MannKind, Afrezza Data, and a Paradigm Shift 6/20/16

*** The following is excerpted (with a few slight modifications and additions) from Issue #257 of Nate’s Notes and reflects our opinions of the situation as of 6/17/16. ***

First off, for those of you who did not read the most recent Inter-Issue Commentary, I want to remind you that yours truly got a nice write up on the Forbes website a few weeks ago, and if you have not yet done so, I encourage you to read the interview I did with Ken Kam from Marketocracy.com regarding my outlook for MannKind.  You can find that interview via the following link:

http://www.forbes.com/sites/kenkam/2016/06/01/top-equity-manager-still-believes-in-mannkind/

Next up, please enjoy the following discussion of the MannKind situation taken from the commentary and company write-up sections of the June issue of Nate’s Notes.

MannKind

Though you would never guess it based on the “flat line” action we have been seeing in the stock lately, there have actually been several positive twists in the MannKind story over the past couple of weeks… and, while I can’t tell you when these positive news items will eventually impact the stock price (good news is often ignored when stocks are trading at the “extremely bearish” end of the fear-greed spectrum), I can tell you that the data that was presented by the company at ADA this week turned out to be every bit as good as I hoped it would be in terms of providing new information for Mike Castagna and his team to take into the field as the rollout of Afrezza 2.0 gets underway (educators will start to be deployed roughly a week from now, with the main sales force gearing up for a mid-July relaunch of the product).

In particular, I believe it is extremely encouraging that the company now has official data showing that Afrezza clearly has a much faster onset and much shorter duration in the body that existing mealtime insulins… and this is important because it finally provides a scientific framework against which to build the case for an honest-to-goodness paradigm shift in terms of how patients think about managing their diabetes relative to diet and exercise.

The “faster in” side of the coin is important because, as stated many times before, as more and more people with T1 diabetes start to use continuous glucose monitors to watch their blood sugar levels in real-time, they are naturally going to want an insulin that is capable of addressing blood sugar spikes in real-time… and though Afrezza’s label does not yet say “ultra-rapid acting,” there is now data out there supporting this type of claim (and Afrezza is the only insulin that can make it).

And, of course, the “faster out” side of the coin is perhaps even more important because with existing mealtime insulins (which tend to have “tails” on the order of several hours), when, for whatever reason, patients don’t correctly match their dosing with their diet and/or activity levels around said meal, the “extra” insulin that is left lingering in the bloodstream several hours later can lead to hypoglycemia (low blood sugar), a condition that can be fatal… and, if you were not aware of this, it may help you understand why patients and doctors may have been hesitant to “tinker with their existing insulin regimen” (i.e. give Afrezza a try) without any supporting data, eh?

Those of us who have been following the story closely have known about the validity of the “faster in, faster out” properties of Afrezza for well over a year now based on the anecdotal evidence that was being provided by early adopters of the technology, but now that it is has officially been shown to be true,

a) it ought to silence the uninformed – but very vocal – skeptics who have been relying on outdated secondary data (from old studies that were not even designed to show faster onset and shorter duration, mind you) to support their bearish thesis,

and, much more importantly,

b) it will provide a much more positive and compelling story for doctors who are just now learning of Afrezza and starting to research it on their own (previously, most of the information they would encounter first was the very literature just mentioned in “a” above!).

And, speaking of anecdotal evidence of better blood sugar control, better A1Cs, less need to count carbs, etc., it continues to flow in on many fronts.  No – Mike Castagna and his team are hardly looking at a “slam dunk” in terms of being able to walk into doctors offices and generate new prescriptions with little or no effort; however, between the obvious immediate benefits that Afrezza provides… and the anecdotal evidence that will continue to grow via social media as more people try the product (and will eventually be converted into data via clinical trials)… thanks to the new clinical data, I now believe more strongly than ever that, at current prices, MannKind probably represents the most extreme example of a mis-pricing of assets that I have ever seen in my 28 years of following the sector (and the stock market as a whole, for that matter).

As always, please be careful about owning more than you can afford to lose if I am wrong, but provided you still have some room to average down, you are strongly encouraged to do so.

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Cirrus Logic (CRUS) – though it has not broken out yet, Cirrus’ stock is one of the better acting in the newsletter this month, and if it does start hitting new highs, there could be a nice run in store for us.

MannKind (MNKD) – with the release of the data associated with the abstracts that were presented at ADA last week, my confidence has only grown that, at current prices, MannKind probably represents one of the best investment opportunities most investors will ever see in their lifetimes.

NVIDIA (NVDA) – NVIDIA’s stock continues to march to its own drummer, and, at least for now, it appears to wants to march higher.

MannKind

MannKind’s stock has been trading in an extremely tight channel following the announcement of the secondary offering last month, and it will be very interesting to see where the stock heads next once the battle between buyers and sellers at this price level finally runs its course.  Given that MannKind received the rights to Afrezza back on April 4th (right at the 90-day mark per one of the clauses invoked by Sanofi as part of the termination), it will be interesting to see if anything usual is announced on (or about) July 4th, which, of course, represents the 180-day mark cited in the other clause that Sanofi invoked as part of the termination… stay tuned (heh).  MNKD is a very strong buy under $2 and a buy under $5.

How Does The MannKind Story Compare? 2/16/16

*** The February issue of Nate’s Notes was published for subscribers earlier this month, but is now available for the general public below; however, please note that all recommendations are as of February 5 and therefore may now be out of date. ***

ISSUE 253

February 5, 2016

Did you hear about the termite who
walked into the pub and asked
“Where’s the bartender?”

  – from The World’s Best Supersonic Riddles

Someone Buy This Newsletter A Drink!

Wow! It is hard for me to believe, but Nate’s Notes is turning 21 with this issue (hence the call for a drink)!  Unfortunately, as you will notice as you read through this month’s issue (and with a few notable exceptions here and there), I am afraid there is not much else going on for us to celebrate this month…

As you can see in the Eyebrow Levels table below, the markets are continuing to slide, and while it would be great if there were only bull markets, if there’s one thing I’ve learned in the time I’ve been doing this, it is that bear markets are an inevitable part of the equation, and rather than fight them, our job is to step back and respect them.

Though it is quite possible the markets will start rallying on Monday and never look back, I have to admit that I am feeling somewhat relieved that, at least for now, it appears it was the right thing to do to move some cash to the sidelines last month… and, as you may have noticed, we are moving roughly another 10% to cash in the Model Portfolio this month (and reducing our margin debt by a bit in the Aggressive Portfolio as well).

After all, history suggests we may be entering a period in which those investments that have been working suddenly stop working… and those that haven’t been working (but “should have been”) finally start to… and, as you will also notice, along with lots of “sell” orders, I am also being fairly aggressive with some our purchases of stocks/ETFs that match that criteria this month.

Though space is short this month since I want to talk about MannKind “in earnest” (for what will hopefully be the last time – I really would like to get back to not needing to comment on rumors every month, but we’ll see what Fate has in store!), I want to remind you that most stocks actually only trade at “fair value” for a small fraction of their lives, with the rest of the time spent trading back and forth between undervalued and overvalued… and the more extreme a stock tends to get at one end of the spectrum, the more extreme it is likely to become at the other end as well… and this is especially true when it comes to biotech (so keep that in mind as you compare and contrast the likes of Celgene and Illumina with MannKind, for example… or what’s going on with Apple and many of the chip stocks, for that matter.  To repeat one of our favorite mantras in the newsletter, “once trends get underway, they often go on for far longer than seems reasonable”).

My Latest Thoughts On MannKind (MNKD – $0.97)

Though the list of topics and rumors that could be discussed is virtually endless, I want to use this month’s update to first touch upon some of the more pertinent things that came up in the company’s conference call last week, and then to spend some time putting the current situation into perspective for everyone.

First off, it should be noted that while MannKind and Sanofi are hoping to have everything wrapped up by April 5th, CEO Matt Pfeffer noted that it is a very complex situation to unravel, and thus, it may take a bit longer before all the details are worked out; unfortunately, this means that MannKind’s hands are tied until then with regards to actually implementing any changes in the strategy for Afrezza going forward (including filing for approval in foreign jurisdictions) since Sanofi is still the holder of all rights associated with the commercialization and distribution of Afrezza.

That being said, once Afrezza has been fully returned to MannKind, Pfeffer confirmed that while the company is exploring  the possibility of finding new partners who may be interested in adding Afrezza to their own product line-ups, MannKind is also moving forward with plans to market and sell Afrezza on its own (at least in the U.S. as part of the initial “next steps” the company is planning to take).

Moving on to other applications of the Technosphere (TS) platform, I am afraid that very little new information was revealed about the “mysterious” Receptor Life Sciences (RLS), the Seattle-based company that recently signed an agreement with MannKind to utilize the TS platform for the development of a number of proprietary compounds that are being worked on by RLS.

As you may or may not know (depending how closely you follow the story), the folks behind RLS have chosen to keep their identities confidential for the time being, though Pfeffer was able to confirm that they are a completely separate entity from Al Mann and MannKind (rumors abound that Paul Allen is behind RLS, but, as far as I know, no definitive evidence has been found yet to confirm that rumor).  In addition, Pfeffer also acknowledged that one of MannKind’s most prominent scientists is now the Chief Science Officer at RLS (and has been there for awhile, it seems).

Along with the above, MannKind also spent a good portion of the call providing an update on the projected timelines for development of the TS applications that the company has been working on for awhile now, and management also took some time to remind folks of just how deep the company’s patent portfolio actually is.

And, now that you’re up to speed on some of the main highlights to come out of last week’s conference call, I hope the following discussion will help you best figure out how to best approach the story from an investment perspective…

First off, as indirectly mentioned above, I think it is important to recognize that “fear” and “greed” really are the two primary forces that drive stock prices over shorter time-horizons, and this is especially true when it comes to the biotech sector.  In addition, I believe it is worth noting that the stocks that overshoot by widest margins at one end of the spectrum are often the ones that overshoot by an equally large margin on the other end of the spectrum as well.

And, as you might imagine, if I felt that the stock was undervalued when it had a market cap of $2 billion a mere six or seven months ago, you know I consider it to be extremely undervalued with a market cap of just over $400 million today (and that’s after already doubling off the extremely, extremely undervalued market cap of just $200 million that was touched last month right after it was announced that MannKind and Sanofi would be parting ways!).

I know it is hard to battle your emotions when it comes to evaluating stocks that have done nothing but hurt your portfolio, but I hope everyone will keep the following things in mind as they  try to figure out what to do next…

First off, as always, please do not own more than you are comfortable losing – there are no sure things in the stock market, and we are far from being “in the clear” when it comes to the MannKind story.

Second, while short sellers like to stir up fears that the company will soon be filing for bankruptcy (which is, admittedly, a possibility), there are plenty of other routes the company could take that would be both easier and less painful than a bankruptcy filing… and thus, I am not terribly concerned that this fear will come to pass.

However, I DO have some concerns (and would be remiss if I didn’t point out) that rather than sink into bankruptcy, the company could be taken private “for a song”… and though such a turn of events would be both nefarious and completely out of character for Al Mann, it probably ranks the highest on my list of “things to worry about when it comes to the MannKind story.”

Having said that, one of the things I hear most often from new subscribers is “I really wish I would have been a subscriber when you first recommended Celgene (or Apple… or Illumina… etc.),” and, while I cannot promise that the MannKind story is going to work out as well for us as those others have (and with the recognition that we have been in the stock for awhile now, so many of us are “averaging down” at current prices rather than starting new positions), I do want to remind folks of what was going on when we first got involved in some of those stocks in order to help give you some confidence that there may, in fact, be some hope for MannKind after all.

Though I had been following Celgene for a number of years before recommending it in the newsletter, it had spent much of that time as a bioremediation company focused on using microbes to clean up toxic waste sites; however, the management team at Celgene had recently come across new research that suggested that the infamous drug thalidomide was showing potential as both a treatment for cachexia (a “wasting syndrome” associated with a number of illnesses, especially AIDS), as well as certain types of cancers.

Not surprisingly, the stock suffered greatly as everyone who had been owning it to be involved in bioremediation had to decide whether to sell it or to stay involved as the company began the transition over to being a pharmaceutical company – and, not just any pharmaceutical company, mind you, but one with no experience selling pharmaceuticals… that was going to attempt to break into the highly competitive cancer arena… by attempting to “bring back thalidomide,” a drug that had been banned for causing birth defects in just about every instance that it had been prescribed for pregnant women while it was on the market… and it was going to try and get into the business on its own, with NO partner.

When I first added Celgene to the newsletter in November 1995, despite already being up close to 150% for the year, it still had a market cap of just $87 million… and it went on to spend a number of years testing our patience while trading back and forth between $5 and $12 (or roughly 20 cents and 50 cents in today’s split-adjusted stock!) before it finally took off.  However, though it took time, all of the skeptics on Wall Street who had been openly mocking the company’s plans to both “go it alone,” as well as attempt to market a product with a “black box warning” on the label that was perhaps the worst the world had ever seen (Celgene actually developed and patented a whole new method for doctors to discuss and address the risks of such a product with their patients as part of getting the product approved!) eventually came around as the results being obtained with the product began to speak for themselves… and the rest is history.

Apple Wired CoverAlong similar lines, though I had been familiar with Apple for many years, it was not until March 1998 that I finally added it to the newsletter (after it had already doubled off its lows, mind you!).  At the time, it had also become a bit of a joke on Wall Street due to the success being achieved by the likes of Dell, Compaq, and other companies that were selling PCs running Microsoft’s Windows operating system.  Not only was Apple’s market share dwindling to low single digits in a hurry, the company was also desperately strapped for cash in the ‘96-’98 time period, and many investors were concerned it would have no choice but to file for bankruptcy… and because I happened to come across it while cleaning out my garage this week, I thought it would be fun to share with you the cover of the June 1997 issue of WIRED magazine.  As you can see, the outlook at the time was “grim,” to say the least!

Of course, thanks to the fact that Steve Jobs returned to Apple and helped get the company back on track towards only putting out products that were head-and-shoulders above anything else on the market when it came to user experience and satisfaction levels, not only did the company survive, but it went on to become even more successful than just about anyone could have imagined due to some variation of the maxim that “happy customers make for happy shareholders.”

As it stands (and again with the acknowledgement that the successes of Apple and Celgene in no way guarantee the success of MannKind), I want to remind those of you who have come this far that many of the greatest investments of all-time have come from periods of market inefficiency like the one MannKind is experiencing right now.  If you are new to the newsletter, I believe you are being given a once-in-a-lifetime chance to start a position… and if, like many of us (myself included), you have ridden the stock down from higher prices but are still involved in the story, the mathematics of the situation strongly suggest that you should be taking advantage of the situation to “average down” if you’re able to (and again, only to a level that will still allow you to still sleep easily at night).

Will it be a challenge for MannKind to sell Afrezza without a partner? Yes – but it’s been done by others… and given the nature of diabetes and associated support groups, I think it will be a significantly easier task for MannKind to sell insulin on its own than it was for Celgene to sell thalidomide, for example!  And, of course, if the company does sign up one or more international partners (especially in territories where FDA approved products can be fast-tracked), the rates of sales growth will likely be that much more impressive as word starts to spread.

As mentioned before, while I can’t tell you why Sanofi had such a hard time selling Afrezza, I can tell you that I am more convinced than ever that Afrezza will eventually become the mealtime insulin of choice, especially as more and more diabetics start to monitor their blood sugar levels in real-time (a trend that is already picking up steam as continuous glucose monitors become less and less obtrusive and easier and easier to use)… and, at least for now, owning MannKind stock is the only way to invest in the story.

Of course, there’s much more to the story than just Afrezza, and with MannKind’s old science officer (perhaps the world’s leading authority on TS?) now in charge of the work being done at RLS, it shouldn’t be long before a) development milestones start being hit, and, perhaps more importantly, b) the idea that TS is really just a platform that will eventually be tapped to improve the delivery of many, many different compounds will start to be validated.

Yes, it has been a bumpy ride… and, yes, there is still plenty of risk in the story.  However, as mentioned above, if you’re still following along, history suggests that you should be taking advantage of the current situation to add to your position.

Summary of Orders Filled

Orders filled 1/11/16 – Sold 3,500 (15,000) AFFX @ 13.96; 450 (3,000) AAPL @ $98.53; 200 (750) CELG @ $103.03; 700 (4,000) CRUS @ $26.86; 600 (4,500) EA @ $64.21; 300 (2,000) FSLR @ $65.42; 125 (750) ILMN @ $165.71; 800 (7,000) LMNX @ $18.87; 10,000 MNKD @ $0.67; 750 (6,000) NVDA @ $29.68; 200 (1,500) NXPI @ $77.22; 750 (3,500) @ $16.81; 100 (1,000) DBA @ $19.83; 200 (1,500) DBC @ $12.45; 300 (2,000) QRVO @ $44.22; 200 (1,000) SWKS @ $66.05; and 200 (1,000) DIS @ $99.92 and bought (200,000) MNKD @ $0.67 and 75 (750) GLD @ $104.74.

Orders filled 1/14/16 – Sold 1,500 (10,000) AFFX @ $13.85; 100 (500) AAPL @ $99.52; 100 (500) CELG @ $105.62; 250 (1,500) CRUS @ $27.47; 200 (1,000) EA @ $64.48; 200 (1,000) FSLR @ $61.78; 75 (250) ILMN @ $175.11; 500 (4,000) LMNX @ $19.40; 500 (6,000) NVDA @ $28.67; 200 (800) NXPI @ $74.51; 250 (2,000) PERY @ $17.90; 100 (1,000) DBA @ $20.00; 200 (1,500) DBC @ $12.34; 200 (1,000) QRVO @ 39.42; 200 (1,000) SWKS @ $64.54; and 100 (1,000) DIS @ $99.11.

In addition, the Portfolios were credited with 101.9 (360.1) shares HQL from special distribution reinvestments on 1/8/16 and $852 ($4,615) worth of DIS dividends on 1/11/16 (we forgot to report the special HQL distribution last month).

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Luminex (LMNX) – Yes, the sector is currently under pressure, but I believe the company’s current market cap may make it an attractive takeover candidate if the industry starts to consolidate.

MannKind (MNKD) – Ironically, parting ways with Sanofi may prove to be the best thing that has happened for shareholders in a long while!

SPDR Gold ETF (GLD) – Gold is due for some cooling-off, but I continue to believe that, at some point, it is going to make a monster move to the upside… and this move might be getting underway now that the stock market appears to be rolling over into a new bear market.

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 150 (500) Apple, 100 (500) Celgene, 150 (500) Cirrus Logic, 200 (1,000) Electronic Arts, 50 (250) Illumina, 750 (3,000) NVIDIA, 100 (400) NXP Semi., 100 (500) Qorvo, 100 (500) Skyworks Solutions, and 100 (500) Walt Disney and purchase 100 (500) First Solar, 300 (2,000) Luminex, 5,000 (200,000) MannKind, and 50 (500) SPDR Gold Trust ETF.  We will use the closing prices on Monday, February 8th, for all transactions.

“Eyebrow Levels”

(used to help us gauge the overall health of the market*)

current one eyebrow two eyebrows
DJIA 16,205 16,750 16,250
Nasdaq 4,363 4,500 4,200
S&P500 1,880 1,950 1,800
BTK 2,743 3,200 2,700
SOX 586 630
580

*As long as all five indices are trading above their “one eyebrow” levels, it is a sign that the current uptrend is still intact; however, if the indices start to dip below those levels, it will cause me to raise an eyebrow and wonder if the trend my be coming to an end… and if both eyebrows go up, it will mean that things are deteriorating in a hurry (and you should start looking for a “Special Alert” from me in your email box).

Summary of Recommended Stocks

Affymetrix

Not surprisingly, Affymetrix’s stock has gapped up to the $14-level in response to the buyout offer from Thermo Fisher Scientific at that price that was announced just as last month’s issue was going to press.  Since the deal is not expected to close until June, I have to admit that I am intrigued by the fact that the stock is actually starting to creep above the $14 mark… and, consequently, I am going to hold on to our remaining shares for at least another month just in case a higher bid happens to come in now that the company is officially “in play.”  That being said, there is no reason for new subscribers to get involved, but existing shareholders may want to continue holding a bit longer.  AFFX is a strong buy under $8 and a buy under $10.

Apple

For the company’s first quarter, Apple reported revenues of $75.9 billion and net income of $18.4 billion, or $3.28 per share, as compared to revenues of $74.6 billion and net income of $18.0 billion, or $3.06 per share, in last year’s first quarter.  As discussed previously, though I find the stock very cheap at current prices, now that a new bear market seems to be getting underway, the odds are increasing daily that Apple’s stock is likely to experience another leg down in the weeks and months ahead as investors become more and more skeptical of the story; consequently, though I am still quite bullish on the company long-term, we are selling a few more shares this month.  AAPL is now a strong buy under $85 and a buy under $95.

Celgene

Along with Apple, I am afraid that Celgene is an example of another market-leading company that is seeing its stock sag to levels that are no longer consistent with a “bull market” interpretation of its chart… and while it admittedly needs to fall just a bit more before it will officially signal a new bear market for the stock (and thus, the sector as a whole, almost certainly), I am taking a few more chips off the table here as well.  For 2015, Celgene reported revenues of just under $9.3 billion and net income of $1.6 billion, or $1.94 per share, as compared to revenues of just under $7.7 billion and net income of roughly $2.0 billion, or $2.39 per share, in the prior year.  CELG is a strong buy under $85 and a buy under $95.

Cirrus Logic

Thanks to a solid earnings report and some upbeat guidance, Cirrus’ stock has jumped dramatically in the four weeks since last month’s issue went to press!  Unfortunately, however, I am growing more concerned that a new bear market may getting underway for both the sector and the market as a whole, and thus, despite the solid relative strength in the stock, I am selling a few more shares out of both Portfolios this month.  For its third quarter, Cirrus reported revenues of $347.9 million and net income of $41.4 million, or $0.63 per share, as compared to revenues of $298.6 million and net income of $22.7 million, or $0.35 per share, in the same period a a year ago.   CRUS is a strong buy under $25 and a buy under $28.

Electronic Arts

While it is true that if EA’s stock is able to hold above $55 in the days and weeks ahead, we will still be able to claim that the longest-term uptrend remains intact; however, when looked at over just about any other time-frame, I am afraid that EA’s stock has suddenly become a very bearish piece of evidence, indeed!  Unfortunately, as discussed a number of times over the past couple of months, once downtrends get underway, they often go on for far longer than seems reasonable… and, though I continue to believe that EA is a stock we will want to hold a position in for many years to come, I am nevertheless taking a few more chips off the table as part of this month’s rebalancing.  EA is now a strong buy under $45 and a buy under $55.

First Solar

Now that we have seen how the stock is responding in the current market environment (and admittedly after selling off 40-50% of our position in each Portfolio as part of the trades that took place between the January issue and today), I am repurchasing a portion of the shares we sold recently.  Not only do I like the good relative strength that we have been seeing lately, I do believe that whenever trends develop “unexpectedly” (remember when “low oil prices are horrible for solar stocks” was a reliable mantra?), it is always worth thinking about being a bit more aggressive when it comes to positioning oneself relative to the trend… so that’s what we’re doing!  FSLR is now considered a strong buy under $60 and a buy under $70.

Illumina

As you can see in the chart to the right, despite posting decent numbers in its most recent earnings report, Illumina’s stock has continued to slide in recent weeks and appears to be on the verge of breaking into new multi-year low territory (never a bullish sign).  For fiscal 2015, Illumina reported revenues of $2.2 billion and net income of $461.6 million, or $3.10 per share, as compared to revenues of just under $1.9 billion and net income of $353.4 million, or $2.37 per share, in the previous year.  Yes, I still believe the company is “best of breed;” however, as discussed elsewhere, there appears to be a new trend getting underway for the sector… so I’m selling a bit more.  ILMN is a strong buy under $120 and a buy under $150.

Luminex

After popping nicely in response to the company’s most recent earnings report, as you can see in the chart to the left, I am afraid that Luminex’s stock has given back all those gains (and then some!).  For 2015, Luminex reported revenues of $237.7 million and net income of $36.9 million, or $0.88 per share, as compared to revenues of just under $227.0 million and net income of $39.0 million, or $0.94 per share, in the previous year.  While I am generally more inclined to sell biotech than buy it at the moment, I believe Luminex’s current valuation makes it a very attractive takeover candidate, and thus, it is one of the few stocks that I am actually buying this month.  LMNX remains a strong buy under $18 and a buy under $22.

MannKind

As discussed above, whether you are new to the story or a battle-scarred veteran, I believe all signs are pointing towards the idea that you should be taking advantage of the current high levels of pessimism surrounding the stock to be starting or adding to your position, always staying at or below “the sleeping level” (the number of shares you can fall asleep easily with at night), of course.  My gut is telling me that there will still be at least a few plot twists involving Sanofi and other potential players before all is said and done, but with a market cap of right around $400 million, I believe this situation has one of the most attractive risk-reward ratios most investors will ever see.  MNKD remains a strong buy under $1 and a buy under $3.

NVIDIA

While “all will be fine” if the stock is able to hold current levels when the market opens on Monday… and then trade back up to the $32 in a hurry… I will be the first to admit that what was one of the most bullish looking charts in the newsletter two issues ago has now become yet another fairly compelling piece of evidence suggesting that a new bear market for both the semiconductor sector and the market as a whole may be getting underway. Consequently, despite my optimism about the company’s prospects over the long-haul, I am taking a few more chips off the table this month in an attempt to preserve our capital while Nature runs its course in the market.  NVDA is considered a strong buy under $24 and a buy under $27.

NXP Semiconductor

For 2015, NXP reported revenues of $6.1 billion and net income of $1.5 billion, or $6.10 per share, as compared to revenues of $5.6 billion and net income of $539 million, or $2.17 per share, in the prior year.  Unfortunately, as is the case with some many other stocks in the newsletter this month, I am afraid that NXP’s is also threatening to slip into new 52-week low territory… and if it does so, it will serve as yet another piece of evidence on the bearish side of the ledger.  While there is a chance that the sector could be bottoming as I type this, experience has taught me that we are better off continuing to move cash to the sidelines… and so I am here as well.  NXPI is now a strong buy under $65 and a buy under $75.

Perry Ellis

Though it is actually up a bit from where it was when last month’s issue went to press, I am afraid that Perry Ellis’ stock is also tracing out a chart pattern that is only growing more bearish-looking as time goes by.  That being said, we have already sold off quite a bit of our positions in both Portfolios, and for this reason – along with the idea that Perry Ellis may be a takeover candidate if things do slow down and larger players start looking to buy up “smaller” players – I am going to hold off selling any more shares for the time being (though I will naturally be re-evaluating this position every month, and will sell more if circumstances seem to call for such action in the future).  PERY is a strong buy under $13 and a buy under $16.

PowerShares DB Agriculture

While it is true that shares of this ETF appear to be finding some short-term support at the $20-level, a quick glance at the chart to the left ought to confirm that the longer-term trend is pretty clearly still intact.  And, as you know if you have been a subscriber for awhile now, though I remain puzzled (and increasingly alarmed) by the fact that commodity prices are behaving in exactly the opposite fashion of how I thought they would be at this stage of the the game, I am also the first to admit that our job is to respect the trend rather than fight it… and though the contrarian in me has struggled at times, I think we’ve done a pretty good job of making sure that  shares (continued under “DBC” below) DBA remains a buy under $20.

PowerShares DB Commodities

(continuing from “DBA” above) of both DBA and DBC have remained among the smallest of our positions during the course of the decline we have seen in commodity prices over the past couple of years.  That being said (and with a recognition of the fact that “gold is its own special kind of commodity”), it will be interesting to see how the recent strength in gold ends up impacting the prices of other commodities (if it does at all).  In the meantime, though I am adding to our gold position (based on the strength that has developed there), please note that I am going to hold off a bit longer when it comes to adding to our positions in the likes of DBA and DBC; however, for those of you anxious to buy, DBC is considered a buy under $12.

Qorvo

As you can see in the chart to the left, thanks to a variety of factors all coming together at once, Qorvo’s stock is scraping along just a couple of bucks above its 52-week low (which, if you recall, is technically also its all-time low, given that the stock was born out of the merger of TriQuint and RF Micro Devices a little over a year ago).  For the company’s third quarter, Qorvo reported revenues of $620.7 million and a net loss of $11.1 million, or $0.08 per share, as compared to revenues of $397.1 million and net income of $87.7 million, or $1.18 per share, in last year’s third quarter (which, it should be noted, was when the two companies were both still independent).  QRVO is now a strong buy under $32 and a buy under $36.

Skyworks Solutions

As you can see in the chart to the right, despite reporting a very solid quarter, Skyworks’ stock is yet another one in the semiconductor space that is threatening to start hitting new 52-week lows… and, as explained so many times before, since “trends often go on for far longer than seems reasonable,” our job is to try to own less of the stock during the downtrend (but to always hold an “investment position,” no matter what).  For its first quarter, Skyworks reported revenues of $926.8 million and net income of $355.3 million, or $1.82 per share, as compared to revenues of $805.5 million and net income of $195.2 million, or $1.01 per share, in last year’s first quarter.  SWKS is considered a strong buy under $55 and a buy under $65.

SPDR Gold Trust ETF

While gold is currently more than due for at least a short cooling-off period after the spectacular run it has made over the past four or five weeks (and it really needs to get back above $1,250/oz. (or thereabouts) before we could start to seriously consider the idea that a new uptrend may, in fact, be getting underway), because we try to only make trades once a month, I am raising the buy limits a bit and adding more shares to both Portfolios as part of this month’s “regularly scheduled rebalancing.”  As always, while it is human nature to resist the idea of “paying up” for something, I want to remind you that you are encouraged to “buy strength” if you see it developing in the price of gold.  GLD is considered a buy under $116.

Tekla Life Sciences Investors

Not surprisingly, as you can see in the chart to the right, HQL’s stock has been slammed along with the rest of the biotech sector over the past four weeks!  And, while it is true that it is not fun to watch the shares themselves tumble, I think it is important to keep in mind that this closed-end fund is set up to invest in a broad cross section of the biotech sector… and this means that, provided the fund managers are on top of things, the current sell-off will actually set them up with an opportunity to take advantage of the bargain prices that are already starting to be created as part of the downturn.  In the meantime, you are encouraged to be patient about new purchases.  HQL is now a strong buy under $15 and a buy under $18.

Walt Disney Co.

Yes – if the stock can hold $90, I agree we could be looking at the possibility that a very significant bottom is being put in for the stock; however, if that level does not hold in the days and weeks ahead, I would be hard-pressed to not call it a very bearish signal, indeed.  Given where I believe we are currently at in the fear-greed cycle, I will sleep much more easily at night if I take a few more chips off the table, and, unless you are just getting started with the newsletter (and are therefore still putting money to work to start initial positions), you are encouraged to join me in lightening up on your position until we get some evidence that the downtrend may be ending.  DIS is now a strong buy under $85 and a buy under $95.

The MannKind Debt Situation Revisited 8/3/15

*** The following was published for subscribers of Nate’s Notes and The Wagmore Advisory Letter on 8/2/15 ***

I will be camping for the next four days (with limited internet access, if any, in the campground… but rest assured I will find some time each day to make sure I am keeping up with the story as it unfolds, even if it means making a short drive back to “civilization”), but before I leave, I wanted to post this short note to answer some of the questions that have come in over the past few days, as well as give you an update on my thoughts on the recent announcement from MannKind regarding the $100 million convertible notes that are due on August 15th.

First, to recap (as well as to include a subtle, but important, clarification to) the details of the situation…

As you know, MannKind has $100M worth of convertible notes that are due later this month.  They pay 5.75% interest and are convertible into common stock at $6.80 per share, and with the stock currently trading well under that price as we head into the conversion date, it is obvious that most holders would opt to have their debt repaid in cash rather than stock under the current terms of the agreement.

In addition, as many of you have asked about, when the convertible notes were first issued, MannKind also agreed to loan 9M shares to Bank of America as part of the agreement, and the purpose of this loan was to allow holders of the convertible debt to hedge their position by shorting those loaned shares.  Though these shares were not mentioned in the press release, based on what I’ve been able to track down, it appears that under terms of the original agreement, these 9M shares must be returned to the company within a specific period of time once the debt is retired (even if it is rolled over into a new agreement with similar terms).

As you know, it was announced last week that MannKind has negotiated new agreements with the holders of the notes.  As part of the agreements, we know that $$15.4 million of the debt will be repaid on its due date, and $27.7 million of the debt will be rolled over into new convertible notes that essentially carry the same terms as the original notes, but mature in August 2018.

That leaves $56.9 million to be dealt with, and this is where I want to make a clarification to what was reported before.  For the record, for a variety of reasons (most notably that I wanted to keep things simple for those of you who just want to understand the gist of the agreement but don’t really want to ponder all the minutiae and nuances of the language), I intentionally simplified the manner in which I presented the situation in my write-up a few days ago.  However, now that I have had some more time to think about and ponder the situation, I feel compelled to revisit this component of the deal in order flesh it out in a little more detail for you after all so that you will be prepared for all possible outcomes.

In particular, I stated that this $56.9 million balance of the debt would be converted to stock over a 10-day period, though I believe it is worth noting after all that the press release actually states that “up to $56.9 million” of the debt will be converted to stock [my italics added for emphasis].

Because the press release nowhere states what will happen if holders decide to not exchange debt for equity, I assumed that the language was chosen to allow for a slight variation in the numbers in case a small handful of holders changed their minds at the last minute (i.e. it provided some “wiggle room” in terms of what the final numbers might look like).

However, given the circumstances (and especially in light of the manner in which the stock has acted following the announcement), I believe we do need to spend some time considering the possibility that perhaps a sizable portion of the holders of that $56.9 million worth of debt may not want stock after all (contrary to the implication I made in my write-up a few days ago).

At one extreme of the spectrum of possibilities, for example, none of the note holders may want to convert, which would mean that rather than just the $15.4 million currently slated to repaid, the number would actually be $72.3 million… and while the smaller number should not be difficult for the company to come up with, the larger number might prove to be more of a challenge based on how the company’s balance sheet currently looks (more on this below).

At the other extreme, however, all of the note holders may choose to convert, and if they do, under the terms of the agreement (which includes a “floor price”), it could result in up to roughly 13 million new shares of stock being issued (on top of the roughly 410 million currently outstanding)… though it should be noted that regardless of how the current debt issue is resolved, its resolution will also then require the 9M shares that were loaned as part of the original deal to be returned.

Either way (and regardless of whether one was including them in the shares outstanding number before), I consider any dilution that might occur under this circumstance to be “insignificant.”

Taking a bearish view of the situation, one could assume that no note holders will want to convert (after all, “it is a stock that is going to $0,” right?), and to support the bearish thesis, one would then ask “how is the company going to come up with that kind of money?”

To be sure, it is a fair question, but as best as I can tell, the company does, in fact, already have enough potential financing options lined up that it could raise that kind of money if necessary (with The Mann Group being the most obvious source of money).  Yes, assuming the stock continues to trade below the current floor price, it would result in even more dilution than the proposed agreement represents… but not by much (unless, of course, the stock were to continue to fall dramatically in the days ahead – in which case, any financing that was done via a stock offering would be done at a correspondingly lower price).

In addition, though it seems to have been wrapped into the company’s income statements and balance sheets in a manner that makes it difficult to “get at,” I think it is worth remembering that the company has received $200 million in milestone payments so far from Sanofi, and though I am not enough of an “accounting jedi” to explain what the mechanics would look like, it seems reasonable to assume that the company could find a way to somehow utilize that money to cover its short-term obligation to repay the notes if absolutely necessary (but I could be wrong about that).

On the other hand, a bullish view of the situation would assume that all of the note holders will jump at the chance to convert their debt into equity in the mid-$4s rather than the high-$6s, especially given where we are at in terms of the rollout of Afrezza.

Unfortunately, while there is a chance the company will provide us with an interim update on how much (if any) of the debt is being converted to equity on each of the 10 days in which conversion is allowed, chances are that we will have to wait until the 10-day period is over to know the outcome (with the only certainty appearing to be the fact that once the original debt issue has been resolved, Bank of America will be required to return the 9M borrowed shares and they will cease to be a part of the equation).

As it stands (and admittedly based on the assumption that the company will be able to repay whatever portion of the notes end up not being converted to stock), I believe that once the issue is resolved – no matter what the final terms look like – it will represent the start of a new era for both the company and, knock on wood, the stock price as well.

Yes, there are quite a few more shares outstanding today than there were two years ago… but I want to remind you that those shares came into existence via the conversion of debt to equity (always a bullish turn of events in my book).

In addition, any new shares that are issued as part of resolving the convertible debt issue will presumably be issued to folks who actually want to own the stock at this stage of the game, whether they are purchased via conversion of the notes or via a private (or public) placement of stock in order to repay the notes… and, given that I believe Afrezza is, thus far, turning out to be all we hoped it would be in terms of how it is impacting patients’ lives, I cannot help but think that once the debt issue is resolved, the trend will slowly but surely continue to shift towards institutions wanting to buy the stock rather than sell it.

I know that the naysayers are pointing to the low prescription numbers so far as “proof that Afrezza is going to die on the vine,” but as mentioned above, all the feedback I have received so far suggests that it is actually on track (albeit at a very slow and deliberate pace) to disrupt not only the fast-acting insulin segment of the diabetes market, but possibly portions of the oral medication – and perhaps even the long-acting insulin – segments of the market as well (i.e. it truly is a “game-changer” that represents a tremendous threat to existing franchises).

Also, as a side note, while increasing capacity at a manufacturing facility in no way guarantees that additional sales will be made, despite the “low” script numbers so far, I believe it is worth noting that MannKind is continuing to scale-up production of Afrezza rather than scale it back (as one would expect them to do if they were getting ready to wind down the product and company).

Of course, Afrezza is just one piece of the puzzle, and though it is difficult to assign a specific value to future applications of the company’s Technosphere platform (and those on the short side like to claim it has no value – “it’s a ‘sham’ technology”), it is important to keep in mind that there is more to the MannKind story than just Afrezza.

In addition, while folks in the bearish camp like to point to the company’s “excessive” market cap of between $1.5 and $2 billion (depending when you look during the volatile trading sessions we’ve had lately!), I want to point out that IF Afrezza ends up delivering in the manner I believe it will, we will all be able to look back in a few years and kick ourselves for not buying even more while it was “so cheap.”

As I’ve mentioned before, no – the success of Celgene in no way guarantees the success of MannKind.  However, I want to remind folks that after being recommended with a market cap of less than $100 million in 1995 (along with a product that ended up being given “the black box warning of all black box warnings” on its label, I might add), naysayers have been pointing to Celgene’s “insane” market cap every step of the way for the past twenty years – it was “overvalued” when it hit $250 million, $500 million, $1 billion, $2 billion, etc… and today, of course, it sports a market capitalization north of $100 billion!

Naturally, I can’t promise that things will turn out as well for us with our investment in MannKind; however, I can tell you that even though we are starting from a much higher market capitalization with MannKind ($700 million when the stock was first recommended in 2009, approximately $1.7 billion today), I feel more certain about Afrezza’s ability to disrupt the diabetes market than I did about thalidomide’s ability to capture a significant share of the cancer market… and, as you know, the global diabetes market is HUGE.

As pointed out in my write-up the other day, there is always a chance that my assessment is wrong… and thus, you are encouraged to make sure you are only investing what you are comfortable losing when it comes to this stock.

However, I also want to remind you that if I am right (and the very sizable number of short-sellers who still need to buy back stock in order to close out their trades are wrong), there is no reason at all that this stock can’t experience the same sort of muli-year appreciation that Celgene has experienced as its product portfolio has grown and matured as time has gone by.

Successful investing (vs. “trading”) often requires patience, and I would suggest that nobody knows this better than Al Mann himself.  Yes, to many it appears that Sanofi might be “dragging its feet” when it comes to rolling out Afrezza, but I would counter with an observation that some of you have seen me make in various other forums on the internet, namely that “when you have a chance to ‘run the table,’ there is absolutely no reason to rush any of your shots”… and whether it takes one year or three years for Afrezza to become the treatment option of choice for diabetics (and pre-diabetics) in a variety of circumstances, at the end of the day, I believe investors will want to own a piece of that pie (the question, of course, is when the stock price will finally start to reflect that anticipation versus the current gloom-and-doom outlook).

Along with the above commentary, I also want to point out that while I am under the impression that the company will be reporting earnings and holding a conference call on August 10th (and said so in my most recent write-up), this date is merely what is being reported on various sites around the internet, and it has not actually be set by the company yet… so we cannot count on it as a certainty in terms of knowing when we might get an official update on how the exchange of debt for equity actually went (or didn’t go, as the case may be).

Having said all that, know that the stock is likely to be quite volatile over the next week or two, so please remain disciplined about buying (or selling, if you’re so inclined) in several small pieces over a period of time rather than making your entire trade “in one fell swoop.”

As mentioned the other day, this has been a long, arduous journey to endure so far… but, knock on wood, we may finally be reaching a turning point in the story in terms of both cleaning up the balance sheet as well as possibly seeing an acceleration in prescriptions being written as Sanofi’s direct-to-consumer advertising kicks into gear and word slowly starts to spread in the medical community about the results that are being obtained by the early adopters of Afrezza.

Stay tuned!

Our Latest Thoughts On MannKind 7/29/15

“MannKind” – it’s a little company based in Valencia, CA… ever heard of it?

In all seriousness, as you might expect, I have been overwhelmed with requests this morning to comment on today’s announcement from the company regarding the resolution of the convertible debt that was coming due in a few weeks, and though I have done my best to answer everyone’s emails as they have come in, I want to also get something posted on the website for the rest of you to read as well.

Though the stock is down again today, the information in today’s press release is actually quite positive and helps to explain the price action we have seen over the past several days (more on this below).

To bring you up to speed, prior to today’s announcement, MannKind had a $100 million convertible note coming due in the middle of August that paid 5.75% and, under the terms of the note, was convertible into stock at $6.80.

However, as it became apparent that the stock would most likely not meet the criteria for conversion (it had to trade above $6.80 for at least 20 of the 30 trading days leading up to the due date, I believe), MannKind needed to figure out how to meet the $100 million obligation, and for those of you who have not had time to read the press release, here are the important details of how they have chosen to resolve the issue (slightly simplified for the sake of explanation):

• of the $100M outstanding, the company will pay down $15.4M;

• in addition, they will rollover $27.7M of the debt into new notes that essentially carry the exact same terms but are due in 2018 rather than 2015;

• and, finally, the remaining $56.9M will be converted from debt to equity over the next ten days (1/10th each day) at a price that is the greater of a slightly discounted “volume-weighted average price” (VWAP) of the stock for that day or “the floor price,” whichever is greater.  This floor price is currently pegged at “94.5% of the VWAP on July 28th” (which, by my calculations would be approximately $4.60, but I’m afraid I don’t have the exact number for you).

Naturally, though cheerleaders on the short side have been beating their chests for months raising alarms that “the company won’t be able to meet its obligation regarding the notes,” now that the company has successfully done so, they are once again changing their tune after being proven wrong, with the latest (and most amusing) interpretation coming from Adam Feuerstein, who was quick to call the resolution an example of “‘Death Spiral’ Financing.”

While it is true that scores of biotech companies have been wiped out by similar agreements over the years in which they found themselves converting debt to equity at lower and lower prices, the fact that this deal has a floor price (whereas the others did not) suggests his dramatic headline is really nothing more than yet another entry in the ongoing log of “Dumb stuff Adam Feuerstein has said about MannKind over the years.”

As it stands, you are first of all encouraged to recognize that MannKind has resolved the “looming” situation regarding its debt… and that’s a positive thing.

Second, as part of today’s announcement, it has actually paid down a portion of that debt ($15.7 million), also a positive.

Third, while it would have been nice to see a slightly lower interest rate attached to the rollover, the company now has a note for $27.7 million rather than $100 million on exactly the same terms as before (also a huge positive in terms of what the company’s liabilities will look like going forward).

And, finally, as I have discussed a number of times before, while a lot of noise has been made about the “huge increase in shares outstanding over the past two years,” I want to remind you that all of these shares have come into existence as large debt holders have chosen to convert their debt into stock… and the only reason I’ve ever seen that folks are willing to trade a “sure thing” for a “maybe” is if they think the maybe has an above-average chance of outperforming the sure thing by a wide margin (so I’m counting this as a positive turn of events as well).

To be sure, the folks who are converting their debt this time around will most likely be  getting to do so in the mid-$4s rather than the high-$6s (as would have been the case if the notes were converted on the original terms), but I think it is important to keep in mind that

a) the holders of these shares are almost certainly long-term investors (their new shares have not been registered and therefore “may not be offered or sold absent registration or exemption from registration requirements”),

b) the dilution to existing shareholders is de minimis (less than 4%), and

c) these terms offer a great explanation as to what has been going on with the stock price for the past several days (assuming you believe that patient long-term investors are interested in maximizing their stakes at the best price possible, of course).

Having said all of that, I know the question that most of you have on your mind is “but when are we actually going to make money in the stock, Nate?”… and, unfortunately, your guess is as good as mine when it comes to what the answer is to that question.

Looking at it from the standpoint of potential catalysts (or booby traps, depending on your level of optimism at the moment), the first event on the horizon is Sanofi’s earnings call, which will take place before the market opens tomorrow.

As mentioned in last night’s Inter-issue commentary, unless they give us a nice upside surprise regarding Afrezza sales, I am guessing that the numbers they report will be viewed as a negative event, even if they are actually “decent” given where Sanofi is currently at in the rollout process.

Of course, beyond Sanofi’s earnings report tomorrow, the weekly prescription numbers released by Symphony and IMS come out every Friday morning, and though I can’t tell you when it will happen (or even IF it will ever happen), at some point, I anticipate there will be a sudden and sizable jump in numbers that will get people’s attention and change the tone of the conversation in a significant manner.

In addition, MannKind will have its own earnings call a few weeks from now (August 10th, I believe), and though Sanofi will likely have already given us a good sense of what Afrezza sales looked like in the quarter, it will be an opportunity for management to talk more about not just Afrezza but possibly other products in the Technsophere pipeline as well.

And, finally, though both companies have been very quiet about their plans, please keep in mind that Sanofi has worldwide rights for Afrezza, and, at some point, we will almost certainly start to see approvals come in for other countries.  Not only will this help to paint a more optimistic picture of the potential market, it will presumably also trigger additional milestone payments to MannKind per the terms of the agreement with Sanofi.

So, where does that leave us?

As always, you are encouraged to only own as much stock as you can comfortably sleep with at night even if it means taking a loss on part of your position today in order to gain the clear-headedness and peace of mind that you will need in order to make sensible decisions going forward.

In addition, though I believe the stock is a screaming buy at current prices, I will be the first to admit that the trend is currently down, and, as is often pointed out in the newsletter, “trends often go on for far longer than seems reasonable”… so you are encouraged to remain disciplined about patiently adding to your position on a periodic basis rather than going “all in” with any particular trade (assuming you’re interested in adding to your position in the first place!).

Yes, this has been one of the longest, bumpiest rides we have been forced to endure in the 20 years I have been publishing the newsletter, but as I have said before, I believe it is also probably the most misunderstood story I have ever come across in my 26 years of following the biotech sector… and while it remains to be seen whether I am right or I am wrong, I continue believe that all signs at the fundamental level are currently pointing towards Afrezza becoming a game-changer in the global diabetes market.

Stay tuned!

Keeping Things In Perspective 5/15/15

***The following is excerpted from the May issue (5/6/15) of Nate’s Notes that was published for subscribers last weekend***

Keeping Things In Perspective

  • For neither good nor evil can last forever;
  • and so it follows that as evil has lasted a long time,
  • good must now be close at hand.

 – from Don Quixote (Miguel de Cervantes Saavedra)

While there is plenty going on in the world that we could talk about this month, I will keep my general commentary fairly short in order to address a lot of the questions and concerns that have been sent in following MannKind’s recent earnings report and subsequent conference call.

In a nutshell, despite all the concerns being expressed by the talking heads on TV and elsewhere that “this is the top,” I want to remind you that while it is possible a top is forming, there actually is no evidence to back up the claim that the current uptrend has run its course.

In fact, as you can see in the Eyebrow Levels table below, all five of the major indices I use to gauge the health of the overall market are still flashing bullish signals, and while it is true that the BTK and SOX indices are both down a bit from where they were last month, both the biotech and semiconductor sectors are long overdue for some profit-taking… and, thus, for the time being, I am not at all concerned or surprised by their slight underperformance.  Yes, at some point it will be time to turn less bullish, but for now, you are encouraged to remain as fully invested as you can comfortably be while still sleeping easily at night.

MannKind Update

I have to admit that I have been unsure about where and how to start addressing all of the emails and questions that have come in regarding MannKind over the past 24 hours.  On the one hand, there really is not that much new to report as we patiently wait for the story to unfold, but, on the other hand, there are a number of you that have asked me to spend some time directly addressing the list of “alarm bells” that appeared in Adam Feuerstein’s latest blog entry regarding MannKind… so, naturally, I feel compelled to devote a fair amount of time to discussing the situation.

For those of you not familiar with him, Adam Feuerstein is a blogger who has been dead wrong with every single prediction he has made about MannKind and Afrezza over the past several years (clinical trial results, etc.), but rather than recognize or acknowledge that he clearly does not understand the story as well as he ought to given the amount of time he has spent on it, he instead continues to write negative column after negative column about the company.  The bad news for us is that his writings clearly influence the stock price over the short-term; the good news for us is that, in the end, the fundamentals of a story always end up winning out over “hype” in the stock market (even if our patience gets tested first).

That being said, I am torn between addressing his most recent column head-on (as some of you have requested, but which, in some ways, would suggest that I find his ideas worthy of discussion in the first place), or simply making some observations about the situation that might help put things in perspective and boost your confidence without giving him more attention than he deserves… and so I’ll probably end up doing a little bit of both in what follows.

First and foremost, I want to remind you that while the stock market is a very efficient pricing mechanism over the long-term (i.e. “the fundamentals always win in the end,” as mentioned above), it can be extremely inefficient over shorter time periods… and this is especially true when it comes to biotech stocks.

In addition, I think it is important to keep in mind that, while a lot of the bears howl about “how badly the stock will tank in response to the dilution” if MannKind ends up needing to raise more money via a secondary stock offering, the fact of the matter is that even if the company did a secondary offering, it would probably be for only 10 or 20 million shares at most… and this is nothing compared to the “extra” 100 million shares (give or take a few million) that have already been dumped on the market by short sellers (folks who borrow the stock in order to “sell high in hopes of buying it back low”).

With a little over 400 million shares outstanding, the roughly 100 million shares that have been sold short represent 25% of the total shares outstanding (talk about “dilution” and additional shares influencing stock price!)… but, unless the stock actually goes to $0, at some point, these shares will need to be repurchased in order for those traders to close out their positions and free the capital up for investment elsewhere.

To be sure, some of them will likely hang on hoping for $0, but once the stock starts to find some traction and begins to head north again (as I believe it will), I suspect the majority of those short sellers will realize their trade has run its course and they will start to cover (i.e. buy back) the shares they have sold short… and so, from a practical perspective, it is like there is a free “stock repurchase plan” in place (and a very sizable one at that!).  No, the covering is not underway yet, but in the same way that flooding the market with an extra 100 million shares has artificially depressed the stock price over the past several quarters, pulling those 100 million shares back out of the market ought to lead to a significantly dramatic move in the other direction as well.

And, speaking of secondary offerings, the company’s cash position, etc., I believe there are a few things to keep in mind on this front as well.

First off, while it is true that the company has a $100 million convertible debt due this summer, the company has suggested that it has a number of options on the table for meeting the obligation.  To be sure, they could be bluffing, but given the circumstances, I have no reason to believe they won’t be able to address the “problem.”  In addition, though management has essentially ruled out the idea of needing to sell more stock to meet the obligation, before you get too worked up over claims from the short camp that “the company is headed for bankruptcy,” I want to remind you that Al Mann has just under $1 billion of his own money tied up in the story, and it is extremely unlikely that he will be willing to watch that investment go to $0 for want of a “mere” $100 million (which he has personally, several times over, I might add).

Secondly, while it is true that the debt that MannKind is accruing as part of the $175 million line of credit that Sanofi has extended as part of profit-loss sharing agreement will have to repaid at some point, I want to remind you that a) if Afrezza is even somewhat successful, this shouldn’t be a problem, and b) should Sanofi ever make an offer for MannKind, that debt would almost certainly simply be absorbed as part of the purchase agreement.

No, I am not suggesting a buyout is imminent (and, in fact, I would rather see MannKind remain independent for as long as possible), but given the circumstances, it is certainly a possibility that we have to keep in mind as we study the cards on the table, especially when one considers the possibility that some of the “confusing” bookkeeping that has taken place with regards to booking milestone payments, etc., has possibly been done with a longer-term exit plan in mind.

As far as the company’s reference to Apple and iPhone sales goes, though Adam naturally chose to mock the comparison, I believe it is actually a far more legitimate comparison than he might want to admit, and I want to encourage you to keep the following in mind as you weigh the circumstances for yourself.

In particular (and in case you didn’t listen to the conference call), management pointed out that total iPhone sales in the first year that product was available barely amounted to a couple of percent of today’s sales of the same product line… thus reminding us that just because something starts small, it does not mean it cannot eventually grow quite large.

In addition (and perhaps more importantly), whereas there was good reason to wonder whether a sizable market would actually develop for a product like the iPhone (early sales numbers for the iPhone were also mocked by skeptics), we already know for a fact that there is a huge (and growing!) market worldwide for prandial (meal-time) insulin… and, while sales have admittedly been slow so far, I believe the benefits provided by Afrezza due to its unique pharmacokinetic profile strongly suggest it will eventually become the meal-time insulin of choice as time goes by.

There are a number of amazing stories from Afrezza users that are starting to pop up in the world of social media, and I have personally heard from a number of my subscribers that they (or a diabetic family member) are very pleasantly surprised at just how well the drug is working for them.  Not only are they achieving “unheard of” levels of control over their blood sugar levels, as pointed out before, as we enter an era when more and more diabetics are starting to track their blood sugars in real-time, they are naturally going to want an insulin that also provides real-time (or very close to it) control of those blood sugar levels… and Afrezza is the only product on the market capable of meeting this demand.

As those of you who listened to (and/or read the transcript of) the conference call already know, despite the nearly unanimous agreement among folks who have tried Afrezza that it is truly a “game changer,” MannKind and Sanofi have identified – and are working to fix – a number of issues that seem to be contributing to the slow adoption of Afrezza.

One of the issues they have identified involves the insurance authorization process associated with obtaining a prescription for Afrezza, and though it would have been nice to have all of the kinks on this front ironed out from the get go, it is not an uncommon problem to encounter when launching a new drug.  While we will have to wait and see how things actually play out, rest assured that Sanofi has a team in place that handles this sort of thing for other drugs on a regular basis, and the odds suggest they will be able to work with insurers to improve the process associated with prescribing (and reimbursing for) Afrezza as well.

Along with a cumbersome approval process for some combinations of doctors’ offices, patients, and insurance companies, MannKind also confessed that the lung test that is required prior to receiving a prescription is also proving to be a meaningful hurdle to adoption due to the fact that a higher than expected number of endocrinologist and diabetes specialist offices do not have their own spirometry machines for performing the test.

Of all the complaints that one could choose to levy against Sanofi and MannKind at this stage of the game, this “surprise” information probably has the most merit; however, as has always been the case for companies intent on achieving success, now that a problem has been identified, rather than sitting on their hands and muttering “it’s not our fault,” they are actively exploring ways to remove the hurdle from the equation (and the good news is that this is probably a fairly easy problem to overcome).

Tying things back to Apple and the iPhone again, in one of my favorite Steve Jobs press conferences of all time, I distinctly remember the absolute frustration and annoyance in his voice as he addressed the “Antennagate” issues associated with the release of the iPhone 4, a model that far and away represented the company’s most ambitious and impressive leap forward at the time.

In the same way that I can only imagine how annoyed Steve Jobs must have been that, after all the effort that had gone into delivering such a revolutionary product, he was forced to utter “fine – everyone gets a free case” in order to keep the product on track for success, I bet Al Mann is probably also thinking the same thing about this issue that appears to be holding back his game-changing Afrezza… and, though it is unlikely we’ll ever hear him say “fine, everyone gets a free spirometer,” it does appear that both Sanofi and MannKind are exploring the possibility of helping to make the test equipment available to doctors as part of their routine sales calls (and this, in turn, will likely be a win:win for all involved, as it will both speed up the prescribing process, as well as give those doctors an extra boost of reimbursement as part of performing the mandated – but very simple – procedure in their own office).

While one can argue whether or not the above two issues should have been identified and fully resolved ahead of time or not, the bottom line is that they are both issues that ought to be fairly easy to address, and thus, I do not consider either of them terribly worrisome as part of our longer-term outlook for the story.

However, just to make sure we’re not chasing windmills after all, I am going to take the same approach I did with Apple during that period after Steve Jobs passed away and people were starting to doubt whether or not Tim Cook did, in fact, have anything coming through the pipeline at Apple (of course, it turned out he did, and the stock has gone on to more than double “against all odds” (sic) since then).

In the same way that I picked an issue by which we needed to see some of the “really innovative products” Tim Cook always talked about (but that had not yet appeared) or we would start to reduce our position regardless of my optimism, I am doing the same thing with MannKind now.

In particular, I am going to use the January 2016 issue as our evaluation point, and over the course of the next eight or nine months, I would like to see at least one of the following events occur in order for us to maintain our current high level of interest in the stock:  a) data showing Afrezza is generating at least 2,000 prescriptions per week (up from the roughly 250 per week that it seems are being reported currently), and b) official public disclosure of at least one of the target drugs currently under consideration for use with the Technosphere platform.

That being said, if the stock was trading at $15, it would be much more difficult to know whether to buy it or sell it; however with it trading down here under $4 – especially when one takes into account the effort that has been put in by those with a bearish slant to bring it down to this price – I believe the risk/reward ratio is extremely skewed towards the reward end of the spectrum (and, in fact, it is telling us we should be buying the stock with both fists)!

Though the trading action we saw today (a “spike down” on much higher than usual volume) suggests to me that a bottom may have finally been put in, there is still a possibility that the real “capitulation” we need to see in order to mark then end of the downtrend may not come until sometime between Monday and Wednesday.

Either way, with the caveat that you should not own more of the stock than you can comfortably sleep with at night, I believe that the time has come for those of you who have been cautiously sitting on the sidelines waiting to either start a position or finally average down on a position you started several months ago to step up to the plate and make a purchase – no, we’re not out of the woods yet, but with such a large disconnect between the share price and the fundamentals of the story, I would be remiss if I was not pounding the table encouraging you to take advantage of the situation while it exists.  Stay tuned!

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Cirrus Logic (CRUS) – Cirrus’ stock has been on a tear lately, and the fact that it is once again setting new muilti-year highs as we go to press suggests there may still be more to come.

Electronic Arts (EA) – EA’s stock has also been on fire for the past several months, and it, too, is breaking out into new high-territory (something that cannot be interpreted as anything but a bullish indicator).

Walt Disney (DIS) – Great relative strength here as well, with the opportunity for more new highs to be set in the weeks ahead if the overall market remains strong.

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 100 NXP Semiconductors and 100 Qorvo and will purchase (5,000) Affymetrix, 100 (1,000) Cirrus Logic, (1,000) Electronic Arts, 250 (2,500) Luminex, and 2,500 (35,000) MannKind.  We will use the closing prices on Monday, May 11th, for all transactions.

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MannKind

I don’t know what else I can tell you about the MannKind story that hasn’t already been said, other than to remind you yet again that has become what I consider to be one of the most extreme examples of an “inefficient market” for a stock in the 26 years I have been doing this.  Also, though it in no way guarantees that the MannKind story will turn out anywhere near as well for us, I want to point out that Celgene’s stock was subject to a lot of the same sorts of irrational skepticism – and tested our patience almost as much – for several years in the late ‘90s before it finally took off for us.  If you’ve thinking about buying some MannKind, now is as good a time as any to get on board.  MNKD is a strong buy under $5 and a buy under $8.