MannKind On My Mind 1/14/14

*** the following is excerpted from the January issue of Nate’s Notes, which was dated January 10, 2014, and published for subscribers over the weekend ***

After creeping up early in the week… and then rocketing sharply higher on Thursday… MannKind’s stock sold off almost as dramatically this morning on news that the FDA has scheduled an advisory committee meeting to review the company’s New Drug Application (NDA) for Afrezza on April 1, 2014.

And, while I believe this is inherently a very good piece of news for the company, it should come as no surprise that those who have been betting against MannKind for awhile now were quick to spin the announcement as a negative turn of events.

Why might such a panel meeting be “bad,” you ask?  In a nutshell, there seem to be two primary reasons the shorts believe such a panel meeting is playing into their favor.

The first reason the panel meeting might be negative for MannKind shareholders (and probably the only truly legitimate thing to hope for if you’re short the stock) is that the panel of experts will be asking a lot of tough questions… and though my assessment of the drug’s potential (and its safety profile) is based on the information that has been disclosed by the company so far, there is always a chance that that new, previously unreleased data will also come to light as part of the questioning.

In particular, given that the drug itself seems to have demonstrated the sort of efficacy the FDA asked to see, I believe a great deal of time will be spent exploring the possible risks associated with delivering the compound via the lungs.  To quote another blogger who hit the nail on the head while discussing the situation in one of his pieces this weekend, “drugs that are delivered via the lungs — but don’t treat problems there — will get extra scrutiny.”

Along with this possibility that some new (and negative) data will come to light at the panel meeting, the shorts have also suggested that by holding the meeting on April 1st – but being required by “the rules” to reach a final decision by April 15th (called the PDUFA date) – the FDA may not have left itself a large enough block of time in which to incorporate the panel’s decision into its final ruling.

However, before you allow yourself to become too worried about the fact that a panel meeting has been scheduled, I want to remind you of the following facts as well…

First and foremost, there really isn’t anything that unusual about panel meetings.  In fact, given that, if approved, Afrezza will possibly be used by millions (if not tens of millions) of patients, it would be much more surprising if the FDA did not convene a panel of experts to help it sift through the data and make sure it leaves no stone unturned in the process of weighing the various pros and cons of granting approval for such an innovative compound.

Secondly, while two weeks is admittedly a fairly small window between the panel meeting and the PDUFA date, I would argue that given how much time the FDA has already spent “getting to know Afrezza,” setting the two events so close together actually suggests that it already has a pretty good idea how it intends to rule and is, in fact, simply getting a second opinion from the advisory committee to “cover its behind.”

Of course, one of the other questions that remains front and center on the minds of investors on both sides of the bull-bear argument is “why no partnership yet?”… and I will be the first to admit that it is a very reasonable question to ask since the terms of such a partnership would give us a much better sense of just how much Afrezza might be worth!

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, 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.

And speaking of experience, Al Mann, and deals, while I am in NO WAY predicting that a deal will be announced next week, I think it is important to keep in mind that the company will be presenting next Wednesday morning at the JP Morgan Healthcare Conference in San Francisco, a forum at which a great many deals in biotech have been announced over the years.

However, even if no partnership is announced, I believe it will still provide a great opportunity for the company to clear up (and finally put to rest) just about all of the outstanding questions still being raised by the short sellers… and if this, in turn, can get the stock moving again, it will simply put that much more pressure on potential partners who may be contemplating taking an equity position in the company as part of any deal that is being considered.

As stated so many times over the past several months, those of you who are more risk-averse are encouraged to wait for the uncertainty of the FDA panel meeting before taking down too large of a position… and even if you end up having to pay more for the stock once the uncertainty is out of the way, you can take comfort in the fact that you will be doing so with a much higher degree of confidence that your capital is safe.

However, for those of you who don’t mind gambling a bit, I can honestly say that in my 25 years of following development stage drug companies, with the stock still trading under $6 (and there being such a large short position relative to the float), I don’t think I have ever seen a situation in which the risk-reward ratio heading into an FDA panel meeting has been better than the one we are currently looking at.  

Consequently, I am adding more shares to both Portfolios this month… and am even willing to go on record with the following prediction (not promise!) –

IF (yes, admittedly a big “if”) Afrezza gets approved, MNKD will be on its way to being a $25 stock by the end of the year… and if initial sales of the drug end up being anything other than “disappointing” (i.e. the company is able to start generating enough cash flow that it can comfortably begin to exploit the many other opportunities that are in the pipeline behind Afrezza), it will also be on its way to becoming $100 stock (or better) by 2022.

That being said, as mentioned numerous times before, there is always a chance the FDA will disagree with my evaluation of the data… and if the drug is turned down again, I will be the first to admit the stock will likely trade down to $1.25 (or less) while the company works on selling off the rest of the intellectual property (of which there is quite a bit!) at the company.

In the meantime, you are encouraged to place as large a bet as you can comfortably sleep with at night… and then keep your fingers crossed that not only will the company deliver a great presentation at the JP Morgan Healthcare Conference next week, but that it also gets a fair and unbiased review at the FDA panel meeting in early April!  We’ve been through a lot with this stock over the past four-and-a-half years, but I think MannKind’s day in the sun is just about here!  Stay tuned!

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