More MannKind Musings 3/11/15

***The following is excerpted from the March issue (3/6/15) of Nate’s Notes that was published for subscribers last weekend***

I skate to where the puck is going to be, not where it has been.

– Wayne Gretzky

“It Doesn’t Need To Be Rocket Science…”

Given the wild ride that MannKind’s stock has been on for the past couple of weeks (actually quarters… or even years, really, depending how long you’ve been following the story!), it should come as no surprise that it is far and away the stock that I have been asked about most often lately, and, as promised in the email sent out to subscribers a few days ago, I want to spend some time discussing certain aspects of the story again in order to help you figure out how involved (or uninvolved) with the story you actually want to be at this stage of the game based on your own investment objectives and tolerance for risk.

In fact, given the wide range of emotions that have been expressed to me over the past week in response to the price movement in the stock, “risk tolerance” is probably a great place to start the conversation… and what better way to start it than to simply repeat a variation of one of our favorite mantras in the newsletter, namely “do not own more of the stock than you can comfortably sleep with at night.”  There are never any guarantees in the stock market (other than “stock prices will fluctuate,” of course), and while I remain optimistic that this is a stock we will likely make a lot of money on over the next several years, I cannot promise you it won’t see $4 per share before it sees $8 again, for example.

That being said, I want to remind you of the main reasons we own the stock, and then I will try to touch on as many of the recent “news events” as space allows.

So, why do we own the stock?  In a nutshell, diabetes is a huge and growing market, and prandial (or “meal time”) insulin is a multi-billion dollar subset of that market.  And, while scientists have made great strides over the decades figuring out ways to deliver meal time insulin to diabetics in an increasingly efficient manner, the fact of the matter is that they have essentially “hit the wall” in terms of being able to improve upon existing products.

However, thanks to the unique composition and delivery method of MannKind’s Afrezza, it is my contention that this segment of the insulin market is about to be turned on its head… and though it may take longer than the optimists are hoping for the paradigm shift to hit critical mass, I believe that once that tipping point is reached, it won’t be more than a year or two longer before doctors and patients will be looking back on “the way they used to do things before Afrezza came along” (and, yes – the implication there is that Afrezza will be the dominant player in the multi-billion dollar meal time insulin market).

Not sure if you believe me?  Pretend you had never heard of MannKind nor Afrezza but were presented with the chart below that graphically shows how a “new insulin product” (in red) compares with “existing insulin products” (black) in terms of the way they enter and exit the body as part of a patient’s effort to control blood sugar levels around meals.  Though there are folks out there who are still arguing that a “slow uptake and slow exit” from the body is “just fine,” common sense certainly suggests that the product that more closely (much more closely, in fact) matches the way insulin is produced and used in the bodies of non-diabetics (blue) is probably going to also come much closer to allowing diabetics to lead “normal” lives rather than spending a sizable chunk of their time managing their diabetes.

afrezza vs. RAA
Source: MannKind Corp.

Of course, what makes the story that much more compelling is the fact that not only would the new product be considered superior even if it was also an injectable product, it happens to have the added benefits of not only eliminating needles from the equation in terms of delivering the insulin, but of also doing so in a manner that is extremely easy and convenient relative to “the old way.”

And this brings us to the first “point of contention” many of you have asked about this week, namely that a big deal is once again being made of the fact that in the most recent clinical trials that were done using Afrezza, the drug didn’t appear to show much of a benefit versus existing therapies.

Though I will be the first to admit that, based on those trials (the results of which were announced in 2013), no clear advantage was seen, I will also point out that based on how the studies were designed (using what I believe will eventually be considered “old school” ways of measuring success), it should come as no surprise that no clear benefit was seen – and if those trial results are what one wants to base their assessment of Afrezza on, I would respectfully suggest that they are skating to where the puck has been rather than where it is going in terms of how patients are starting to manage their diabetes.

Rather than measuring “success” in controlling blood sugar levels via a process of keeping data over a period of several months and shooting to have average readings that are below certain target levels (as has been done for decades), diabetics today have the ability to monitor themselves on a real-time basis (or very close to it, give or take a few minutes)… and, though the studies have not been done yet, once they are done, I believe it is very likely they will show that Afrezza is a far more useful tool for managing blood sugar levels than anything else on the market today.

To be sure, until the studies are done, neither MannKind nor Sanofi can actually make the claim “on the label,” but I think it is important to keep in mind that there is nothing that prohibits patients from sharing their personal experiences with a product (something that is already happening via social media), and if doctors are noticing trends in their patient populations, they are always free to act on those observations regardless of what labels actually say… and thus, it is important to keep in mind that we do not necessarily have to have to wait for these studies to be completed before we might start to see the results “ahead of time” in the real world patient population.

Which brings us to another point I have been asked to address, namely, “what sorts of prescription numbers should we be looking for to know if Afrezza is going to be a success or not?”

To be honest, I do not have a number in mind… but what I do want to emphasize to you is that a) it will take a while for patients and doctors alike to get up to speed with Afrezza (see below), and b) with the exception of some extreme readings on the weekly new prescription front (i.e. a flatline at 150 per week or a sudden jump to 1,000+, for example), I think the very earliest we could start to see meaningful trends will be somewhere in months 4-6 or so.

Yes, I know a lot of the pessimists have been mocking the “low” numbers of prescriptions that have been generated so far, but I want to remind you of a number of variables that are in play at this stage of the game.

First off, even if someone wanted an appointment right now to possibly switch to Afrezza, for most doctor’s offices these days, there is probably a 2-4 week waiting period for any sort of non-urgent appointment (a situation made that much more pronounced by the fact that most diabetics are already on a “diabetes check-in schedule” with their doctors anyway, so they would probably be told to just wait until their next one rolls around “a few months from now”).

Add to this the observation that most diabetics usually have at least a 2-4 week supply of insulin on hand at any given time to begin with, along with the fact that Sanofi has also been giving out free samples of the product that ought to cover most diabetics for 10-14 days, and it should come as no surprise that Afrezza has not “taken over the market” just yet.

Along with these practical matters regarding appointments and insulin supplies during the first 6-8 weeks that Afrezza is on the market, I think it is also worth noting that while there are some family practice docs who do like to be on the cutting edge, many of them will probably take a more conservative approach and “let the endocrinologists spend some time working with Afrezza” before they’re willing to start prescribing it… and thus, I want to repeat what I said above, namely that we shouldn’t put too much weight on the prescription numbers until we get into the June-August time-frame.

That being said, another “issue” that I have been asked to comment on is the recent downgrade of the stock by Jay Olson, an analyst from Goldman Sachs, “due to lower than expected sales of Afrezza.”  While it may be true that Afrezza sales are coming in slower than he and his team expected, I think it is important to keep in mind that the model against which they are measuring sales is a model that they came up with on their own (and, by their own admission, it did miss things by a mile in a number of different sectors across the diabetes market, so you can’t really fault them for wanting to make revisions!); however, in typical Wall Street fashion, once their model proved to be far from accurate, rather than downgrading themselves for doing such a crummy job in the first place, they chose instead to downgrade the companies (while simultaneously trying to get us to believe that their new models are somehow going to be much more accurate than their old ones – such is the Wall Street way, eh?).

In addition, anyone who has ever tried to build a sales and earnings model knows that four weeks is nowhere near enough time to know with any degree of confidence whether the model is a good one or not… so Jay Olson’s decision to abandon his model so early in the process certainly makes one wonder what else is going through his head at the moment.  On the “tame” end of the conspiracy theory spectrum is the idea that he is simply downgrading it today so that if/when he upgrades it again in response to good Afrezza numbers and/or a significant announcement on the Technosphere front, he may have a chance to do so from an even lower price point (he hopes), and on the more dramatic end of the spectrum, it has been pointed out by a number of folks that he and Sanofi’s new CEO were at Pfizer at the same time, and there may be some bad blood between the two of them (purely rumors, mind you).

Either way, I found the reasons for the downgrade to be laughable, especially since Afrezza is currently off to a start that is more than ten times better than Exubera’s was (the only other launch Jay Olson and his team could realistically be looking at as a benchmark for comparison when putting their models together).  And, as a parting thought on this topic, I believe it is worth noting that even though there is supposed to be a firewall between the buy side and the sell side at firms like Goldman, it will be very interesting to see whether or not the firm has, in fact, continued to aggressively add to its position in MannKind during the quarter (after doing so last quarter) despite this dramatic downgrade by its analyst on the sell side.

Along with the above issues, there are a few others I have been asked to address, but since I am starting to run out of space, I will do so in a bullet-point format in hopes that my comments will give you “enough” to go on when making your investment decisions:

• virtually all of the insider sales we have seen over the past couple of years have been pre-planned sales, and they have all been executed by the non-billionaire members of management for whom such diversification absolutely makes sense; Al Mann himself has not parted with a single share (though he just as easily could have entered into a pre-planned sale program too if he was anxious to move capital out of the story), and from this, I think it is safe to assume that he is not likely to sell the company for anything less than $12 per share (assuming an offer appeared);

• speaking of buying and selling by large players, I believe it is also worth noting that institutional ownership has been increasing, not decreasing, over the past several months, and, perhaps more importantly, while it is true that there are quite a few more shares outstanding today than there were a year ago (the “awful dilution” certain detractors of the stock like to point to), those shares came into existence because large holders of debt decided they would rather have an equity stake in the company… and the only reason I’ve ever seen large debt holders convert a sure thing into a risky thing is if they found the payoff potential to be even more attractive;

• there has been a lot of fuss made about the fact that Sanofi “isn’t doing much” to market the product yet… and, while it is true that they seem to be going out of their way to not set expectations too high, before you become too discouraged by the situation, I think it is worth keeping in mind that a) they have already plunked $200 million on the table as part of the relationship with MannKind (with another $700 million or so still on tap in the form of milestone payments), b) they desperately need a catalyst to get their diabetes program back on track, and having Afrezza on the front end of a one-two punch for meal time insulin paired with their new long-acting insulin product (Toujeo) ought to go a long ways towards this goal; c) to be sure, logo placements don’t sell product, but I found it especially interesting that in its slide for “new product launches” as part of a recent presentation, Toujeo and Afrezza were placed side-by-side in the center of the top row (of two), and I don’t think this “front and center” placement was on accident; and, finally, d) though perhaps not as loudly as some bulls would like, Sanofi IS talking about the product… and they claim to be getting plenty of positive feedback from their sales reps out in the field regarding doctor and patient interest;

• finally, it is important to keep in mind that now that Afrezza has been handed off to Sanofi, MannKind is turning its attention back towards Technosphere, the platform that allows it to take existing compounds and deliver them to the body via inhalation rather than orally or by injection.  The company claims that it has narrowed down the list of possible candidates for this program to those that it finds most promising in terms of market size and cost/time to develop, and though they are keeping the targets under wrap for the time being, it would not surprise me at all if we start to get more visibility on this front sometime later this year.

Yes, there is plenty more I can talk about regarding the story, but I hope that the above helps give you some confidence that even if it takes awhile for things to play out, there are a lot of reasons to think we are going to make a lot of money in this stock as time goes by… but it will require patience, and there will undoubtedly be plenty more volatility along the way.  That being said, I want to remind you that I have quite a bit of my own money invested alongside yours (and Al Mann’s), and so I, too, feel your pain when the stock drops; however, as mentioned before, I really do believe that this is probably one of the most inefficient markets I have ever seen develop for a stock in the sector – and that means opportunity (just don’t own more than you can comfortably sleep with at night!)


I could talk forever when it comes to discussing various angles of the MannKind story, but I suppose the best thing I can do with this space this time around is to simply remind you that while there is definitely a lot of science involved when it comes to diabetics keeping their blood sugars in line, at the end of the day, it boils down to an art for each individual patient.  With patients becoming more and more able to track their sugars in close to real-time, they are going to start demanding an insulin that is able to keep up with them – and Afrezza is the only insulin currently on the market that has any hope of meeting that demand.  Buy only as much as you can sleep with at night!  MNKD is a strong buy under $6 and a buy under $9.

Final MannKind Musings For 2014 12/17/14

***The following is excerpted from the December issue (12/12/14) of Nate’s Notes that was published for subscribers last weekend (all prices, etc. as of that date)***

Time is the friend of the wonderful business, the enemy of the mediocre…

                           – Warren Buffet


  since last issue year to date since inception (10/31/97)
+40.2% +1,359.1%
+1.7% +76.1% +4,191.7%
-2.0% +4.2% +132.3%
Nasdaq -0.7% +11.4% +192.0%


A Wee Bit Of Seasonal Contrarianism

Thanks to a combination of plunging oil prices (which are causing concerns about a global economic slowdown to spring to the forefront of investors’ minds), political and economic uncertainty in the eurozone, ongoing tensions around the world, the need for some profit-taking after the great bounce we have seen over the past couple of months, and good old-fashioned tax-loss selling, the markets have been extremely volatile lately.

However, as you can see in the performance table above (and as is confirmed in the “Eyebrow Levels” table below), the bull market is still intact at this point in time, and thus our job is to remain as fully invested as we can comfortably be while still sleeping easily at night.

In addition, though I have learned over the years that it is usually best to avoid stocks that are not acting well, given the manner in which certain stocks have been trading lately, I want to draw your attention to the fact that a number of our buy orders this month are for stocks (or ETFs) that I believe have gotten extremely oversold as a result of tax-loss selling (and thus we are taking advantage of the situation to do a bit of averaging-in to them).

Another MannKind Update

After intentionally not talking about MannKind in the most recent Inter-Issue Commentary, I was quickly reminded by a number of you that until the stock finally kicks into gear for us, you would appreciate updates and pep-talks as frequently as possible… and though I can’t promise I will write about it every month, the current situation certainly represents a good time to step back and look at the big picture to make sure everyone understands the possible outcomes from here (based on your emails, I worry that some of you may have forgotten that there is still some risk in owning the stock).

Starting with the optimistic side of things (before heading to pessimism and back to optimism again), it is my belief (and it is a point that I think gets overlooked far too often in discussions about “inhalable insulin”) that Afrezza is quite a bit more than just a clever repackaging of the existing insulins that are on the market, and while “no needles” is a benefit in and of itself, the fact of the matter is that what really sets Afrezza apart from the competition is the that it represents a significant step forward in the goal to develop “ideal” insulin (i.e. insulin that behaves as if it were produced naturally in the body).

This is a big deal because it allows patients to more easily monitor and control their blood sugar levels, and this, in turn, should lead to better patient outcomes… and, while each of them has a different motivation for achieving that goal, what patients, doctors, and insurance companies are all looking for is patient well-being.

Since I often get asked “why would insurance companies care if a patient is happy – all they want is money, right?,” I wanted to take a moment to point out to those of you who may not have thought about it before that whereas the cost of providing insulin to a patient pool can be estimated with a very high degree of accuracy, the costs associated with treating the complications of poorly-managed diabetes are a) much harder to predict, and b) much more expensive than simply providing insulin and hoping it gets used correctly.

If I am right about Afrezza, I believe it has the potential to become the mealtime insulin of choice over the next several years… and if it manages to do so, the product would likely be considered a “blockbuster” by even the most reluctant of skeptics.

Of course, there is a chance that I am wrong and Afrezza will end up struggling to gain traction in the highly competitive world of diabetes drugs (please read that sentence again, and keep re-reading until you really believe it… then you may proceed).

Working against the company are:

• the fact that its partner for the product, Sanofi (SNY – $45.16), is currently struggling with personnel and PR issues;

• the last inhalable insulin that was introduced to the market (Exubera) flopped big-time;

• there is a very significant short interest in the stock that a) is keeping a lid on the share price (which, in turn, makes it more difficult for the company to raise capital on favorable terms if/when it needs to), and b) may turn out to be right (though, ironically, when all of those shorts start to cover, it may end up causing a higher floor to be put under the stock than many of them are counting on – i.e. their upside may not be as big as they think it is);

• while the company has expressed confidence that it will be able to meet all of its cash flow needs going forward, there are still a lot of variables in play that might make this a challenge;

• as it stands, the labeling for Afrezza is less favorable than the company would like (though this variable can change over time as more studies are done);

• and, finally, while there have not been any flags raised based on the studies that have been done so far, the possibility of Afrezza being a lung cancer risk still gets a lot of airtime and may cause a number of potential users to hold off trying Afrezza (and, of course, there is a chance that lung cancer might actually be identified as a risk after more studies are done).

All of that being said, if you had told me in January that the stock was going to finish the year basically right where it started after having the uncertainty regarding both approval and a partnership removed from the equation, I would not have believed you… however, that’s exactly what we’re looking at today.

Given the nature of the products being developed, the biotech sector is notorious for having “market inefficiencies” in which stocks become radically mis-priced based on what turns out to be a misinterpretation of the data that is available to investors… and in my 26 years of following the sector, I believe this may represent one of the most inefficient markets I have ever seen for a stock.

While I do not claim to know for sure what has been going through their minds (and I freely acknowledge that a portion of the large short position may simply be a hedge put on by folks who own MannKind’s convertible debt), the initial batch of short sales were put in place based on the idea that Afrezza was going to fail its clinical trials.

When that investment thesis didn’t work out, it appeared that instead taking a step back and wondering if perhaps they were wrong, many of those shorts simply doubled-down on their position and changed their mantra to “despite passing clinical trials, it will never be approved… and I’ll cash in when that event occurs.”

Given human nature, it should come as no surprise that this same group of people did the same thing again after the product was, in fact, approved, and they started pinning their hopes on the idea that “they’ll never find a partner.”

Of course, not only did MannKind find a partner, they found a great partner (assuming Sanofi can weather the PR storm that erupted a few months after they signed up with MannKind)… and they got a great deal to boot.

To be sure, the shorts may still prevail if Afrezza fails to sell (I will be the first to admit that the old adage “Q. What do you call a man who is right for all the wrong reasons?  A. Right.” could come into play here), but the situation sure looks to me like a case in which a group of investors have fallen in love with an idea (“MannKind is going to $0 because _____”), and they’ve stuck with it despite the fact that MannKind has – on a number of occasions now – managed to clear the hurdles they were planning on seeing the company stumble over.

Please note that MannKind is still just a moderately-sized position in the Model Portfolio (and thus it should be around that size too in your own portfolio if you are more risk-averse), but is definitely one of our largest positions in the aptly named Aggressive Portfolio.  This is on purpose, but I want you to notice that our MannKind position (my favorite speculative stock) is being matched by an equally large position in Apple (one of my favorite conservative ideas), and if you are also “going big” on MannKind with me, you are encouraged to make sure a sizable chunk of your other money is parked in some of the less risky stocks as well.

Some Recognition… and An Opportunity!

As some of you may have noticed, Nate’s Notes and yours truly were lucky enough to be written up in an article Forbes magazine put together featuring insights from some of the best long-term performers on the website.

If you are not familiar with the site, it was set up by its CEO, Ken Kam, as a way for him and his team to find great investors via a very novel approach – namely, they gave everyone who signed up on their site a $1 million hypothetical trading account… and then sat back and waited for the top-performers to emerge from the very large pool of investors who had signed up.

As time has gone by, Marketocracy has put together a team made up of some of the most successful traders in the program (known as “Masters”), and it taps into this talent pool to manage money for its clients by essentially mirroring the trades being made by the Masters in their hypothetical accounts.

What does this have to do with you, you might be wondering?

To make a long story short, the account I created in 2002 has generated almost exactly the same returns we have seen in the newsletter since then (roughly 17.6% annualized, according to the Forbes article), and, according to Ken Kam, this means that my Marketocracy account is one of just a handful that have managed to outperform both Warren Buffett and the top-performing U.S. mutual fund manager over the past 10 years.

Consequently, I am very pleased to report that I recently signed an agreement with Marketocracy to become one of their “Masters” so that they can start offering “my” portfolio as an investment option to clients in their separately managed account program (which is open to U.S. residents with a $100,000 minimum).

Those of you who think you might qualify for and have an interest in participating in Marketocracy’s managed account program are encouraged to visit and/or email Ken Kam directly at to learn more about the program.

Important note:  while I am very optimistic that my relationship with Marketocracy is likely to be a long and fruitful one, in order to help you keep your options open to invest money directly with me should I ever start my own money management firm, it is very important that you let me know ahead of time if you sign up with Marketocracy so that we can make sure your name is on a list of clients that will be exempt from a 2-year “no poaching” clause that is part of our agreement.

Finally, I want to personally wish you and your loved ones a wonderful holiday season and a very prosperous and healthy new year!  Cheers!

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:

Celgene (CELG) – though it is currently trading above its buy limit, the stock has been on fire lately (and strength often begets strength).

Electronic Arts (EA) – great relative strength going on here too, with the potential for a nice holiday quarter to materialize as well.

Skyworks Solutions (SWKS) – yep, this stock has been on fire too, and it probably has the most attractive looking chart among all of our chip stocks this month (albeit by just hair over TriQuint).

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 450 (2,200) Cubist and purchase (500) Electronic Arts, (500) First Solar, 1,000 (30,000) MannKind, 400 (2,000) PowerShares DB Ag., 800 (3,500) PowerShares DB Cmdties., and (800) Skyworks Solutions.  We will use the closing prices on Monday, December 15th, for all transactions.

“Eyebrow Levels” (slightly revised)

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

current one eyebrow two eyebrows
DJIA 17,281 16,250 15,400
Nasdaq 4,654 4,200 3,900
S&P500 2,002 1,875 1,740
BTK 3,421 2,900 2,600
SOX 671 600

*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 (if you see eyebrow levels being broken, start looking for a “Special Alert” from me in your email box).



As discussed above, while I feel good about my analysis of Afrezza and MannKind (which includes the Technosphere platform, in case you had forgotten), I will be the first to admit that the stock is not acting the way I would have expected it to… and that is always a circumstance worth reflecting on.  However, with $2-$4 to be lost on the downside if I am wrong (admittedly a huge percentage change from current prices) but $20-$40 (or more) of upside potential if I am right, I know which side of the trade I want to be on (especially when the other side of the trade has been forced to change its investment thesis three times over the past eighteen months).  MNKD is now a strong buy under $6 and a buy under $9.

Another MannKind Card About To Be Flipped 11/18/14

***The following is excerpted from the November issue (11/14/14) of Nate’s Notes that was published for subscribers last weekend***

“Take Two And Call Me In The Morning…”

What a crazy past several weeks, eh?!

If you recall, the market as a whole was starting to look especially weak as last month’s issue was going to press, and to make things even more interesting, for the first time in ages, one of the five major indices we use to gauge the health of the overall market (see Eyebrow Levels table below) had actually fallen below its one eyebrow level that very day.

Not only had the SOX semiconductor index taken a dramatic turn for the worse that Friday (with some of our chip stocks down 8% or more in that trading session alone!), the other three non-biotech indices were also perilously close to flashing bearish signals for us… and consequently, in order to help everyone sleep more easily at night (along with the fact that I intentionally only make trades once a month based on what is going on at publishing time), I decided that we would “take two for flinching” by selling off roughly 20% of all of our chip positions even though our Eyebrow Levels table had not actually called for such action just yet.

In hindsight (and as you can see in the performance table above), we obviously should have trusted our system 100% and left all our chips on the table (pun intended) rather than moving some cash to the sidelines after all!

That being said, however, though we did receive the anticipated penalty of “two for flinching” (i.e. we let go of roughly 20% of each of our semiconductor positions at what essentially turned out to be “the bottom” of the sell-off), the good news is that a) the sales gave me (and hopefully you) some peace of mind that made it easier to ride out those nail-biting couple of days that took place right after the issue was published, and b) we still own 80% of those positions… and many of the stocks are already starting to hit new multi-year highs again.

In addition, if you recall, as part of our game plan to “hedge” against the possibility that our decision to take two for flinching was premature, we also made the conscious decision to add to our positions in two of our favorite stocks, namely Apple and MannKind… and both of those stocks have been performing very well since then (in fact, it appears that our purchase of MannKind may turn out to have been made on THE low closing price for the downtrend).

Now that the market is once again heading the right direction (and we have had a round of solid profit-taking to help shake out weak holders), you are encouraged to become as aggressive as you can comfortably be while still sleeping at night when it comes to putting your capital back to work (while also keeping in mind that the sorts of monthly returns that were just generated in the Aggressive Portfolio, for example, are not sustainable, and thus you should not get used to them!).

Along these lines (and, as always, with the caveat that you should never own more of a stock than you would feel comfortable losing in its entirety), given how the stock has been acting lately (and how strongly I believe that you should own at least a small position in the stock ahead of the launch of Afrezza), I want to draw your attention to the MannKind story yet again ahead of what may prove to be one of the most important days yet for us as long-term investors.

Another MannKind Card About To Be Flipped Over

In case you were not aware, MannKind’s partner Sanofi (SNY – $46.68) will be holding a “New Medicines Day” seminar that will be webcast live for investors starting at 8:30am Eastern on Thursday, November 20th.

Afrezza is definitely included on the list of new products in its pipeline that Sanofi plans on discussing in more detail, and I believe that what is said (or not said) about the product will finally shed some light for us on the question about how Sanofi is actually viewing the partnership.

If it turns out that Afrezza only gets a small mention and/or the presenters seem to be going out of their way to avoid saying much about the product, I am afraid the stock price will likely suffer a bit (perhaps back into the mid-$4s if the silence is deafening?).

However, if Afrezza gets a fair amount of “airtime” in the course of discussion, I believe the stock will likely continue trade sideways or slightly higher while we wait for Afrezza sales to actually start early next year…

And if it turns out that Sanofi does, in fact, plan on making the rapid-acting nature of Afrezza a key selling point when it comes to pitching its line-up of complementary diabetes drugs to doctors, insurance companies, and patients, I believe there is an above-average chance that at least a handful of short sellers will finally see the handwriting on the wall, throw in the towel, and start to cover some of the 80+ million shares that are currently sold short (and this, in turn, ought to add fuel to the fire that I likewise believe will be lit for new investors as they start to get their heads around the possibility that Afrezza may, in fact, represent a significant paradigm shift in the treatment of diabetes after all).

As it stands, I believe there are a great many folks on Wall Street who have been (and still are) looking at Afrezza as nothing more than Exubera 2.0, and, consequently, a very “inefficient market” has been created for the stock.  In fact, if it turns out that Sanofi does give Afrezza a reasonably-sized spotlight in the center ring next week, I will go so far as to say that it may represent the most inefficient market I have seen develop around a story in the sector since I first started following biotech stocks a little over 25 years ago!  With downside risk of $3-$4 if I am wrong, but upside potential of $30-$40 (or more!) if I am right, I really like the risk-reward ratio from current prices (and I hope you do too)!

A Couple of Frequently Asked Questions

Aside from questions about specific stocks, two of the other questions that I have been asked most often lately are “do you ever sell stocks?” and “do you ever recommend new stocks?”

Both are great questions, and to help answer them for everyone else who is fairly new to the newsletter and may be wondering the same thing but hadn’t gotten around to asking yet, I thought I’d offer the following set of thoughts to help shed some light on the situation.

In a nutshell, “yes” to both questions… however, since I take such a long-term view to investing in stocks (and have intentionally set up Nate’s Notes in a publishing format that reinforces this approach), the frequency of such events in the newsletter is probably significantly lower than it is for most investors (especially if they enjoy trading on a daily or weekly basis).

And, while it is true that the approach we take in the newsletter can seem dull at times, I believe the newsletter’s track record speaks for itself*… and it also lends a great deal of credence to old adage “When is the best time to sell a great growth stock? Never!”

Though I am quite pleased with the performance that has been generated by a sensible weighting of the basket of stocks we have been working with for the past several years (and especially the past 18 months), I will also be the first to admit that it might not be a bad idea to do a bit of spring cleaning in the months ahead… and this, in turn, will free up some space in the newsletter to make some new recommendations as well.

That being said, you are encouraged to stick to the game plan that I try to cover to one degree or another each month, namely, to be working on averaging-in to positions over time, with an eye towards those stocks that a) seem most interesting to you, b) are showing decent relative strength, and c) are still trading below their buy limits.

In addition, I want to remind newer subscribers that your job will be even easier if you always start with the much smaller list of stocks that are delineated as “first buys” in the table on page 1 of the “pretty version” of the newsletter (or in the downloadable spreadsheet of data available on the same page of the website)… and, of course, be sure to read the “how to get started” material that was published in the May 2013 issue of the Nate’s Notes (see the “New To The Newsletter?” section of either online version of this month’s issue for a link to that issue).

*in case you were not aware, Nate’s Notes is currently ranked #1 for 10-year performance by The Hulbert Financial Digest (HFD)… and I am looking forward to seeing where the newsletter ranks when it finally becomes eligible for ranking on the list for 15-year returns in early 2015 (HFD did not start covering Nate’s Notes until early 2000).

“Eyebrow Levels”

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

current one eyebrow two eyebrows
DJIA 17,391 16,250 15,400
Nasdaq 4,631 4,200 3,900
S&P500 2,018 1,875 1,740
BTK 3,354 2,575 2,175
SOX 641 580

*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).

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:

Electronic Arts (EA) – the stock appears to be breaking out to the upside, and if history is any guide, the odds are in our favor when it comes to seeing further gains as part of the run.

MannKind (MNKD) – IF Afrezza is given a fairly large spotlight at Sanofi’s upcoming “New Medicines Day,” the revelation could help propel the stock back above $7 in a hurry.

Perry Ellis (PERY) – the stock continues to perform well for us, and as one our favorite mantras goes, “trends often go on for far longer than seems reasonable.”

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will not make any sales this month but will purchase 100 (1,000) Electronic Arts, 100 (1,000) Luminex, 1,000 (25,000) MannKind, and 100 (1,000) Perry Ellis.  We will use the closing prices on Monday, November 17th, for all transactions.



While it is certainly far too early to declare the “post-approval downtrend” a thing of the past, I do take heart in the fact that not only did we get to add a few more shares to the Aggressive Portfolio right near the low of the move, it appears that the pendulum may finally be starting to swing back the other direction as well.  As discussed above, I believe the story may be shaping up to be one of the most attractive risk-reward ratios I have seen my 25+ years of following biotech, and though the stock will still only be a moderately-sized position in the Model Portfolio after this month’s purchases, it is intentionally one of our largest in the aptly named Aggressive Portfolio.  MNKD is now a strong buy under $7 and a buy under $10.

Another MannKind Pep Talk 10/15/14

***The following is cut-and-pasted from the October issue (10/10/14) of Nate’s Notes that was published for subscribers last weekend***

Again, my apologies to those of you who have chosen to avoid MannKind (MNKD – $4.68) for one reason or another, but a great many of my subscribers are involved in the story, and in the face of what has been going on with the stock over the past three months, I feel compelled to keep people up-to-date in terms of how I see the story unfolding.

First off, it is important to keep in mind that it is actually quite common for the share prices of “biotech” stocks to become completely de-coupled from the actual story that is unfolding for the underlying company… and, though it is never fun to watch a company’s stock decline even though its fundamentals are improving, it is important to recognize that a) such things happen in the sector, and b) they actually represent tremendous opportunities for investors willing to look at the big, long-term picture rather than get caught up in short-term emotional swings.

In the case of MannKind, not only do we have the usual patterns of “post-approval trading” to take into account, we also have the influence a very large and very vocal group of short sellers affecting the share price… a situation perhaps made even worse by the fact that the CEO running the company has nothing to prove at this stage of his career and knows there is no point spending too much time worrying about the share price since “in the long run, the fundamentals will take care of the situation” [my words, not Al Mann’s, mind you!].

As mentioned a number of times before, I don’t think MannKind could have found a better partner for Afrezza than Sanofi (SNY – $52.43), and I am anxiously looking forward to seeing what sort of advertising campaign they end up putting together to promote Afrezza as part of the impressive line-up of products that Sanofi has put together as part of its game plan when it comes to addressing the diabetes market.

To be sure, touting all the benefits of “fewer needle sticks” is an easy and obvious component of the story to get a lot of mileage out of (especially when it comes to TV advertising where “ease of use” and “no more pain from shots” can be shown to potential customers in “real life” situations), but I want to remind you yet again that the real value in Afrezza is the fact that it acts much more like “regular” insulin in the body than many of the products it will be competing with… and, because this ought to make it that much easier for patients to avoid the sorts of swings in blood sugar levels that get folks into trouble, I believe doctors and insurance companies are going to be extremely excited about the product too.

Of course, if management is going to take a “hands off” approach to the situation, we may have to wait several quarters before we get rewarded for our patience… and I know that might be a difficult thing for some of you to endure.

Consequently, I want to offer the following set of thoughts for those of you trying to figure out what to do with your position: a) if you’re nervous, by all means, “sell down to the sleeping point;” b) if you’re comfortable with the long-term prospects for the company, patiently add to your position from time to time; and, c) know that I really do believe this is the sort of situation that only comes along once every decade or so, and I have a great deal of my own money involved alongside yours… here’s to hoping the tide turns soon!



As you can see in the chart to the left, MannKind’s stock has done nothing but slide since the FDA approved Afrezza back at the end of June, and I have to admit that I am as puzzled, surprised, and disappointed by the price action as you.  As discussed above, I continue to believe there are a number of reasons to believe our best bet continues to be on the long side of the situation, and as part of our approach to always averaging-in and -out of positions, you are encouraged to patiently add to your position as time goes by (especially if you own most of your shares at higher prices); however, as always, “don’t own more than you can comfortably sleep with at night.”  MNKD is now a strong buy under $6 and a buy under $9.


The Aggressive Portfolio will buy 15,000 MNKD using the closing price on Monday 10/13/14.


An Update on The Market and MannKind 9/1/14

***The following is cut-and-pasted from the Inter-issue Commentary that was posted to the website for Nate’s Notes subscribers earlier today [slightly edited 9/2/14 2:25pm Pacific to replace the term “sales” with “profits” where appropriate]***

Climbing The Proverbial Wall of Worry

After keeping us on the edge of our seats for the first week or so of August, I am very pleased to report that all five of the major indices we use to gauge the health of the overall market have since rebounded nicely (see “Eyebrow Levels” below).

To be sure, the volume has been fairly light during the move (as is to be expected in the summer month of August), but at the end of the day, “up is up,” as the saying goes, and as discussed so many times before, our job is to position ourselves on the right side of trends… and then ride them until they finally run out of steam.

Yes, there is a chance that the fact that some of these indices are hitting new multi-year and/or all-time highs on fairly light volume means the breakout is actually a fake-out, but given where we seem to be at in the fear-greed cycle right now, my gut feeling is that we will see additional volume come into the market as September gets underway… and if this volume continues to be biased to the buy side, you are strongly encouraged to look at it as an excuse to buy stocks rather than sell them!

In particular, you are especially encouraged to consider adding to your positions in Apple (AAPL – $102.50) and NXP Semi. (NXPI – $68.52) on any pullbacks that may present themselves in the weeks ahead, as well scooping up all the MannKind (MNKD – $7.37) you can comfortably sleep with at night while it is still trading under $10.

As you know, literally an hour or so after the August issue was posted to the website last month, MannKind announced that it had partnered with Sanofi (SNY – $54.70) for the commercialization of Afrezza… and, as you are probably all too aware, rather than rising on the news, MannKind’s stock has sold off sharply!

Naturally, the poor performance of the stock has caused a number of you to wonder whether or not the deal is a good one after all… and I hope the following helps you realize the answer is a resounding “yes!”

First off, I believe it is worth noting that there is probably no large pharmaceutical company out there that has become more focused on and aggressive about capturing diabetes market share in recent years than Sanofi – they are “hungry,” they have momentum at this stage of the game, and I have no reason to doubt that they are going to do all they can to educate doctors and patients alike on the benefits of Afrezza.

And, speaking of those benefits, I think it is extremely important to note that while one of the main – and most often cited – selling points of Afrezza is that it can be used by patients (especially newly diagnosed diabetics) who may be averse to giving themselves shots on a regular basis, it is just as important (and perhaps even more important, in the long run) to note that Afrezza’s ultra-rapid acting nature has the potential to redefine how patients control their diabetes, especially when the drug is used in conjunction with other technologies and drugs that will be making their way into the marketplace in the quarters and years ahead… and I believe it is no coincidence that in addition to signing an agreement with MannKind in August, Sanofi also entered into a major diabetes collaboration agreement with Medtronic (MDT – $63.85) back in June.

Not only does it seem clear that Sanofi is planning on putting an awful lot of effort into the diabetes market in the years ahead, I also believe it is worth pointing out that Medtronic is the company that Al Mann sold his last major venture to (MiniMed, maker of insulin pumps and other products, was bought by Medtronic for $3.7 billion in 2001), so there is certainly reason to believe that the pieces of this puzzle may be falling into place with a bigger picture in mind than it might first appear!

Anyhow, getting back to the terms of the deal itself, not only has Sanofi agreed to pay MannKind $150 million upfront for the right to market Afrezza, it will also pay MannKind up to an additional $775 million for various sales and regulatory milestones if/when they are hit.  In addition, the two companies will split all profits and losses 65% (Sanofi) – 35% (MannKind), with Sanofi agreeing to advance MannKind up to $175 million if needed.

While short sellers (and other journalists who have had a negative bias against the company for years now) were quick to complain that it was a “horrible” deal for MannKind shareholders, all one needs to do is take out a pencil and piece of paper and run through possible scenarios to realize that it is, in fact, a great deal for MannKind shareholders.

Starting with the worst case scenario (i.e. Afrezza turns out to be a flop), any time an executive can bring in $150 million for “nothing,” I think it is fair to call it a “win” for shareholders.

However, assuming that Sanofi is, in fact, able to sell more than just a few doses of Afrezza, the company’s critics have claimed that “MannKind gave away too much – 35% is far too small a percentage”… but again, when one actually takes the time to look at the math, the deal doesn’t look too shabby at all.

For example, let’s start small and assume that no milestones are hit and Sanofi generates “just” $50 million worth of profit from Afrezza.  In this case, MannKind will get it’s 35% cut ($17.5 million), and when this is combined with the $150 million it got upfront, we’re looking at the company receiving $167.5 million for a product that generated $50 million in profits.

Moving further along the optimism spectrum, let’s still assume that no milestone payments are triggered but that Sanofi generates $150 million worth of profit from Afrezza.  In this case, MannKind will be collecting $52.5 million for its share, plus $150 million, which works out to $202.5 million for a drug that generated $150 million in profits.

Ah, but you’re thinking the critics must have meant it’s a bad deal for MannKind shareholders if Afrezza is actually a blockbuster (which, of course, is an amusing way to look at it since their underlying premise has always been that it will not be a blockbuster… heck, many of them were even convinced it wouldn’t even be approved, never mind find a partner in the world of big pharma), so let’s make our assumptions a bit grander.

Let’s assume that the drug generates $300 million in profits, and because usually at least the first one-third or so of a “milestone” package is meant to be fairly easily attained, let’s also assume that in the process of getting to $300 million, at least a half of that first third is triggered (and, to keep the math simple, we’ll assume the milestone package was for $750 million rather than $775 million).

In this case, MannKind will be receiving it’s cut of the $300 million ($105 million)… plus one-half of one-third of the milestone package (so half of $250 million, or $125 million)… plus the $150 million it received upfront… bringing us to a grand total of $380 million for a drug that generated $300 million in profits!

Of course, we could continue to ratchet up our levels of optimism and see what the numbers look like, but I hope you get the point by now – namely, unless/until Afrezza sales numbers reach the level of being truly “blockbuster,” this deal is actually skewed in favor of MannKind… and even if/when the day comes that Afrezza is doing several billion dollars a year in sales, I don’t think you’ll hear anyone complaining that in addition to the nearly $1 billion in milestone payments MannKind received along the way, the company is still collecting 35% of that revenue stream “in perpetuity.”

To be sure, there will be costs and expenses along the way that will need to be managed in a judicious manner… and those numbers will admittedly impact how much money the company actually earns each quarter… but I think it is fair to say that MannKind did, in fact, find a great partner on great terms.

In fact, though I was certainly not part of the negotiations, I don’t think I am out of line in summarizing the situation as follows:

In a nutshell (and admittedly taking a few percentage points of liberty here and there to help keep the math really simple), Al Mann has put a little over $900 million of his own money into the company and still owns a third of it (actually more than that, but again, I’m trying to keep the math simple).  He believes he is sitting on at least one blockbuster (Afrezza), and he has convinced his partner to put roughly the same amount of money into the company as he has put into it… but the partner will not end up with any equity in the company in exchange for its $900+ million; instead, the companies will split the revenue stream from the product into three pieces, with both companies taking one piece for their involvement, and Sanofi keeping the third piece in lieu of getting any equity (i.e. Al got a third of the whole company for his $900 million, Sanofi  gets “just”a bonus third of Afrezza).

As pointed out above, if Afrezza flops, MannKind comes out ahead in the partnership, and if Sanofi turns Afrezza into a wild success, all parties involved go home winners… with the bonus for MannKind shareholders being the fact that Al Mann will quite likely utilize the revenue stream coming in from Afrezza to move other products through the pipeline on the Technosphere platform (and these products, in turn, will have the potential to be licensed and/or partnered along the way, further increasing the size of the revenue stream coming in for shareholders).

While I want to remind you yet again that it is never a good idea to put all your eggs in a single basket… and there are no guarantees that Afrezza will ever generate the types of sales numbers that will be required to help produce another 10-bagger for us in the newsletter… I believe the deal with Sanofi has placed the odds firmly in our favor, and with over 70 million shares still sold short, not only do those “investors” (sic) represent a pool of buyers that will likely help keep a floor under the stock for us, they also represent an awful lot of fuel (i.e. buying pressure) that will be poured on the fire IF the stock does start to rally in the months ahead.

Add to this the possibility (but not a promise – I’m not calling the shots at the company) that, at some point, the company may do a reverse split to help bring the share count more in line with what some critics are looking for, and things could get even uglier for the shorts.

No, it won’t change the valuation of the company (fewer shares outstanding times a correspondingly higher stock price will still be the same market cap), but as any poker player will tell you, it is much harder to engineer a betting strategy when you have 10 chips in front of you rather than 100… and though I doubt the company would do a full 1-for-10 reverse split, the idea is the same in terms of how reverse-splitting the stock would force the short sellers to change their approach regardless of the size of the split.  Again, I am not predicting this will happen, but it wouldn’t surprise me if it hasn’t at least been considered as part of the company’s longer-term plans.

Anyhow, it has admittedly been a long, frustrating last three weeks to be a MannKind shareholder, but as was mentioned in the blog entry I posted shortly after the partnership agreement was announced, I have seen this happen before in my 25+ years following the biotech sector… and in the long run, the fundamentals always win out over short-term emotions and artificial price depression (so please don’t let the short-term action deter you from sticking to our game plan!).

I think a big part of the sell-off was due to disappointment on the part of traders that an outright buyout of the company did not occur, and, as mentioned above, the usual cast of characters were also quick out of the gate to utilize their soapboxes for criticizing the deal as a bad one.

However, the stock seems to be finding some traction, and I hope the above has helped you understand that the deal is actually a far richer one than all but the most bullish of bulls could have hoped for… never mind how great a partnership it is relative to the “rent-a-sales force” deals that were being called for by the more vocal skeptics (the same folks who, I might add, have yet to be right about a single major call related to the Afrezza story – are you starting to notice a pattern?).

Hang in there – it is still to early to say for sure, but it looks like the worst may finally be behind us!

“Eyebrow Levels”

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

current one eyebrow two eyebrows
DJIA 17,098 15,900 15,400
Nasdaq 4,580 3,900 3,750
S&P500 2,003 1,825 1,740
BTK 3,132 2,375 2,175
SOX 645 580

*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).

The next issue of Nate’s Notes will be dated Friday, September 12th, and posted to the website sometime on Sunday, September 14th.

*this .pdf file will require Adobe Acrobat for viewing.  Click to download Acrobat (if needed)