).

    And, speaking of things that the press seems to be focusing on (especially those folks who have clearly stated their skepticism of the story in the past), I think it is worth noting that a number of people are citing language from the briefing documents to explain why they think Afrezza will not be a commercial success… and, ironically, by making this part of their argument as to why the FDA won't approve the drug (again ignoring the fact that "safety" and "efficacy" are really the only two pieces of the puzzle the FDA is charged with exploring), they are implicitly suggesting they actually think it has a chance at being approved (but chose to write the article with a negative bias anyway)! Go figure!

    However, while the commercial viability of the drug is admittedly the one aspect of the story that is still completely open for debate (we won't know if doctors will prescribe - or patients will use - Afrezza until it is actually on the market… though early surveys suggest they will), the fact that an FDA briefing document is being used to discuss the commercial potential of Afrezza ought to make it crystal clear that these articles are being written with the intent of being sensational rather than practical in nature, as the bottom line is that the FDA's job is simply to evaluate whether or not a drug is safe enough and efficacious enough to be allowed on the market, NOT to determine how large of a success it will (or will not) become if approved (just think of our often mentioned friend Exubera if you don't believe me!).

    As it stands, based on what we do know as "outsiders," I continue to believe Afrezza is likely to be deemed efficacious for at least a portion of the target population, and though the phrases "lung cancer" and "cough" do appear regularly in the briefing documents (and therefore in many of the negative articles written about the story as well), I have yet to see any compelling data that suggests these issues will actually cause the FDA to rule that the drug is unsafe.

    In fact, though a number of bloggers, tweeter, and journalists have suggested that Afrezza has an unapprovable safety profile, I have yet to see a single one of them produce any meaningful data to actually back up the claims they make in their headlines and articles, which have been as extreme as "Afrezza use tied to lung malignancies" (or similar) for example.

    Putting all the known pieces together - along with the fact that the ultimate "insider," company founder and CEO Al Mann (who has seen ALL the data), has put close to a billion dollars of his own money on the line (and not sold a share heading into the panel meeting despite having plenty of time and opportunity to do so) - suggests to me that the drug IS likely to be approved for at least a portion of hoped for indications (and that's all we need to unlock the rest of the potential waiting in the wings at MannKind).

    As is almost always the case ahead of FDA panel meetings, the stock is likely to be extremely volatile over the next few days… and, as mentioned above, I will be the first to admit that it is hard to put a positive spin on the price action we saw this morning (other than to wonder out loud whether the short sellers might be getting "slow rolled" without even realizing it as they continue to bet aggressively in this high stakes match).

    The shorts clearly appeared to be in control today, though as discussed above, given the nature of the players who have been invested in the story on the long side for some time now, this may, in fact, be an intentional turn of events on their part as they position themselves for the upcoming AdCom decision.

    As mentioned so many times before, please do not own more of this stock than you can afford to lose in its entirety, as there is always risk when it comes to FDA evaluations.

    However, for those of you who do own the stock (or might be thinking of starting a position on Monday), I want to encourage you to look beyond the noise and wait patiently for things to unfold at the AdCom meeting on Tuesday - the questions will be tough, but again, as best as I can tell, all the evidence points to Afrezza passing muster on both the SAFETY and EFFICACY fronts (which is all an FDA approvable is supposed to be about).

    Yes, with a market cap of close to $2 billion, this is already a much larger company than Celgene was when we first got into it in 1995… but given all that is in the pipeline behind Afrezza, if the company can get past this one last hurdle, I believe this is a stock that we will also end up owning "forever" as the company grows and matures (though, of course, Al Mann's history of selling his companies once they are "up and walking on their own" suggests we may have to settle for a buyout of the company instead if things do go our way… oh darn).

    It has been a long ride since we first got into the stock back in June 2009, but the finish line is now in sight… don't give up now! Here's to hoping for a fair and rational AdCom meeting!

    Disclosure: I am long MNKD.

    Additional disclosure: The hypothetical portfolios used to track the performance of my first newsletter (Nate's Notes) are long MannKind; the real world cash account used to track performance of my second newsletter (The Wagmore Advisory Letter) is long MannKind, with a small portion of that position hedged via the writing of covered calls; and I own MannKind personally in my own trading accounts and IRAs.

    Tags: MNKD
    Mar 29 5:57 PM | Link | 1 Comment
  • Why Might Deerfield's MNKD Conversion Be A Big Deal?

    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.

    Tags: MNKD
    Feb 21 5:11 PM | Link | 3 Comments
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