Post by slushy on Jan 17, 2014 14:30:12 GMT -5
seekingalpha.com/article/1949881-why-mannkind-is-my-2014-short-pick-in-healthcare?source=email_rt_article_readmore
So it's been a long series, and I want to thank everyone for checking it out. And if you missed it, my 'home run' pick in healthcare, Ocera Therapeutics (OCRX) jumped over 25% since the article was published, although it gave back some of those gains at closing yesterday. And Acadia Pharmaceuticals (ACAD) has been lagging behind the sector as predicted, and the short thesis behind Questcor (QCOR) is getting pummeled as well. Finally, Novavax (NVAX) has soared over 15% since calling the company a top buyout pick this year.
I saved my short pick(s) for last because these candidates have generally produced the best and fastest gains in my career. So I wanted to end the series with a bang.
Before launching into the pick, I think it's important to give an overview of my view of shorting, and what makes a good short candidate.
First off, I find it unfortunate that many retail investors believe shorting is somehow "unethical". Shorting is a natural and important checkpoint on market hyper-enthusiasm. Without shorts, I think the market would be even more prone to bubbles than it already is.
And from an investing standpoint, I think you are tying one hand behind your back in the stock market game if you think shorting is off-limits. Stocks go up and down, and you can profit on both types of movements. So why would you deem one type of movement as "ethical" and the other "unethical"? Seems like nonsense to me.
That said, shorting is extremely risky, and you shouldn't engage in it unless you are ok with those risks. If you time a short incorrectly, it can wipe out your account in a hurry, especially for folks that are overconfident in their trading abilities.
And that's where knowing what makes a good short candidate comes into play. By now, most people have heard of the Bill Ackman vs. Herbalife (HLF) case. In case you haven't, Mr. Ackman has basically lost his ass shorting Herbalife because of his stubborn refusal to admit he's wrong. My understanding is that this short has cost Pershing Square around $400 million in "paper losses". While he eventually may be proven correct, I think long-term shorts like that are just a bad idea for most folks. Besides the fact that you have to pay fees to borrow shares, tie up good money on a losing bet, and constantly worry about unlimited losses, there are generally better strategies to make money. Shorting a company because you have an axe to grind is bad investing, plain and simple.
So what makes a good short pick? In my view, binary events that will make or break a company are perfect shorting opportunities. During my career, I have only held onto one short for several months, that being Arena Pharmaceuticals (ARNA), and that was simply because it kept going down. My other shorts like Sarepta Therapeutics (SRPT), Vanda (VNDA), and Telik (TELK) produced massive gains within days or weeks, not months. Put simply, timing is key when picking a short play.
So who looks like good short candidates this year?
If you listen to the chatter, you would get the impression that Opko Health (OPK), Seattle Genetics (SGEN), and even Acadia are all good candidates. And of course, shorts have made themselves heard in regards to Questcor and Herbalife.
But I don't like any of these picks because they lack a clear binary event, and all carry the risk of black swans lurking in the shadows. Seattle Genetics and Acadia, for example, could easily be bought out, crushing your hopes of playing the short game.
Nope, there is only one candidate on the horizon that meets our needs, and that bad boy is MannKind Corp. (MNKD). After listening to CEO Alfred Mann's presentation at the J.P. Morgan Healthcare conference yesterday, I lost all confidence in the company's lead clinical candidate, Afrezza. I now believe the product is destined for a rejection from the FDA, and it will essentially be the death knell of the company.
Prior to this presentation, I thought Afrezza was a relatively benign product that would squeak through its upcoming PDUFA date, and the company would be put up for auction soon thereafter. But what I heard made me take a second look, and the more I dug into this story, the more it fell apart at the seams.
So here is the basic bull thesis: Afrezza is an ultra-fast acting insulin that better mimics the physiology of the pancreas than currently available products. So it's supposed to be superior to fast-acting insulins like Novo Nordisk's (NVS) NovoLog. Secondly, patients will prefer to use Afrezza because it's inhalable, and people generally don't like injections. Flowing from these 'axioms', one would naturally conclude that Afrezza will eventually come to dominate the insulin market, a multi-billion dollar space.
Backing up my brief summary of the bull thesis, here are some paraphrased tidbits of what the CEO said yesterday:
· First product that matches the physiology of the pancreas
· Substantially lower risk of hyperglycemia
· Weight neutral, better than current products
· No safety signals
· Believes Afrezza will grow market among Type II because of lower risk of hyperglycemia
· Product is easy to use, delivers insulin in less than a second
· Clinically superior product compared to NovoLog
The problem with some of these statements is that the Phase 3 clinical trial data actually refutes them. And the funny part is that Mr. Mann made some rather odd statements explaining the mismatch between the company's position on Afrezza's performance compared to the actual trial results.
Turning to the trial results, Afrezza did not outperform NovoLog in terms of A1c levels in type 1 diabetics. It actually performed worse. So Mr. Mann touting Afrezza's 'clinical superiority' is a factually incorrect statement. But what is extremely bizarre is his explanation. During his presentation, he actually blames the patients in the clinical trial for improper fasting procedures, saying that once patients learn how to use the device properly that Afrezza's superiority will be apparent.
I can't say that I've ever heard a CEO blame patients in a clinical trial for their product's performance, but sure, why not?
But it gets better. In the introduction, Mr. Mann claims that Afrezza/Dreamboat are so easy to use that a 4 year old can use it. So let me get this straight, it's so easy a 4 year old can use it, but the patients in the clinical trial were using it improperly?
Which is it?
Mr. Mann also claims that Afrezza offers a "weight advantage" in that it's weight neutral. In Affinity 2, however, patients gained an average of 3.5 lbs when using Afrezza. That's not weight neutral.
Finally, Mr. Mann preaches about how it's "impossible" for Afrezza to cause hypoglycemic events when used properly. According to the clinical trials, however, Afrezza caused more hypoglycemic events than placebo in type 2 diabetics.
So what is the truth? Is everyone using the device improperly? Does that mean it's not so easy to use?
While this may look like I am parsing the man's words, these discrepancies speak to a larger problem with these clinical trial results. The company has been repeatedly criticized for not being more transparent with the results with investors, especially heading into a regulator meeting with the FDA.
Basically, MannKind is telling investors to take their word for it. But as I've shown, their words do not necessarily match reality. The FDA isn't going to be so kind, trust me on that. If Mr. Mann goes beyond the realm of the data, he will more than likely be questioned on it.
So, let's ask a simple question: Why should the FDA approve this product?
Firstly, it offers no clinical advantage per the clinical trial results compared to existing therapies, despite what the company says. In the best light, you could say that it does as well as existing therapies. But you can't tell the FDA the product is clinically superior without actual data to prove it. That dog won't hunt.
Secondly, there is no patient advocacy surrounding the product. While many MannKind investors believe diabetics are scared of needles, the truth is that they generally are not. Try reading any of the numerous blogs on this issue, and you'll see that many diabetics are annoyed by MannKind investors suggesting that diabetics suffer from needle-phobia. I suspect this is why the big pharmas ditched their development programs altogether, as patients don't seem to despise needles as much as the industry thought they did.
At the end of the day, MannKind is left with one card to play: the product is inhalable. Is that enough to get past the FDA? Maybe, maybe not. But they are going to get hammered if they start spouting off about clinical superiority.
Unknowns and the possibility of Black Swans
Getting to the real reason I feel MannKind is going to implode is that there appears to be a very good chance of a Black Swan making an appearance in the briefing documents. The mismatch between the results provided to the public so far, and Mr. Mann's belief in the product's performance, are clearly at odds with one another. My bet is that these are the best results the company has to offer, and there are some naughty surprises that will be revealed in the briefing documents. And this, my friends, is why I suspect the FDA called an Advisory Committee in the first place. If these trial data looked as impressive as the company claims, an Advisory Committee would be a waste of time and effort. So, I don't think they called an ADCOM to rubber stamp Afrezza.
Think about it this way. If reality coincided with Mr. Mann's view of Afrezza, why hasn't a big partner stepped in to either buy the company or partner? The answer is obvious: they don't share his outlook. They either believe Afrezza will be rejected again, or its sales will underwhelm.
My view is that Mr. Mann has gotten emotionally involved in the development of this product, and has therefore lost sight of its significant shortcomings. That's a recipe for disaster.
So in conclusion, my bet is that Afrezza will indeed be rejected come April, and MannKind shares sink below $1. If you're long this stock, you should think carefully about hedging this position.
So it's been a long series, and I want to thank everyone for checking it out. And if you missed it, my 'home run' pick in healthcare, Ocera Therapeutics (OCRX) jumped over 25% since the article was published, although it gave back some of those gains at closing yesterday. And Acadia Pharmaceuticals (ACAD) has been lagging behind the sector as predicted, and the short thesis behind Questcor (QCOR) is getting pummeled as well. Finally, Novavax (NVAX) has soared over 15% since calling the company a top buyout pick this year.
I saved my short pick(s) for last because these candidates have generally produced the best and fastest gains in my career. So I wanted to end the series with a bang.
Before launching into the pick, I think it's important to give an overview of my view of shorting, and what makes a good short candidate.
First off, I find it unfortunate that many retail investors believe shorting is somehow "unethical". Shorting is a natural and important checkpoint on market hyper-enthusiasm. Without shorts, I think the market would be even more prone to bubbles than it already is.
And from an investing standpoint, I think you are tying one hand behind your back in the stock market game if you think shorting is off-limits. Stocks go up and down, and you can profit on both types of movements. So why would you deem one type of movement as "ethical" and the other "unethical"? Seems like nonsense to me.
That said, shorting is extremely risky, and you shouldn't engage in it unless you are ok with those risks. If you time a short incorrectly, it can wipe out your account in a hurry, especially for folks that are overconfident in their trading abilities.
And that's where knowing what makes a good short candidate comes into play. By now, most people have heard of the Bill Ackman vs. Herbalife (HLF) case. In case you haven't, Mr. Ackman has basically lost his ass shorting Herbalife because of his stubborn refusal to admit he's wrong. My understanding is that this short has cost Pershing Square around $400 million in "paper losses". While he eventually may be proven correct, I think long-term shorts like that are just a bad idea for most folks. Besides the fact that you have to pay fees to borrow shares, tie up good money on a losing bet, and constantly worry about unlimited losses, there are generally better strategies to make money. Shorting a company because you have an axe to grind is bad investing, plain and simple.
So what makes a good short pick? In my view, binary events that will make or break a company are perfect shorting opportunities. During my career, I have only held onto one short for several months, that being Arena Pharmaceuticals (ARNA), and that was simply because it kept going down. My other shorts like Sarepta Therapeutics (SRPT), Vanda (VNDA), and Telik (TELK) produced massive gains within days or weeks, not months. Put simply, timing is key when picking a short play.
So who looks like good short candidates this year?
If you listen to the chatter, you would get the impression that Opko Health (OPK), Seattle Genetics (SGEN), and even Acadia are all good candidates. And of course, shorts have made themselves heard in regards to Questcor and Herbalife.
But I don't like any of these picks because they lack a clear binary event, and all carry the risk of black swans lurking in the shadows. Seattle Genetics and Acadia, for example, could easily be bought out, crushing your hopes of playing the short game.
Nope, there is only one candidate on the horizon that meets our needs, and that bad boy is MannKind Corp. (MNKD). After listening to CEO Alfred Mann's presentation at the J.P. Morgan Healthcare conference yesterday, I lost all confidence in the company's lead clinical candidate, Afrezza. I now believe the product is destined for a rejection from the FDA, and it will essentially be the death knell of the company.
Prior to this presentation, I thought Afrezza was a relatively benign product that would squeak through its upcoming PDUFA date, and the company would be put up for auction soon thereafter. But what I heard made me take a second look, and the more I dug into this story, the more it fell apart at the seams.
So here is the basic bull thesis: Afrezza is an ultra-fast acting insulin that better mimics the physiology of the pancreas than currently available products. So it's supposed to be superior to fast-acting insulins like Novo Nordisk's (NVS) NovoLog. Secondly, patients will prefer to use Afrezza because it's inhalable, and people generally don't like injections. Flowing from these 'axioms', one would naturally conclude that Afrezza will eventually come to dominate the insulin market, a multi-billion dollar space.
Backing up my brief summary of the bull thesis, here are some paraphrased tidbits of what the CEO said yesterday:
· First product that matches the physiology of the pancreas
· Substantially lower risk of hyperglycemia
· Weight neutral, better than current products
· No safety signals
· Believes Afrezza will grow market among Type II because of lower risk of hyperglycemia
· Product is easy to use, delivers insulin in less than a second
· Clinically superior product compared to NovoLog
The problem with some of these statements is that the Phase 3 clinical trial data actually refutes them. And the funny part is that Mr. Mann made some rather odd statements explaining the mismatch between the company's position on Afrezza's performance compared to the actual trial results.
Turning to the trial results, Afrezza did not outperform NovoLog in terms of A1c levels in type 1 diabetics. It actually performed worse. So Mr. Mann touting Afrezza's 'clinical superiority' is a factually incorrect statement. But what is extremely bizarre is his explanation. During his presentation, he actually blames the patients in the clinical trial for improper fasting procedures, saying that once patients learn how to use the device properly that Afrezza's superiority will be apparent.
I can't say that I've ever heard a CEO blame patients in a clinical trial for their product's performance, but sure, why not?
But it gets better. In the introduction, Mr. Mann claims that Afrezza/Dreamboat are so easy to use that a 4 year old can use it. So let me get this straight, it's so easy a 4 year old can use it, but the patients in the clinical trial were using it improperly?
Which is it?
Mr. Mann also claims that Afrezza offers a "weight advantage" in that it's weight neutral. In Affinity 2, however, patients gained an average of 3.5 lbs when using Afrezza. That's not weight neutral.
Finally, Mr. Mann preaches about how it's "impossible" for Afrezza to cause hypoglycemic events when used properly. According to the clinical trials, however, Afrezza caused more hypoglycemic events than placebo in type 2 diabetics.
So what is the truth? Is everyone using the device improperly? Does that mean it's not so easy to use?
While this may look like I am parsing the man's words, these discrepancies speak to a larger problem with these clinical trial results. The company has been repeatedly criticized for not being more transparent with the results with investors, especially heading into a regulator meeting with the FDA.
Basically, MannKind is telling investors to take their word for it. But as I've shown, their words do not necessarily match reality. The FDA isn't going to be so kind, trust me on that. If Mr. Mann goes beyond the realm of the data, he will more than likely be questioned on it.
So, let's ask a simple question: Why should the FDA approve this product?
Firstly, it offers no clinical advantage per the clinical trial results compared to existing therapies, despite what the company says. In the best light, you could say that it does as well as existing therapies. But you can't tell the FDA the product is clinically superior without actual data to prove it. That dog won't hunt.
Secondly, there is no patient advocacy surrounding the product. While many MannKind investors believe diabetics are scared of needles, the truth is that they generally are not. Try reading any of the numerous blogs on this issue, and you'll see that many diabetics are annoyed by MannKind investors suggesting that diabetics suffer from needle-phobia. I suspect this is why the big pharmas ditched their development programs altogether, as patients don't seem to despise needles as much as the industry thought they did.
At the end of the day, MannKind is left with one card to play: the product is inhalable. Is that enough to get past the FDA? Maybe, maybe not. But they are going to get hammered if they start spouting off about clinical superiority.
Unknowns and the possibility of Black Swans
Getting to the real reason I feel MannKind is going to implode is that there appears to be a very good chance of a Black Swan making an appearance in the briefing documents. The mismatch between the results provided to the public so far, and Mr. Mann's belief in the product's performance, are clearly at odds with one another. My bet is that these are the best results the company has to offer, and there are some naughty surprises that will be revealed in the briefing documents. And this, my friends, is why I suspect the FDA called an Advisory Committee in the first place. If these trial data looked as impressive as the company claims, an Advisory Committee would be a waste of time and effort. So, I don't think they called an ADCOM to rubber stamp Afrezza.
Think about it this way. If reality coincided with Mr. Mann's view of Afrezza, why hasn't a big partner stepped in to either buy the company or partner? The answer is obvious: they don't share his outlook. They either believe Afrezza will be rejected again, or its sales will underwhelm.
My view is that Mr. Mann has gotten emotionally involved in the development of this product, and has therefore lost sight of its significant shortcomings. That's a recipe for disaster.
So in conclusion, my bet is that Afrezza will indeed be rejected come April, and MannKind shares sink below $1. If you're long this stock, you should think carefully about hedging this position.