*** The following is excerpted from the Nate’s Notes Inter-Issue Commentary that was published for subscribers on January 1, 2019, and reflects our opinions of the market, MannKind (MNKD), and all other stocks mentioned as of that date. ***

Happy New Year… now what?! 1/1/19

Along with the two stocks in the newsletter that are far more reliant on our domestic economy than foreign markets (Catasys and MannKind), the other “stock” I want to also point you towards at this particular moment in time if you’re looking to put money to work would be the SPDR Gold Trust ETF, with a reminder to be patient and not chase it above the buy limits (which I may or may not raise in the January issue).

Yes, it has been a difficult past several weeks… and it may end up being a challenging next several months (or quarters) as well… but that doesn’t mean we can’t still be smart about positioning our portfolios in response to the situation, especially since, as long-term investors, we can be patient about scaling-in and -out of the market as circumstances warrant rather than feeling like we have to catch every zig- and zag the market makes in order for our “system” to work.

And, speaking of zigs and zags, I hope the following will help add some perspective for those of you involved with the MannKind story…

As those of you who are following the story closely know, the company will be holding a conference call on Friday morning before the market opens, and though speculation has been running wild on social media regarding what the call might be about, the only two things we know for sure are that the press release announcing the call said that its purpose is “to discuss Company developments,” and that Mike Castagna (CEO) is the only representative from management that will be on the call.

That being said (and with a reminder that everything below is merely speculation on my part in an attempt to answer the many questions that have come in over the past few days on the topic and NOT meant to be a prediction about anything, so please don’t read too much into it), the first thing that we can say with almost 100% certainty is that Castagna is not holding the call to announce “bad news,” as he would have been required to report it when it came into existence, not via a conference call ten days after the fact.

Second, I think it is also fair to assume that the call is not likely to be about adding a partner, licensing a new molecule, or anything else in the “deal” department, otherwise the appropriate other members of management would likely be listed for the call (science, CFO, etc.), as well to discuss and answer questions about said deal.

Third (and especially), given what has happened to the stock price in response to the recently announced financing, I think it is also fair to assume that Castagna will spending at least a portion of the call discussing his rationale for raising money at a point in time when many were not expecting it… and, in fact, it would not me surprise at all if this ends up being the sole reason for the call.

Yes, I am as anxious as you to hear what he has about the situation, but as mentioned in the Special Alert that was sent out a week-and-a-half ago, unless there is a truly negative reason that forced him to raise money “out of the blue” (again, not likely given that it would need to be disclosed), having the cash in the bank cannot be counted as anything but a positive for a company at the stage of its existence that MannKind currently finds itself in, especially if my reading of the tea leaves is correct and we are (finally!) getting to the point in the adoption cycle where we will likely get a much more realistic sense of Afrezza’s chances for success than we have in the past.

In particular, as you’ve seen me write a number of times over the years, even if a doctor is genuinely interested in Afrezza, they are still likely only going to put a handful of patients on it at the beginning to watch them and see how they do for at least three months, and, more likely, six months (or even longer) before they decide what to do next; however, if those patients do well, the next step is to put a larger group of patients on the drug and see if they exhibit the same results… and so on and so forth with an ever larger portion of their practice each time around (assuming the “impressive results” hold at each step along the way, of course).

Obviously, since there is no way to speed this process up, it cannot help but be an 18-36 month process, and though those at the most bearish end of the spectrum like to say that we are already four years into the cycle, the reality of the matter is that we are probably somewhere between six and twelve months into it, depending when you’re willing to assume that the salesforce was really trained and equipped with the tools required to start the process in a meaningful way with doctors.

The good news, of course, is that regardless of whether we are just at six months or already at twelve months into the process, if our underlying assumption about the superiority of Afrezza is correct, the next twelve months have the potential to be exciting ones on the prescription front, even if only the doctors who have been using Afrezza for awhile now continue to scale-up their practices (never mind if new doctors start to join the fray with their own “handfuls” of patients to “take a test drive” as well).

And this brings us to two important points…

The first is that if we are, in fact, getting to this point in the cycle, it means that now is, in fact, the time for Castagna to be applying as much heat as possible on the advertising front, as awareness can grow exponentially when doctors start hearing about the product from not just their colleagues (“hey – have you seen the results Sally is getting with this new inhalable insulin she’s started using in her practice?”) but from patients as well (“I’ve heard about this new inhalable insulin, and I’d like to try it” – a situation that is always an easier sell than the doctor having to say the same thing in the other direction!)… and though only time will tell whether raising capital when he did was smart or dumb, the fact that the company, at least in theory, should not have to spend any time looking for capital in 2019 means that Castagna and his team can finally spend 100% of their time focused on running the business rather dividing it between running the business while also trying to keep it afloat.

And the second (which is an important corollary to the first) is that for a number of reasons, there really is no way around the fact that 2019 is shaping up to be the year that the thesis we have been investing in for the past nine-plus years (“Afrezza will eventually become the mealtime insulin of choice”) will either start to bear fruit or it won’t – Castagna has done a remarkable job of retooling the company from the manufacturing company it was originally intended to be into a full-fledged up-and-coming biopharmaceutical company, and now that he’s got everything place, it really is make-or-break time.

Of course, for those of you who sometimes wonder about it, yes – this means that if we are NOT seeing the sort script growth that makes us smile (which, in turn, should translate into a stock price that also makes us start to smile again) as the year rolls by, this will be the year that I finally need to start the process of scaling-out of our intentionally large positions in the stock… and I will absolutely make good on this process if circumstances begin to warrant such action.

In the meantime, however, I want to point out that weekly Afrezza scripts topped the $1 million mark for the first time ever last week (coming in at just under $1.2 million, in fact), and though this dollar amount is still spit in the ocean compared to the numbers that get posted for the established mealtime insulins each week, the fact that MannKind just did in a week what it used to take almost a full month to do should give you hope that the train is, in fact, back on the tracks and (finally) starting to leave the station.

No, there are no guarantees the trend will continue, but for all the reasons discussed above, I am extremely optimistic that we are finally entering the early stages of what should be a period of exponential growth, especially if Castagna does announce that a large portion of the recent capital raise will be spent to accelerate the company’s advertising efforts over the next six months.

And, along these same lines, I want to also point out that if things do start to play out in the manner described above, there will be additional capital raised along way due to the exercise of the warrants that have been issued as part of the recent offerings, and this will only give Castagna more flexibility on the advertising and negotiating fronts (and if the warrants end up not being exercised, it means all of the concern about the dilution they represent will have been for not).

Having said all of that, I want to remind you that, while I am extremely confident about my assessment of the situation, there is no guarantee I will end up being right, and so, as I have warned you many times, please do not own more of the stock than you a) can comfortably sleep with at night, and b) can afford to lose, if it eventually comes to that.

In the meantime, provided there are no “bombshells” dropped in the upcoming conference, please note that I do not plan on putting out anything specific to MannKind after the call, but I will definitely provide an update to whatever degree may be justified when the January issue comes out in a few weeks… so stay tuned!