Some Thoughts on the Recent Action in MannKind’s Stock 8/19/13

(note: the following blog entry is a paraphrased and expanded-on update to a bulletin that was posted on the website for subscribers of The Wagmore Advisory Letter on 8/16/13)

Well, in hindsight, it obviously would have been a great idea to go ahead and write some calls against our MannKind position immediately after we purchased it last week, eh?

Though the strategy of buying a stock and then waiting for further price appreciation before pulling the trigger when it comes to writing calls agains the position is working out with the NVIDIA shares we bought on the same day, I am afraid that MannKind’s shares are being subjected to the classic “buy the rumor, sell the news” sort of action that often hits drug development stocks when the underlying company releases positive clinical data… and the selling pressure is being further exaggerated by the fact that not only was the data released just before a “Dow down 200+” day (never an environment to spur bullish sentiment!), but Friday was also an options expiration day as well (which often means additional volatility as traders try wring as much action as they can out of whatever trend happens to be in place heading into expiration).

In addition, there is still a very large short interest in the stock, and though history suggests that the smart players were using the lucky gift of last week’s “buy the rumor, sell the news” weakness to cover their positions, history also suggests that the greedier among them were instead assuming that a declining stock price meant they should double-up on their positions “because the data was ‘bad.'”

However, as the saying goes, “bears make money, bulls make money… and pigs get slaughtered” when it comes to how the stock market treats its participants over the long-haul, and with both of the phase III studies in question pretty clearly meeting their endpoints, I think only a greedy fool would continue to have more than just a small bet on the table if they wanted to bet against approval.

The risk (and one of the primary hopes of the bears) was that these trials would produce data that wouldn’t justify approval, and now that this risk is off the table, we can stop worrying about it (with the caveat that the FDA has disagreed with me in the past… and I’ve learned the hard way over the years to never assume that a slam dunk is going to be a slam dunk when it comes to their rulings!).

That being said, the concerns raised over the past couple of days by some of the bearish analysts regarding certain components of the data that suggest doctors and patients may find reasons to not adopt Afrezza do have some validity… but they are concerns that will not come into play until the drug is actually on the market (assuming it gets approved) and we find out whether or not doctors and their patients share the same concerns as the analysts.

Consequently, though you would never guess it from the recent action in the stock price, the scoreboard after the most recent set of news actually reads “bulls: 1, bears: 0” in terms of how the fundamentals are shaping up for investors.

And, amusingly, while it remains to be seen how doctors will interpret the clinical data when it comes to helping their patients find the best solutions to their problems (and, again, assuming that Afrezza does, in fact,wind up being one of their treatment options), it is worth noting that virtually everyone who has written something negative about the MannKind story in recent days has spent a fair amount of time dwelling on the fact that all previous attempts at an inhalable insulin have flopped (which, they believe, implies that Afrezza will flop too)… and though past efforts are definitely worth keeping in mind, they are a dangerous point upon which to base one’s bearish case when it comes to new technologies – especially when those new technologies are being funded and brought to market by someone with the track record of Al Mann (the company’s Founder and CEO).

Yes, there is admittedly still a long ways to go between here and actual sales, but it looks like the conversation has now shifted from “will the data support approval?” (I believe it will) to “will the data result in meaningful sales?”… and I don’t think there is any way to know the answer to this question until the product is on the market and we see what happens.  However, given that virtually all of the negative press the company is currently receiving seems to coming from people who have never liked the story (and probably have a great deal invested in seeing the company fail), I wouldn’t put too much time into listening to the noise (especially considering how wrong they turned out to be regarding the recent phase III data).

I remain bullish on the story, with the same caveat that has been repeated over and over again Nate’s Notes for the past couple of years now, namely that it is speculative and you should not own “too much” of it… and though I can’t tell you for sure where the stock will go over the short-term, I can tell you that the positive phase III data released by MannKind a few days ago removed a great deal of risk from the equation.

Now that this uncertainty has been removed, history suggests that the stock ought to start working its way higher again once the current round of profit-taking and panic-selling is cleaned up… and once this has happened and trading gets back into a more normal “flow,” I will start looking for a good entry point for us to write some calls against the shares we purchased last week.

In summary: Until the FDA actually grants approval of Afrezza, there remains a risk that the drug will be turned down (though I believe the latest data dramatically reduced the size of this risk).  In addition, once the drug is approved, there is also the risk that sales will never materialize to the degree that those in the bullish camp are hoping for (and these sales, in turn, will be somewhat dependent on the “risk” of what kind of partnership – if any – the company is able to enter into between now and commercialization)… and, consequently, I want to remind you that this story remains speculative and you should be careful not become too overweighted in the stock!  That being said, the odds of success for this company actually went up last week, not down, and if you still have some room in your portfolio to comfortably add a few more shares, you are strongly encouraged to take advantage of the current sell-off to add to your position!

Stay tuned!