*** The following is a slightly edited and modified excerpt from the main commentary and company write-up sections of issue #297 of Nate’s Notes, which was published for subscribers on October 11th, 2019, and reflects our opinions of the market and all stocks mentioned as of that date. ***

*** UPDATED 12/12/19 to include MannKind commentary from Issue #298 (published 11/15/19) as well. ***

Goes to show you don’t ever know
watch each card you play,
and play it slow…

                                     – from Deal (R. Hunter)

MannKind Update (and clarification)

Thanks, in part, to the usual blitz of negative commentary that always seems to be served up for retail investors whenever positive things start happening for MannKind (go figure, eh?), I have been receiving a lot of emails lately about the situation, and so, in order to help clarify how I see things at this stage of the game, as well as clear up some confusion about what I had to to say about my plans for the stock in the most recent Inter-Issue Commentary (and actually had said for the first time in the August issue), I want to devote this month’s commentary section to addressing at least a few of those questions/topics (and then will do my best to avoid discussing the stock “in detail” again until at least the January issue, if not longer – thanks again for your patience if you have chosen to steer clear of what has been a very demanding story to cover!)…

Scripts – After coming in at levels that many investors probably found disheartening in the weeks leading up to the increase in question, scripts all of a sudden took a massive jump in the report released last Friday, and it proved to be a turn of events that left many investors on social media scratching their heads and wondering what was going on.

Not surprisingly, those on the more bullish end of the spectrum were quick to point out that it could be the beginning of the long-awaited “hockey stock” growth pattern starting to take shape, while those on the bearish end of the spectrum were quick to label it is an anomaly not worth getting excited about.

That being said, while it remains to be seen just how much more “up and to the right” will need to take place before people start to realize that the growth in scripts is most likely going to happen in a manner that much more closely matches what has been described here in the newsletter on a regular basis over the past few years rather than in the linear fashion often seen in the growth of retail apparel products, for example, the bottom line is that history suggests the sort of jump we saw last week is the sort of thing that we will likely be seeing a lot more of as time goes by (and, of course, I could be wrong; however, as was discussed a few issues ago, if there is one thing I learned in my early days of following biotech stocks exclusively, it is that while it is almost always possible to build a model that may find some success matching the data generated during the early stages of a new drug’s adoption cycle, that model will also almost certainly become less and less useful as time goes by, and a completely new one will eventually need to be created to reflect the new adoption rate… and, after they have played the game long enough, most investors come to realize that it never really mattered what the models said, all that ultimately mattered was that the product ended up growing from $0 in sales to whatever significantly larger number proved to represent full market penetration for that particular product several years later – a phenomenon that is FAR easier to predict if one has done their homework on the product and the market in which it will compete).

To be sure, I will have to reconsider my position if scripts remain stagnant between now and the end of the year, but in the meantime, you are encouraged to stay focused on the big picture and let Nature take its course.

Will the December warrants be exercised? – Unfortunately, I do not have any inside information about what the holders of the warrants to buy MannKind shares directly from the company at $1.60 anytime between now and late December are planning to do with those warrants, but I can tell you that despite what you may be reading on various blogs, there is no “bad” outcome for shareholders when it comes to the warrants – if they are exercised, MannKind will receive a substantial chunk of change (putting yet another nail in the coffin of the idea that you should avoid the stock because the company is going to run out of money), and if they are not exercised, the shares that have been set aside in case the warrants are exercised will once again be available for other possible uses (i.e secondary offerings, acquisitions, partnership buy-ins, payments with stock in lieu of cash, etc.).

As it stands, provided things continue on the path they currently seem to be on (and provided we also do not get any sort of negative news that dramatically changes the underlying story in the weeks ahead), I believe the odds are growing that the warrants will end up being exercised, but we have to keep in mind that there are never any guarantees in the stock market (especially when it comes to MannKind, eh?!), so who knows; the good news, of course, is that this is another case where, despite the fact that certain parties would like to make the warrants an “issue” for you to worry about, the reality is that it is a non-issue for everyone except short-term traders who might be trying to scalp a dime or two out of the situation rather than simply buying the stock, sitting back, and letting the story play itself out (which is a far easier and less stressful way to make money in the stock market, if you ask me).

Regarding the short position – As you’ve seen me write many times over the past several years, this story has been the most exceptional story I have ever seen unfold in my 30+ years of following the stock market, and though I absolutely wish I would have found the stock a year ago rather than ten years ago, it is also a situation that we have been able to feel more and more comfortable about being involved with as the evidence has continued to grow that Afrezza is all we hoped it would be when it was still in clinical trials “way back when.”

Along with this growing body of evidence that our underlying investment thesis is, in fact, a solid one, we have also been able to build a far larger position at a far lower price than we normally would have been able to absent the market inefficiency that has been created by the selling of so many “extra” shares into the marketplace,* and, just as importantly, we have also discovered that virtually all of the predictions made by those on the short side over the years (“Afrezza won’t pass clinical trials, clear AdCom, or receive FDA approval” in the early years, “MannKind will run out of money and file for bankruptcy” on an almost weekly basis for the past several years) have proven to be nothing more than hot air designed to create a sense of FUD (“fear, uncertainty, and doubt”) in the minds of investors.

*Amusingly, one of the more pessimistic bloggers who writes about the MannKind story from time to time covered this very topic of how “extra” shares can influence share price a few months ago, but rather than looking at it through the lens of short selling, he chose instead to describe it via a warning that management might be negatively impacting the share price by selling shares on the open market via the ATM agreement; of course, while management may decide to “tap the ATM” at some point, they have not done so yet, but there is no doubt that there has been plenty of short selling of the stock… and the good news for us as shareholders is that even though we have been forced to suffer through the selling pressure created by the short sellers (and MannKind received $0 in exchange for the “extra” shares that were sold), all those shares still need to be bought back by those who sold them (and this buying will likely introduce just as much inefficiency, if not more, in the other direction when it occurs).

To be honest, I cannot explain why the short position is still as large as it is, other than, given the extraordinary amounts of time and effort that have gone into painting a dim outlook for the company, it may be that those who were initially short the stock several years ago have been quietly and patiently handing it off to other less sophisticated short sellers who find the short thesis they’ve been pitched on social media “compelling” (and, given that it IS Wall Street we are talking about, it would not surprise me at all if those investors who were previously short the stock actually end up being the ones who initiate a short squeeze on the folks they just finished unloading their short position on to).

Either way, the bottom line is that there is still a large short position that either needs to see this stock go to $0 so that covering is no longer necessary… or it needs to repurchase the shares that it has sold short… and I am very much looking forward to seeing how things play out over the next twelve months!

United Therapeutics – Yes, we had been told that we would have an update on the situation at United Therapeutics by now… but we have not, and I cannot tell you for sure what the hold up might be – on the one hand there could be negotiations underway to expand the relationship even further, but, on the other hand, it is also possible there has been a “hiccup” of some sort and both sides are trying to figure out what to do next in terms of how to best work together (and, of course, it could just be that whatever tasks needed to be done before making a decision is simply taking longer than anticipated). Either way, based on what we know at the current time, the relationship between MannKind and United seems to be on solid ground, and though it would be great to already know what’s going on behind the scenes, we really have no choice but to simply wait for the card to be turned over (and sell down to our own personal sleeping points if we are feeling anxious about the possible outcomes).

Receptor Life Sciences (RLS) – Though much of what RLS is up to remains a mystery, there does seem to be some buzz building around the story on social media, and given how things are playing out on a variety of fronts, one would think that the folks at RLS must recognize that the iron probably can’t get much hotter in terms of picking a time to finally start ramping things up; unfortunately, the fact that they are a private company makes it difficult to learn much about their plans, and so I am afraid there is not much more I can say other than to remind you that RLS represents a way for MannKind to participate in the cannabinoid space without having to spend any money on product development, and though only a little over $1 million in milestone payments have been made to MannKind so far, there could be up to $100 million more, along with royalties if/when RLS finally brings its Technosphere-based product to market.

Brazil – No, I don’t know when Afrezza will officially launch in Brazil, other than “probably very soon,” based on recent comments from Mike Castagna; as far as what Brazil “means” in the grand scheme of things, I want to discourage you from getting your hopes up too high that a great deal of money will flow in from the situation, but I do want to point out that one of the things that makes the launch in Brazil a potentially exciting event is the fact that all signs are pointing to a much more receptive audience among patients and doctors alike in Brazil, and, at this point in time, I think the odds are good that word will start to spread pretty quickly on social media… and though this alone is not going to make or break Afrezza, it is this “word of mouth” spreading of awareness that has historically played the biggest role in convincing new patients and doctors to think about giving new ways of managing diabetes a try (and, especially in this day and age, success stories from Brazil absolutely can find their way to America in fairly short order).

What’s going on with HFM? – For those of you who aren’t familiar with it, Hope For MannKind (HFM) is the name of a shareholder activist group that came into existence shortly after Bill McCullough (Founder and CEO of Vdex) penned “The Vdex Letters” back in late May or early June (you can read more about them in the June issue of Nate’s Notes on the website if you want to refresh your memory), and though the group has been quiet for the past several weeks, one of its organizers recently tweeted that there may be more information coming from them on October 15th, and so folks are naturally asking me if I know what’s going on.

Unfortunately, my own approach to investing (and the types of relationships I have with both Bill McCullough and Mike Castagna) has caused me to take a neutral stance on the matter rather than pick a side, and so I am afraid that I do not have any special insights about what HFM might have planned, as I am not part of the movement.

That being said, as mentioned in previous issues, whether HFM’s activistism helps unlock shareholder value… or Castagna’s plan continues to move forward all on its own towards success… or possibly some combination of the two… doesn’t really matter to me, as the ultimate route to success doesn’t have any impact on my underlying reason for owning the stock, namely, I do not believe the company’s current market capitalization of roughly $250 million comes anywhere close to reflecting to the true value of company’s assets and intellectual property, and, consequently, in addition to not having any insights about what HFM is up to, I am afraid that I also do not have a strong opinion one way or the other about whether you should get involved with them or not (sorry).

If you are so bullish, why are you selling? – Though I am one of the most patient people I know when it comes to my investments (perhaps to a fault?), even I am growing tired of waiting when it comes MannKind… and so, as was discussed in the August issue (and re-iterated again in the most recent Inter-Issue Commentary), in order to start freeing up some of the capital that is currently tied up in our intentionally oversized MannKind positions in anticipation of putting it back to work in other stocks that may not be facing the same business and “journalistic/short-selling” headwinds that MannKind has been facing for the past several years (as well as take as much emotion out of the equation as possible), I announced in that issue that whenever the stock is trading under $1.60 when an issue goes to press, I plan to sell 10K and 100K shares out of the Model and Aggressive Portfolios, respectively.

In addition, however, along with pointing out that I was adopting a new game plan for the stock in August issue, I also reminded people that this was not meant to be a “set it and forget it” situation either, and so, for example, if the stock is showing some strength at press time (i.e. is doing more than just trading sideways on light volume), even if the stock has not cleared $1.60 yet, I may choose to not make a sale that month. That being said,

1) if you are not as overweighted in the stock as the newsletter has become (and/or you don’t mind keeping the money tied up a bit longer without any better movement to the upside), you can feel comfortable either adding more or just sitting tight, depending on your own situation, and

2) given the intentionally large position sizes we have built in each of the Portfolios over the years (100K shares represents just 4% of our MannKind position in the Aggressive Portfolio, for example, to help keep things in perspective), please note that even if we end up making these sales for a full year as part of this plan (and nothing else were to change, though, naturally, other positions will get rebalanced and change in value as well during the course of a year), our MannKind positions would STILL be among the largest in each Portfolio, even if they won’t be as large as they are today (i.e. this is a case of being disciplined and sticking to a game plan rather than “proof that I am giving up on the stock,” a claim that I have no doubt will likely make the rounds on various social media outlets sometime within the first 24 hours that the newsletter is available).

MannKind

No, there is not really much more to say that hasn’t already been said, other than to re-iterate that the worst is almost certainly behind us; the possibility that MannKind is going to go out of business is almost certainly off the table; the adoption process for new ways of managing diabetes has historically taken 12-36 months to gain meaningful traction (and my take on things is that we are probably still just 12-14 months into the process); though Afrezza is proving to be all that Al Mann claimed it would be, there are also other irons in the fire that are (finally!) moving forward; and, yes, you are encouraged to look at any strength that develops as a reason to buy/hold rather than sell! MNKD is a strong buy under $5 and a buy under $10.

UPDATED MATERIAL (11/15/19)

…and, finally, since the MannKind questions keep coming, I cannot help but devote a tiny bit of space to addressing them as well (quick bullet-points to hit the main topics):

• no, there is no “bad” outcome for the warrants – if they are exercised, MannKind gets a large chunk of cash, if not, those shares will be available for other deals; if the warrants are held by folks short the stock, they will have some tough decisions to make heading into the expiration date – if the stock is above $1.60, they’ll cover that way, but if it’s not, they’ll be facing the less desirable situation of needing to cover via open market purchases and/or options (which simply causes the option seller to buy stock in the open market if they’re not already long),

• speaking of short sellers, if you are “worried” that short sellers are protected by calls they’ve purchased, keep in mind that if they exercise those calls, folks who wrote covered calls will then find themselves without shares (which they may or may not choose to replace via new purchases – either way, note that there is still the potential for “a buying surge” ),

• no, for a variety of reasons, I am not part of the Hope for MannKind movement,

• though I understand that there is a lot of chatter going on amongst traders around loan covenants, I want to remind you that the interest rate MannKind will be paying on a loan is not likely to have any influence the ultimate fate of Afrezza (and Technosphere) – at this stage, as an investor, you just have to ask yourself whether you think MannKind is going to succeed or not succeed, and then place your bet accordingly (and, as you know, our underlying reason for owning the stock – and especially for being so aggressive at these lower prices – is that I believe the company’s assets and intellectual property are worth quite a bit more than $250 million).

MannKind

There were only “good” cards turned over during the most recent earnings call, and though sentiment seems to be at an all-time low thanks to the never-ending chorus of “there’s nothing right going on at MannKind!” being sung in the world of social media these days, I have to say that, from where I sit, the company actually appears to be in the best shape it has been in since Viehbacher was let go from Sanofi; consequently, I am taking advantage of the recent sell-off to repurchase the shares we sold last month in the Aggressive Portfolio (and, in doing so, will also restore the much more “satisfying” 1:10 ratio between the Model and Aggressive Portfolio’s position sizes – heh). MNKD is a strong buy under $5 and a buy under $10.