Short MannKind On Afrezza Approval?

[savzak]

seekingalpha.com/article/2239823-short-mannkind-on-afrezza-approval?uprof=45

Short MannKind On Afrezza Approval?

May. 27, 2014 3:33 PM ET | About: MannKind Corporation (MNKD)



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
  

Summary
•MannKind is waiting on its PDUFA date, coming in July, for Afrezza.
•Lately, the stock has started its emotional push upwards in anticipation of approval.
•Tons of work remains after the approval, which is near-priced in, and MannKind could actually be considered a short upon approval - albeit for the short term.

Alright, before MannKind (MNKD) longs flip out on me for the title, I'd like to offer a disclaimer that I am no way bearish on the company itself and what it's trying to do with Afrezza. For me, for you, and for humanity, I hope Afrezza receives its approval in the coming month and MannKind shareholders are lucratively rewarded.

I have, however, noticed a couple of small biotech trends: runs-up to binary events and post-FDA approval corrections. It's post-approval that I want to talk about. Let's talk about a trend I pointed out in a previous article.

Post-FDA approval, there is usually a pocket of some time where the hysteria wears off and people realize that millions upon millions in sales still stand between their coveted biotech company and the burgeoning acquisition target that they are seeking it to be. Sometimes, the company does go down that path - successful sales that eventually lead to a Big Pharma buyout or partnership. Sometimes, things come up that prevent that from happening.

In "My Definitive 17 Cardinal Rules...," one of the recurring themes is emotion in trading and how to use it to your advantage. I wrote:

“
Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they baghold buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:

"This stock may never stop going up! Better get in no matter what cost!"

And conversely:

"This company is doomed! We are going to zero right here, right now, on this crash!"

This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash.

Emotion is one of the key factors at play here with MannKind, as it is during a lot of biotech events. One trend that I continually see is that there is a lot of emotion behind biotech stocks leading up to binary events - whether it's FDA approval or trial results. Most companies, just like MannKind, have great stories of searching for drugs that will help humanity, in addition to having the ability to make savvy investors rich if they're on the right side of the trade.

What I've noticed from a lot of biotech catalysts is that the emotional charge behind the event often leads stock running far higher than rational, and that on good news, the share price usually pulls back and corrects. It's the age-old adage: buy the rumor, sell the news - in practice.

In the case of MannKind, we've gotten no new news over the last couple of weeks, but the stock is starting to poke upwards in anticipation of good news coming in July.

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The resistance at $8 seems to be calling the shots, for the time being. We'll have to see how MNKD fares in the upcoming short week to see if the stock is going to make it over the $8 point.

Simply put, there's something in the human psyche that tells traders to keep jumping in, no matter what the price, when the possibility of good news is coming down the pipe.

This is why we're seeing the move into MannKind right now. There's a chance we could continue to see it right through July. Heck, this could be a good time to buy and just wait for the run-up to the news. On the news, however, MannKind likely presents a more cogent short-term short.

It's the "run-up to the binary event" we've seen in the past. Hell, I was even part of it in CLSN:

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The fact is that depending on how much MannKind runs, the FDA news could become priced in here. Because so many people are expecting approval, the risk inherent in getting behind the trade is significantly less than in a normal binary event. Thus, people have decided to "cherry pick" and get in early.

Here are three examples of biotech catalysts and corresponding price movements after FDA approval:

Stock Event Date PPS Spike PPS Low

Keryx (KERX) 1/28/13 $9.08 (1/31/13) $6.43 (2/28/13)
Amarin (AMRN) 4/18/11 $19.50 (5/27/11) $1.30 (5/20/14)
Arena (ARNA) 6/27/12 $11.81 (7/10/12) $4.39 (11/1/13)

Shorts playing the exact right time in these three could be yielding anything from 30% and up, if done correctly.

Again, this isn't a bearish stab at MannKind. It's simply a reminder that the company sports a $3 billion market cap right now and produces zero revenue. Upon FDA approval, the likelihood of producing significant revenue gets a boost, but until the rubber meets the road, the onus is on MannKind.

While I love the long-term prospects of the company, it's important to keep your focus after FDA approval and potentially consider the company for a short until it starts to get some traction, sales, or a pharmaceutical partner. The short thesis is off the table if a major partnership is announced between now and FDA approval.

Best of luck to all investors.

[babaoriley]

More or less agree with the above, especially since he puts in that last caveat about the partnership, which will change the landscape tremendously going forward. But we all do believe we will have a very supportive partner not too long after approval, or even before, right?

[4Balance]

Not before...more likely, soon after.

[savzak]

I don't think the PPS is expensive enough to warrant a sell off after approval.  If we run to $11 or $12, then maybe; but even then any "sell the news" reaction should be muted by the expectation of a partnership as you have identified.  I can tell you one thing.  If we're trading at $15 or less on approval, this is one long who will not be selling any shares in anticipation of a sell off. 

[mannmade]

Yes but remember the x factor is that there are still some 60m shares out there already shorted and if we get an "Epic" short squeeze you could see a very fast run-up and then a hangover after the dust settles... But even the authors tells you it is a very short term strategy... Perhaps if you are already short and need to make up some losses?

[seanismorris]

I think there is almost zero chance of Mannkind announcing a partner prior to approval.  There is also very little chance of Mannkind being bought out in the near term (5%).  I do think there is a good chance of Mannkind being bought out after having Afrezza on the market for 1 year (50%).

Here's what I posted on the Seeking Alpha site:
The current expectation is post approval you will have a week or two before the partner announcement. Some people believe the two events will occure simultaneously, which will likely result in the stock shooting up (on approval) then retreating until the partnership announcement. For traders you could can obviously play that many ways. Personally, I'm long MNKD and don't short stocks, so I'll sell some 25% after the approval bounce then buy them back a few days later (pre partner announcement). The partner announcement is the more important event (as long as the terms are favorable -as I expect they will be) and that's when you want all your chips on the table. The question, is this tragedy worth the potential risk of missing the partner announcement...
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I agree, shorting Mannkind at any point would be very risky.  The problem is we don't have firm dates for any of the major events coming up.  Making 30% on a short position isn't worth it...  Playing the Options in Mannkind make more sense.

Who the partner turns out to be, is incredibly important in determining if Afrezza will be just a success or a major blockbuster.  I'm hoping Al is very active in the final partnership decision.  He has enough experience to know its not just about the upfront payment.  If Mannkind pledges 1 billion on marketing but signs up a partner I consider poorly chosen, the smart decision would be selling most of my shares.  I don't expect to do so (because they have a good management team) but it's a possibility.

[ezrasfund]

Remember the run up to approval on April 15th that never really happened? The only thing I can say for sure is that if everyone thinks it's going to happen, it ain't gonna happen that way. Otherwise we would have minted a lot more millionaires by now.

My guess (just a guess, and a hope) is that there will be a sudden spike (short covering?) well before approval, but the price will come back to earth. Then a bump up on approval, when we will again have the nay-sayers pointing to the label and the REMS to temper the enthusiasm. Partnership will come later (Al could have made a mediocre deal anytime), but the terms will be good, and the share price will reflect that. I believe that MNKD's market cap is already too weighty for the price to stay at unreasonable levels for long, as some of the other small cap biotechs can.

So if shorting is selling, which I guess it is, I've got plenty of Good Until Cancelled sell orders in place to try and catch that spike. But if I get lucky and those sell orders are triggered I plan to buy right back in, because any valuation of $10B or $25/share will take some serious Afrezza revenues, IMO.