“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!