Rho: An Objective, We Think, Up-To-Date Look At MannKind
Mar 1, 2015 20:16:26 GMT -5
babaoriley, coco, and 1 more like this
Post by spiro on Mar 1, 2015 20:16:26 GMT -5
George Rho at SA, It appears SA may have suppressed his article getting out. I just got it.
George Rho, 3Dimensional Research (768 clicks)
Research analyst, long/short equity, special situations, arbitrage
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An Objective, We Think, Up-To-Date Look At MannKind
Feb. 26, 2015 2:17 PM ET | 71 comments | About: MannKind Corporation (MNKD)
Disclosure: The author is long MNKD. (More...)
Summary
MannKind is flush with cash.
The launch of Afrezza appears to be progressing nicely.
New applications for the company's Technosphere drug delivery platform are taking shape.
This article was sent to 17,923 people who get email alerts on MNKD.
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The uncomfortably tight-lipped management of MannKind (NASDAQ: MNKD) talked with the investment community twice over the past two days, first on Tuesday during a conference call with Wall Street analysts and then the following morning at a healthcare conference conducted by RBC Capital. As is almost always the case in the bizarro world that the company seems to inhabit, the media was chockfull of articles about all-things MannKind, before and after the two appearances by the chief executive and chief financial officers, Hakan Edstrom and Matthew Pfeffer, respectively. Needless to say, at least to the many investors that follow the small biotech reasonably closely, not much positive was said by the assortment of pundits, columnists, and amateur analysts. Indeed, they were almost precisely in line with what we've come to expect in the aftermath of the black-is-white and white-is-black commentary that accompanied the release of phase 3 trial results, the Advisory Committee hearing, the FDA approval of Afrezza, and the securing of Sanofi as a marketing partner. Three years into following MannKind, it's still tough to know what constitutes good news for this so-called battleground company.
With that said, in this article, we first lay out the latest information provided by management, unvarnished and without interpretation, allowing the reader to determine for him or herself whether the news is good, bad, or inconsequential. We then toss in our two cents worth of analysis, leaving ourselves open to the often vicious back and forth commentary from what can only be characterized as an extraordinarily well-informed cohort of investors. In reviewing the statements made by management, we think the reader should take the following into consideration. Management has met every target that it has mentioned over the past few years. Moreover, it has been extremely conservative when talking with the investment community, virtually disappearing for long stretches of time and seldom exhibiting undue exuberance. Last, although some would like to imagine corporate executives as shysters looking to mislead investors, Wall Street has a very low tolerance for cheerleaders who don't deliver. And executives who aren't trusted by Wall Street don't occupy the corner suite for very long.
The information provided covers four general areas - historical earnings, the balance sheet, the Afrezza launch, and new applications for Technosphere. MannKind's bottom-line performance in 2014 isn't all that important since the company is essentially a far different entity going forward, so we'll large skip the review of last year's P&L.
The Balance Sheet
As of December 31, 2014, the company's balance sheet contained $120.8 million in cash and cash equivalents. As well, it had $50.0 million in receivables from Sanofi for achieving certain manufacturing milestones. The funds were received early this year, so the long-cash-strapped biotechnology concern had approximately $170.8 million in cash to fund both current operations and the new R&D programs that will be detailed below. As well, although not specified in the financial statements, MannKind has $30 million still available in a credit facility with Alfred Mann, the company's founder. On the other side of the ledger, the balance sheet contains $403.4 million in current liabilities. This includes roughly $100 million in senior convertible notes. They will convert into equity later this year if MNKD stock price is no lower than $6.80 a share, if memory serves. Another large chunk of the liabilities, perhaps as much as $200 million, reflects the payments from Sanofi, as they haven't been recognized as having been earned; it's still unclear how and when those payments will be recognized, but Mr. Pfeffer did indicate that investors would be fully briefed as they are being earned.
The Afrezza Launch
Over 1,200 Sanofi sales representatives attended a training session in Las Vegas last month. A soft commercial launch was initiated on February 3rd. According to Mr. Pfeffer, the reps were "clearly excited" by the opportunity to detail Afrezza. The company also reports a high level of excitement among general practitioners, given how easy Afrezza is to use and to learn how to use, which will allow the GPs to retain their patients rather than pass them on to endocrinologists.
MannKind didn't discuss the prescription data to date, noting that the dynamics of the product make the early numbers of little relevance. Demand is supposedly greater than originally anticipated, however, and Sanofi has asked the company to increase the provision of Afrezza samples. Management also noted that Sanofi initiated a "soft launch," in order to, among other things, make sure demand didn't outstrip supply; the company's sales representatives had ample time to fully detail physicians; and third-party reimbursement approvals were better established.
The launch should pick up steam in the months ahead considering the following:
1. Installation of additional capacity is on schedule, so production capacity should more than triple in the second quarter. Moreover, the facility in Danbury, Connecticut could accommodate another quadrupling in production capacity.
2. Sanofi filed an sNDA (supplemental New Drug Application) for a 12-unit dose in December, so the patients will have more options sometime in the second quarter; only four- and eight-unit doses are available currently.
3. Sanofi will roll out a second, major launch shortly, presumably after production capacity has ramped up.
4. No official advertising campaign has been initiated, yet, but commentary by patients excited by Afrezza is becoming increasing common on social media - YouTube, Facebook, and Twitter. Indeed, there are a number of Hollywood celebrities that have been publicly sharing their excitement with the product.
5. An advertising campaign will begin in the year's second half.
New Products in the Pipeline
Last summer, the company announced that it would have news concerning Technosphere in November and February. Late last fall, management didn't reveal much beyond saying that the company had "an embarrassment of riches." They were a little more informative in yesterday's conference call, indicating that the company, with the assistance of a major consulting group, had identified, validated, and commercially assessed the best applications for Technosphere. MannKind has decided to focus on three areas: pulmonary disease, pain, and oncology support. Significantly, the company has already identified the specific APIs (active pharmaceutical ingredient). Moreover, according to management, they all address serious unmet medical need; have comparatively short delivery times (or low cost of development); take advantage of the unique benefit of the company's delivery technology; and address large markets. The development of these drugs should get underway in stages over the coming months.
Significantly, too, the company remains in discussions with some other drugmakers to bring their API on to the Technosphere platform; nondisclosure agreements preclude any details. The one exception is the discussions between MannKind and Sanofi about the possibility of developing an inhaled GLP-1 product.
Our Two Cents
Although not reflected in the stock price, we're perfectly comfortable with both the nebulous trajectory of the Afrezza launch and management's actions in transitioning MannKind into a company that's not just about inhaled insulin. Sanofi's 1,200-plus sales force certainly puts to rest the detractors' suggestions that the large pharmaceutical company wasn't a fully committed partner. And its request for additional samples is clearly encouraging, contrary to how some have tried to spin this. After all, how significant is the cost of a 10-day sample pack when it could translate into a roughly $2,000 per year annuity that could run for 15, 20, 25 years. It's also difficult not to be optimistic about Afrezza's sales potential when one considers the huge target patient population and sees the videos and tweets by actual patients so excited by the product that they are publicly spreading the word. Just as injected insulin probably wouldn't have been developed if inhaled insulin had come first, it's hard to imagine anyone going on social media to broadcast their injecting themselves with insulin. Legendary Fidelity Magellan fund manager Peter Lynch was famous for advising "buy what you know." We think that advice applies perfectly when it comes to MNKD stock. Most of the investors who'll read this article probably know MannKind as well, if not better, than any other company, and are well aware of both the number of diabetics in the United States, let alone in the world, and the sales potential of Afrezza.
We can all quibble about the prescription data in week one, week two, etcetera, and what the appropriate profit margins and price/earnings multiples are, but, ultimately, it comes down to how comfortable we are with the overall story. For our part, we remain strongly bullish. Our earnings and price projections also remain unchanged, absent any concrete information to incorporate into a new earnings model.
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Comments (71)
John Kastanes
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Great bird's-eye view of MannKind. Thank you!
26 Feb, 02:33 PMReplyLike9
Snake eye
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Hey George,
Nice to hear from you. Welcome back to the Fray.
26 Feb, 02:44 PMReplyLike5
tvaldezmd
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Thank you kindly George for a concise and objective update.
26 Feb, 03:03 PMReplyLike5
George Rho , Contributor
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Author’s reply » tvaldezmd,
Concise is probably right on target. I think if more people had the time to simply listen to the company's conference calls or read the transcripts, articles such as mine would be completely unnecessary.
In my view, the MNKD story, as it now stands, is a very easy one to understand. Management is also very straight forward, as far as I'm concerned. So, who needs third-party folks to interpret what the company had to say!
26 Feb, 07:03 PMReplyLike19
Chris Lacoursiere , Contributor
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Great article George, Im a buyer at this price, keep up the great job keeping investors informed!
1 Mar, 12:16 PMReplyLike0
Wiseman1
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I think Matt said the 100 will not convert to shares but they restructure the loan.
26 Feb, 03:10 PMReplyLike3
pauliene
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george, you make the most sense of all the wriiters.
the convertible 100 million will be converted if we are above the 6.87 price. that means we take off that liability from the balance sheet.
the 200 million dollars is money we have received being booked as a debt in case we fold and they need cash to pay back sanofi
next its the nine million shares just given as a loan to the bank.
no strings, just that they return the shares to the company.
no gain , no loss on that deal in august
the problem and the situation that no one wants to talk about is the 86 million shares short.
I cannot believe smart writers like you cannot explain to the simple investors like me and your viewers the impact this has on trading.
if they can short 6 million shares in two weeks that's about 42 million dollars of selling power absorbed by buying power.
if they did not short and we had this buying power would the stock be priced higher?
its 86 million shares short versus 400 million outstanding
is there no end to shorting
26 Feb, 04:34 PMReplyLike15
George Rho , Contributor
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Author’s reply » Pauliene,
It's always good to hear from you. The short interest in this stock is obviously a huge depressant on the price, not only in terms of the selling pressure and the increased supply, but also the seemingly endless stream of negative articles that may be published in support of the shorts. I'm not sure it's very productive to continually dwell on this, however. The shorts are there, we all know they're there, and they'll stay as long as they think they can still get out at a lower price. In my view, they are running out of time, though, as there are fewer and fewer potential problems (for MNKD) they can hope for, and time is becoming increasing expensive for them. Last I checked, it's costing them some 15% to maintain their short positions. Imagine paying 15% on a position that's also rising in price.
26 Feb, 06:57 PMReplyLike25
Robert Sacher , Contributor
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George,
Could you please elaborate about how does a stock acquire p/e that is based upon numbers much higher than what is the fundamental value of the company?
I don't understand the process. Is it simply a matter of many more people wanting to own a piece of something because they are excited by it? Or is there something much more in play?
Do all the shorted shares have any impact on the potential p/e ratio up the road?
And, is there any way to measure a potential MannKind p/e against a similar company?
Thanks again for your article and thoughts.
RS
26 Feb, 04:42 PMReplyLike2
George Rho , Contributor
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Author’s reply » Robert,
There are many ways to value a stock. None is perfect, however. Biotechs with no earnings are particularly difficult, if not virtually impossible, to value since we're essentially trying to put a price on potential. As for the P/E, the best way to review that may be by way of an analogy. If the explanation is too basic, my apologies.
Buying a stock is like buying a rental property or the corner grocery store, you're buying a stream of income. So, how do you price the rental property? A key component will be the rental income that it generates. For this example, we'll say $20,000 a year. The next important component is a reasonable multiple. A rule of thumb might be 15, almost equivalent to the p/e for the overall stock market. So, at the simplest level, a fair price to pay for the property might be $300,000. Then come the many variables that complicate the picture.
If interest rates are very low, the buyer may be willing to pay a higher multiple. As well, if the property is in a very nice and growing neighborhood, the property will command a higher price, since the rental income will be more dependable and the buyer will most likely be able to raise the rent on a regular basis. So, a rental property in NYC might command a 25 multiple. On the flip side, a property in Detroit will require a far smaller multiple, since there will be periods when rent will go unpaid, and increases will be very difficult.
Applying this concept to biotechs is extremely difficult. Let's say, for argument's sake, MNKD earns $0.25 this year and we apply Psycho Analyst's p/e of 20. Then the stock is worth $5.00. If earnings double next year, however, the $5 is just 10-times earnings, and a tremendous bargain. So, any investor looking beyond just one year would buy every share possible in anticipation of making huge capital appreciation.
As such, a better way to value these type of stocks is to look way into the future, to a time when earnings growth may be more normal. Applying a roughly market or sector multiple then gives you a long-term price target, which you would then discount back to get some sense of what the price should be now or in a year....
Bottom line, applying a 20 p/e to this year's estimate makes very little sense.
I'm not sure how to answer other parts of your question, but price is almost always a function of supply and demand. In MNKD's case, the shorts have created an additional roughly 80 million shares, which is huge compared to the public float. So, not only have they created additional supply, they have increased selling pressure.
Name me a company similar to MNKD and I'll try to answer your final question.
26 Feb, 06:32 PMReplyLike8
Robert Sacher , Contributor
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George,
Thank you for your reply. I understand your analogy and the variables included. MannKind's potential is what we must believe in order to hope for and then justify higher and higher p/e.
That's why simply considering fundamentals on a new company likely to impact a market is, in a way, a limiting handicap against potentiality.
It's an interesting consideration for me personally since I made my living working with young bands doing original music when those bands were looking for their first gigs in NYC. Some of them are now world famous and all I was going on back then was the potential that I saw in their music.
I get it. I am attracted to potentiality and I am willing to take risk based on that potential.
I don't really know of any other companies similar to MNKD but I guess I don't really need to take this further. I understand.
Thank you for your explanation.
RS
26 Feb, 10:20 PMReplyLike1
centralcoastinvestor
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As always, thank you for your great insight into this company. If you have time to respond, have you ever encountered another stock that has been this abused by short interest?
26 Feb, 05:00 PMReplyLike3
George Rho , Contributor
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Author’s reply » centralcoastinvestor,
I think I can always find time to say NO.
More seriously, I really haven't experienced anything remotely similar in my greater than 25 years of following the market on a daily basis. It's astounding how relentless and persistent the short sellers have been, no improvements in the company's fundamentals seem to matter to them.I've also been surprised by how much assistance they seem to get from the talking mouthpieces in the media. And, at the risk of sounding naive, I continue to be amazed by the shamelessness of some that opine regularly... I'm guessing you know whom I'm referring to.
26 Feb, 06:46 PMReplyLike7
yale1066
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There have been many...Arena Pharma (ARNA) comes to mind immediately. Mr. Rho may wish to comment here.
26 Feb, 09:23 PMReplyLike0
George Rho , Contributor
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Author’s reply » yale1066,
I recommended Arena to my subscribers as an event driven special situatlon prior to FDA approval, which worked out well. I subsequently penned an article for SA suggesting it was at best a trading vehicle. The article was largely a response to some who were saying that it was likely to be acquired. Other than that, I didn't following the company that closely.
If you think Arena was as shorted and the subject of as much misinformation and disinformation as MNKD, perhaps you can elaborate. Could you also give a few more examples, you say many.
28 Feb, 05:16 AMReplyLike2
kingsmill
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The difference to me has always been that ARNA had a desired but over hyped weak product so selling in the run up to approval and release was appropriate while (in my opinion) MNKD has a strong product so shorting into its release after approval has never made sense to me but apparently some continue to feel the products ( both Technosphere and Afrezza) will not succeed. Time will tell. I am staying long.
1 Mar, 12:55 PMReplyLike0
mark woods
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George Rho, in the know.
Robert Sacher, great fact chacker. Whoops! I mean checker.
Seriously fantastic to see you guys in the same thread. It's such a relief to read unspun prose and intelligent curiosity.
People like you elevate this site and make me smarter. Thanks.
26 Feb, 05:14 PMReplyLike4
Robert Sacher , Contributor
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Mark,
Thank you but I do not deserve to be mentioned in the same sentence as George. I'm just an amateur trying to find my way through the woods.
No pun intended, I just noticed your last name…
26 Feb, 05:38 PMReplyLike3
ShortSlaver
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Well written article - I wish some of the other MNKD authors around here could write articles this articulate and on point.
My take on MNKD is if you're sick of day and swing trading this is a great opportunity to take on some risk and park some cash and see what happens in the next couple years.
26 Feb, 05:48 PMReplyLike4
yale1066
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Wonderful overview of the direction and potential of Mannkind. Thank you Mr. Rho. The thesis set out by the author is clear and very bullish. I simply do not understand how 86 million shares can be short. I my opinion it is a bloodbath waiting to happen at almost anytime. One would hope that they see the error of their ways and cover.
George Rho, 3Dimensional Research (768 clicks)
Research analyst, long/short equity, special situations, arbitrage
Profile| Send Message| Follow (1,213 followers)
An Objective, We Think, Up-To-Date Look At MannKind
Feb. 26, 2015 2:17 PM ET | 71 comments | About: MannKind Corporation (MNKD)
Disclosure: The author is long MNKD. (More...)
Summary
MannKind is flush with cash.
The launch of Afrezza appears to be progressing nicely.
New applications for the company's Technosphere drug delivery platform are taking shape.
This article was sent to 17,923 people who get email alerts on MNKD.
Get email alerts on MNKD »
The uncomfortably tight-lipped management of MannKind (NASDAQ: MNKD) talked with the investment community twice over the past two days, first on Tuesday during a conference call with Wall Street analysts and then the following morning at a healthcare conference conducted by RBC Capital. As is almost always the case in the bizarro world that the company seems to inhabit, the media was chockfull of articles about all-things MannKind, before and after the two appearances by the chief executive and chief financial officers, Hakan Edstrom and Matthew Pfeffer, respectively. Needless to say, at least to the many investors that follow the small biotech reasonably closely, not much positive was said by the assortment of pundits, columnists, and amateur analysts. Indeed, they were almost precisely in line with what we've come to expect in the aftermath of the black-is-white and white-is-black commentary that accompanied the release of phase 3 trial results, the Advisory Committee hearing, the FDA approval of Afrezza, and the securing of Sanofi as a marketing partner. Three years into following MannKind, it's still tough to know what constitutes good news for this so-called battleground company.
With that said, in this article, we first lay out the latest information provided by management, unvarnished and without interpretation, allowing the reader to determine for him or herself whether the news is good, bad, or inconsequential. We then toss in our two cents worth of analysis, leaving ourselves open to the often vicious back and forth commentary from what can only be characterized as an extraordinarily well-informed cohort of investors. In reviewing the statements made by management, we think the reader should take the following into consideration. Management has met every target that it has mentioned over the past few years. Moreover, it has been extremely conservative when talking with the investment community, virtually disappearing for long stretches of time and seldom exhibiting undue exuberance. Last, although some would like to imagine corporate executives as shysters looking to mislead investors, Wall Street has a very low tolerance for cheerleaders who don't deliver. And executives who aren't trusted by Wall Street don't occupy the corner suite for very long.
The information provided covers four general areas - historical earnings, the balance sheet, the Afrezza launch, and new applications for Technosphere. MannKind's bottom-line performance in 2014 isn't all that important since the company is essentially a far different entity going forward, so we'll large skip the review of last year's P&L.
The Balance Sheet
As of December 31, 2014, the company's balance sheet contained $120.8 million in cash and cash equivalents. As well, it had $50.0 million in receivables from Sanofi for achieving certain manufacturing milestones. The funds were received early this year, so the long-cash-strapped biotechnology concern had approximately $170.8 million in cash to fund both current operations and the new R&D programs that will be detailed below. As well, although not specified in the financial statements, MannKind has $30 million still available in a credit facility with Alfred Mann, the company's founder. On the other side of the ledger, the balance sheet contains $403.4 million in current liabilities. This includes roughly $100 million in senior convertible notes. They will convert into equity later this year if MNKD stock price is no lower than $6.80 a share, if memory serves. Another large chunk of the liabilities, perhaps as much as $200 million, reflects the payments from Sanofi, as they haven't been recognized as having been earned; it's still unclear how and when those payments will be recognized, but Mr. Pfeffer did indicate that investors would be fully briefed as they are being earned.
The Afrezza Launch
Over 1,200 Sanofi sales representatives attended a training session in Las Vegas last month. A soft commercial launch was initiated on February 3rd. According to Mr. Pfeffer, the reps were "clearly excited" by the opportunity to detail Afrezza. The company also reports a high level of excitement among general practitioners, given how easy Afrezza is to use and to learn how to use, which will allow the GPs to retain their patients rather than pass them on to endocrinologists.
MannKind didn't discuss the prescription data to date, noting that the dynamics of the product make the early numbers of little relevance. Demand is supposedly greater than originally anticipated, however, and Sanofi has asked the company to increase the provision of Afrezza samples. Management also noted that Sanofi initiated a "soft launch," in order to, among other things, make sure demand didn't outstrip supply; the company's sales representatives had ample time to fully detail physicians; and third-party reimbursement approvals were better established.
The launch should pick up steam in the months ahead considering the following:
1. Installation of additional capacity is on schedule, so production capacity should more than triple in the second quarter. Moreover, the facility in Danbury, Connecticut could accommodate another quadrupling in production capacity.
2. Sanofi filed an sNDA (supplemental New Drug Application) for a 12-unit dose in December, so the patients will have more options sometime in the second quarter; only four- and eight-unit doses are available currently.
3. Sanofi will roll out a second, major launch shortly, presumably after production capacity has ramped up.
4. No official advertising campaign has been initiated, yet, but commentary by patients excited by Afrezza is becoming increasing common on social media - YouTube, Facebook, and Twitter. Indeed, there are a number of Hollywood celebrities that have been publicly sharing their excitement with the product.
5. An advertising campaign will begin in the year's second half.
New Products in the Pipeline
Last summer, the company announced that it would have news concerning Technosphere in November and February. Late last fall, management didn't reveal much beyond saying that the company had "an embarrassment of riches." They were a little more informative in yesterday's conference call, indicating that the company, with the assistance of a major consulting group, had identified, validated, and commercially assessed the best applications for Technosphere. MannKind has decided to focus on three areas: pulmonary disease, pain, and oncology support. Significantly, the company has already identified the specific APIs (active pharmaceutical ingredient). Moreover, according to management, they all address serious unmet medical need; have comparatively short delivery times (or low cost of development); take advantage of the unique benefit of the company's delivery technology; and address large markets. The development of these drugs should get underway in stages over the coming months.
Significantly, too, the company remains in discussions with some other drugmakers to bring their API on to the Technosphere platform; nondisclosure agreements preclude any details. The one exception is the discussions between MannKind and Sanofi about the possibility of developing an inhaled GLP-1 product.
Our Two Cents
Although not reflected in the stock price, we're perfectly comfortable with both the nebulous trajectory of the Afrezza launch and management's actions in transitioning MannKind into a company that's not just about inhaled insulin. Sanofi's 1,200-plus sales force certainly puts to rest the detractors' suggestions that the large pharmaceutical company wasn't a fully committed partner. And its request for additional samples is clearly encouraging, contrary to how some have tried to spin this. After all, how significant is the cost of a 10-day sample pack when it could translate into a roughly $2,000 per year annuity that could run for 15, 20, 25 years. It's also difficult not to be optimistic about Afrezza's sales potential when one considers the huge target patient population and sees the videos and tweets by actual patients so excited by the product that they are publicly spreading the word. Just as injected insulin probably wouldn't have been developed if inhaled insulin had come first, it's hard to imagine anyone going on social media to broadcast their injecting themselves with insulin. Legendary Fidelity Magellan fund manager Peter Lynch was famous for advising "buy what you know." We think that advice applies perfectly when it comes to MNKD stock. Most of the investors who'll read this article probably know MannKind as well, if not better, than any other company, and are well aware of both the number of diabetics in the United States, let alone in the world, and the sales potential of Afrezza.
We can all quibble about the prescription data in week one, week two, etcetera, and what the appropriate profit margins and price/earnings multiples are, but, ultimately, it comes down to how comfortable we are with the overall story. For our part, we remain strongly bullish. Our earnings and price projections also remain unchanged, absent any concrete information to incorporate into a new earnings model.
This article was sent to 17,923 people who get email alerts on MNKD.
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About this article
Emailed to: 17,923 people who get MNKD real-time alerts and 534,881 people who get Investing Ideas daily.
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Become a contributor »
Tagged: Investing Ideas, Long Ideas, Healthcare, Biotechnology
Problem with this article? Please tell us. Disagree with this article? Submit your own.
More articles by George Rho »
Enanta Is The Big Winner In The Hepatitis C War Between AbbVie And GileadTue, Dec 23Very Exciting Days Are In Store For Enanta StockholdersThu, Nov 27Puma Is As Expensive As MannKind Is CheapTue, Nov 25The State Of MannKindTue, Oct 14
Latest on MNKD
Analysts Weigh In On MannKind Following Q4 ResultsSat, Feb 28MannKind's Financial Statements Can Be Scary To Most InvestorsFri, Feb 27More Insight Into MannKind's Near-Term ProfitabilityWed, Feb 25MannKind Is Tripling Production To Meet Future DemandWed, Feb 25MannKind: Another Year Of Disappointments?Wed, Feb 25MannKind's (MNKD) CEO Hakan Edstrom on Q4 2014 Results - Earnings Call TranscriptTue, Feb 24MannKind trims losses in Q4Tue, Feb 24MannKind EPS in-lineTue, Feb 24Bioness neuromodulator cleared by FDATue, Feb 24Second Sight up premarket on implant progressTue, Feb 24
Comments (71)
John Kastanes
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Great bird's-eye view of MannKind. Thank you!
26 Feb, 02:33 PMReplyLike9
Snake eye
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Hey George,
Nice to hear from you. Welcome back to the Fray.
26 Feb, 02:44 PMReplyLike5
tvaldezmd
Comments (17)| + Follow | Send Message
Thank you kindly George for a concise and objective update.
26 Feb, 03:03 PMReplyLike5
George Rho , Contributor
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Author’s reply » tvaldezmd,
Concise is probably right on target. I think if more people had the time to simply listen to the company's conference calls or read the transcripts, articles such as mine would be completely unnecessary.
In my view, the MNKD story, as it now stands, is a very easy one to understand. Management is also very straight forward, as far as I'm concerned. So, who needs third-party folks to interpret what the company had to say!
26 Feb, 07:03 PMReplyLike19
Chris Lacoursiere , Contributor
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Great article George, Im a buyer at this price, keep up the great job keeping investors informed!
1 Mar, 12:16 PMReplyLike0
Wiseman1
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I think Matt said the 100 will not convert to shares but they restructure the loan.
26 Feb, 03:10 PMReplyLike3
pauliene
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george, you make the most sense of all the wriiters.
the convertible 100 million will be converted if we are above the 6.87 price. that means we take off that liability from the balance sheet.
the 200 million dollars is money we have received being booked as a debt in case we fold and they need cash to pay back sanofi
next its the nine million shares just given as a loan to the bank.
no strings, just that they return the shares to the company.
no gain , no loss on that deal in august
the problem and the situation that no one wants to talk about is the 86 million shares short.
I cannot believe smart writers like you cannot explain to the simple investors like me and your viewers the impact this has on trading.
if they can short 6 million shares in two weeks that's about 42 million dollars of selling power absorbed by buying power.
if they did not short and we had this buying power would the stock be priced higher?
its 86 million shares short versus 400 million outstanding
is there no end to shorting
26 Feb, 04:34 PMReplyLike15
George Rho , Contributor
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Author’s reply » Pauliene,
It's always good to hear from you. The short interest in this stock is obviously a huge depressant on the price, not only in terms of the selling pressure and the increased supply, but also the seemingly endless stream of negative articles that may be published in support of the shorts. I'm not sure it's very productive to continually dwell on this, however. The shorts are there, we all know they're there, and they'll stay as long as they think they can still get out at a lower price. In my view, they are running out of time, though, as there are fewer and fewer potential problems (for MNKD) they can hope for, and time is becoming increasing expensive for them. Last I checked, it's costing them some 15% to maintain their short positions. Imagine paying 15% on a position that's also rising in price.
26 Feb, 06:57 PMReplyLike25
Robert Sacher , Contributor
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George,
Could you please elaborate about how does a stock acquire p/e that is based upon numbers much higher than what is the fundamental value of the company?
I don't understand the process. Is it simply a matter of many more people wanting to own a piece of something because they are excited by it? Or is there something much more in play?
Do all the shorted shares have any impact on the potential p/e ratio up the road?
And, is there any way to measure a potential MannKind p/e against a similar company?
Thanks again for your article and thoughts.
RS
26 Feb, 04:42 PMReplyLike2
George Rho , Contributor
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Author’s reply » Robert,
There are many ways to value a stock. None is perfect, however. Biotechs with no earnings are particularly difficult, if not virtually impossible, to value since we're essentially trying to put a price on potential. As for the P/E, the best way to review that may be by way of an analogy. If the explanation is too basic, my apologies.
Buying a stock is like buying a rental property or the corner grocery store, you're buying a stream of income. So, how do you price the rental property? A key component will be the rental income that it generates. For this example, we'll say $20,000 a year. The next important component is a reasonable multiple. A rule of thumb might be 15, almost equivalent to the p/e for the overall stock market. So, at the simplest level, a fair price to pay for the property might be $300,000. Then come the many variables that complicate the picture.
If interest rates are very low, the buyer may be willing to pay a higher multiple. As well, if the property is in a very nice and growing neighborhood, the property will command a higher price, since the rental income will be more dependable and the buyer will most likely be able to raise the rent on a regular basis. So, a rental property in NYC might command a 25 multiple. On the flip side, a property in Detroit will require a far smaller multiple, since there will be periods when rent will go unpaid, and increases will be very difficult.
Applying this concept to biotechs is extremely difficult. Let's say, for argument's sake, MNKD earns $0.25 this year and we apply Psycho Analyst's p/e of 20. Then the stock is worth $5.00. If earnings double next year, however, the $5 is just 10-times earnings, and a tremendous bargain. So, any investor looking beyond just one year would buy every share possible in anticipation of making huge capital appreciation.
As such, a better way to value these type of stocks is to look way into the future, to a time when earnings growth may be more normal. Applying a roughly market or sector multiple then gives you a long-term price target, which you would then discount back to get some sense of what the price should be now or in a year....
Bottom line, applying a 20 p/e to this year's estimate makes very little sense.
I'm not sure how to answer other parts of your question, but price is almost always a function of supply and demand. In MNKD's case, the shorts have created an additional roughly 80 million shares, which is huge compared to the public float. So, not only have they created additional supply, they have increased selling pressure.
Name me a company similar to MNKD and I'll try to answer your final question.
26 Feb, 06:32 PMReplyLike8
Robert Sacher , Contributor
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George,
Thank you for your reply. I understand your analogy and the variables included. MannKind's potential is what we must believe in order to hope for and then justify higher and higher p/e.
That's why simply considering fundamentals on a new company likely to impact a market is, in a way, a limiting handicap against potentiality.
It's an interesting consideration for me personally since I made my living working with young bands doing original music when those bands were looking for their first gigs in NYC. Some of them are now world famous and all I was going on back then was the potential that I saw in their music.
I get it. I am attracted to potentiality and I am willing to take risk based on that potential.
I don't really know of any other companies similar to MNKD but I guess I don't really need to take this further. I understand.
Thank you for your explanation.
RS
26 Feb, 10:20 PMReplyLike1
centralcoastinvestor
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As always, thank you for your great insight into this company. If you have time to respond, have you ever encountered another stock that has been this abused by short interest?
26 Feb, 05:00 PMReplyLike3
George Rho , Contributor
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Author’s reply » centralcoastinvestor,
I think I can always find time to say NO.
More seriously, I really haven't experienced anything remotely similar in my greater than 25 years of following the market on a daily basis. It's astounding how relentless and persistent the short sellers have been, no improvements in the company's fundamentals seem to matter to them.I've also been surprised by how much assistance they seem to get from the talking mouthpieces in the media. And, at the risk of sounding naive, I continue to be amazed by the shamelessness of some that opine regularly... I'm guessing you know whom I'm referring to.
26 Feb, 06:46 PMReplyLike7
yale1066
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There have been many...Arena Pharma (ARNA) comes to mind immediately. Mr. Rho may wish to comment here.
26 Feb, 09:23 PMReplyLike0
George Rho , Contributor
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Author’s reply » yale1066,
I recommended Arena to my subscribers as an event driven special situatlon prior to FDA approval, which worked out well. I subsequently penned an article for SA suggesting it was at best a trading vehicle. The article was largely a response to some who were saying that it was likely to be acquired. Other than that, I didn't following the company that closely.
If you think Arena was as shorted and the subject of as much misinformation and disinformation as MNKD, perhaps you can elaborate. Could you also give a few more examples, you say many.
28 Feb, 05:16 AMReplyLike2
kingsmill
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The difference to me has always been that ARNA had a desired but over hyped weak product so selling in the run up to approval and release was appropriate while (in my opinion) MNKD has a strong product so shorting into its release after approval has never made sense to me but apparently some continue to feel the products ( both Technosphere and Afrezza) will not succeed. Time will tell. I am staying long.
1 Mar, 12:55 PMReplyLike0
mark woods
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George Rho, in the know.
Robert Sacher, great fact chacker. Whoops! I mean checker.
Seriously fantastic to see you guys in the same thread. It's such a relief to read unspun prose and intelligent curiosity.
People like you elevate this site and make me smarter. Thanks.
26 Feb, 05:14 PMReplyLike4
Robert Sacher , Contributor
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Mark,
Thank you but I do not deserve to be mentioned in the same sentence as George. I'm just an amateur trying to find my way through the woods.
No pun intended, I just noticed your last name…
26 Feb, 05:38 PMReplyLike3
ShortSlaver
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Well written article - I wish some of the other MNKD authors around here could write articles this articulate and on point.
My take on MNKD is if you're sick of day and swing trading this is a great opportunity to take on some risk and park some cash and see what happens in the next couple years.
26 Feb, 05:48 PMReplyLike4
yale1066
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Wonderful overview of the direction and potential of Mannkind. Thank you Mr. Rho. The thesis set out by the author is clear and very bullish. I simply do not understand how 86 million shares can be short. I my opinion it is a bloodbath waiting to happen at almost anytime. One would hope that they see the error of their ways and cover.
