Disclosure: I am a MannKind investor as well as an everyday investor and a patient advocate.
MannKind Corporation (NASDAQ: MNKD) is a small company based in Valencia, California, poised to launch its FDA approved drug, Afrezza, as treatment indications for both Type 1 and Type 2 diabetes. Despite near unanimous backing from experts at the Advisory Committee (ADCOM) and the medical community, Mr. Market is still pessimistic on the company. The Father of Value Investing Benjamin Graham described Mr. Market as a bipolar or fickle character, who is constantly shouting quotes that are not reflective an issue's intrinsic value.
During the July 24, 2014 trading session, MannKind shares on sale for as low as $ 8.70 represented an irresistible bargain for intelligent and opportunistic investors. Even its peak SP of $9.57 was still a significant discount, because the company is worth $38 per share based on highly accurate integrated research. The Illustrious Peter Lynch would have describe this situation as a "back up the truck" opportunity as MannKind is poised to capture the vastly expanding $29 billion insulin market. Also, the company has a novel drug delivery platform called Technosphere that could be leveraged to develop other lyophilized powdered blockbusters.
- Warning! GuruFocus has detected 3 Warning Signs with MNKD. Click here to check it out.
- MNKD 15-Year Financial Data
- The intrinsic value of MNKD
- Peter Lynch Chart of MNKD
Source: Yahoo Finance
Yesterday, Mr. Market shouted his previous prejudice toward Afrezza labeling by asserting that potential lungs issues and spirometry would deter physicians from prescribing the drug. While it's easy to get the impression that Afrezza is toxic due to the warnings and medical jargon, my experience as an MD and my familiarity with drug labels reveals that Afrezza's label has a similar or better safety profile than similar as well as competing drugs like Novolog and Humalog.
When a patient inhales any new drug it usually causes an initial discomfort reflected by the lungs natural responses like coughing or, in rare cases, bronchospasm. Readers should also note that nearly all medicines potentially cause irritation and allergy symptoms in certain patients, and Afrezza is no exception. Needless to say, as the lungs get used to Afrezza over time those symptoms should abate. Similar to all drugs, Afrezza's label warnings are cautionary measures or disclaimers so-to-speak.
Source: US Food and Drug Administration
Albuterol's label below shows many warnings – headache, dizziness, tachycardia, pharyngitis, and rhinitis – that are difficult to understand due to medical jargon as well as an impression that Albuterol is harmful or even potentially fatal. Nonetheless, clinicians know that Albuterol is a very good drug. Despite potential risks associated with all drugs, clinicians would still prescribe these medicines if they demonstrate favorable overall benefits versus risks. Hence, MannKind shareholders can rest assured that Afrezza label warnings are predominantly cautionary measures, similar to disclaimer documents one has to sign when registering to use a legitimate website.
Source: US Food and Drugs Administration
Despite Mr. Market's flawed assertions and inaccurate forecasting, readers should note that Mr. Market is not any less intelligent, but rather the picture reaching Wall Street became distorted, lacking accurate assessments of Afrezza by clinicians from Main Street clinics and hospitals. In addition, prescribing decisions might come down to a clinician's personal preferences, especially when there are alternative treatments like Novolog and Humalog. Nonetheless, Afrezza's unparalleled patients’ convenience, superior kinetics in mimicking healthy pancreas and freedom from needles and stigma should prompt patients to request their doctors to prescribe the drug. Hence, providers should prescribe Afrezza in response, because it is prudent to take into account the patient's preferences in promoting good doctor-patient fiduciary relationships.
Pertaining to Mr. Market's assertion that Afrezza's label calling for a lung function study called spirometry once, at the initial visit, and every six months thereafter would doom Afrezza's prospect was again misperceived. Spirometry might appear to those unfamiliar with the test as cumbersome, but to those who administered and/or had the test performed, I confidently voice that spirometry is easy to perform with minimal discomfort to the patients, taking as little as only several minutes, and notably allowing clinicians to bill for the test.
Source: National Institute of Health
Facing increasing working hours and decreasing reimbursement from Medicare and insurance companies, clinicians would indeed be inclined to prescribe Afrezza en-masse or "capturing the incoming tide at the flood." Based on the American Academy of Family Physicians or AAFP and Medicare billing schedule, a spirometry could be billed for $40, which adds significant incomes for average office visits. The use of the spirometer and Afrezza makes it economically sensible, because with Afrezza's improved patient compliance, the drug would substantially reduce the striking $245 billion annual spending to treat diabetic complications.
As a rule-of-thumb, it is cost effective to focus on preventative care such as diabetes education, supporting primary care providers such as the family physician, NP, internist and PA in order to retain talents as these healthcare providers play critical roles in nipping chronic diseases such as diabetes, obesity, or cancers in the bud.
Source: American Academy of Family Physicians
Source: Medicare Physician Fees
In analyzing the profitability of using spirometry, a premium device only costs around $1500 while procuring $40 revenues or more per office visit, thus, yielding a significant profit margin. Given spirometry is done routinely in clinics to evaluate symptoms of shortness of breath, asthma, or COPD, physicians should already own and have mastered spirometry. Moreover, physicians would also enjoy having peace of mind in knowing that Afrezza improves the clinic's revenues and quality of care, while reducing US healthcare spending.
While analysts voice misperceived public opinion, it is irresponsible journalism to stake negative/unsubstantiated claims, even after having been provided with abundant data analysis from experts like the ADCOM physicians, scientists, industry leaders, and patient advocates. Further, a hedge fund only profits little from shorting MannKind while taking high risks. Moreover, shorting would limit MannKind's ability to raise capital, thus, deterring partnerships or a buyout and ultimately robbing millions of patients with diabetes of Afrezza, as well as honest working Americans' investments. It's understandable to short a fraudulent company like Enron but shorting MannKind is not socially responsible or conscientious, as MannKind is a firm lead by an exceptional philanthropist, Dr. Alfred E. Mann. His inventions and donations had saved millions of lives. To short MannKind at this stage is similar to hindering Doctor Mann's efforts to deliver his ultimate gift, Afrezza, to millions of patients suffering from diabetes, many of those being kids.
In assessing stock shorting strictly from an investing perspective, it is unwise to short MannKind, as short firms tend to underperform the market and competing longs. Though I do not have resources like the famed investor activist, Carl Icahn, to "take a flame thrower to this place!" I maximize investor activism (and patients' advocacy) through my pen by casting my faith in ultimate triumph through diligence, data analysis, patience, and a conviction to hold on to MannKind shares as well as to purchase more shares during market hiccups.
The bottom line is that Afrezza is a highly promising drug, poised to gain complete dominance as MannKind executes its commercialization strategies. Shares are currently trading at a deep discount to their true valuation. Mr. Market's arguments regarding Afrezza's labeling, though reasonable at first glance prove themselves to be false under comprehensive/data analysis. Moreover, Afrezza has highly favorable therapeutic benefits versus risks. Additionally, the required label necessitating spirometry rather incentivizes clinicians to prescribe Afrezza en-mass. Also, there should not be any issue with pulmonary hyperplasia, and the lung cancer risk is overblown, as there was no evidence indicating a predominant IGF-R in the lung epithelium. Despite the highly favorable odds that MannKind is a prudent investment, neither any one nor I can make such a promise for investing research is an imperfect science.
"Integrity, ingenuity, essence, and essentially all else follows."