Are Better Days Ahead for Mannkind?

Nate Pile Editor, Nate’s Notes and The Wagmore Advisory Letter

Nate Pile takes a look at a long-standing biotech recommendation that has had a very rough few years; nevertheless, the editor of Nate’s Notes continues to believe in the long-term promise of its inhalable form of insulin for diabetics.

Steve Halpern:  Our guest today is Nate Pile, editor of Nate’s Notes.

How are you doing today, Nate?

Nate Pile:  Fine, thanks, good to be here.  

Steve Halpern:  Well, thanks for joining us.  Now, you’ve covered a broad array of stocks and sectors over the past 28 years but have a noted background in the buyer technology sector.  Could you share a current outlook on this space?

Nate Pile:  Sure, however, I think to answer your question it’s important to remind people that it’s really a two-pronged question.

On the one hand, you can look at the sector from a fundamentalist standpoint and from that angle, things look great, probably the best they’ve been in the, again, almost three decades I’ve been following the sector.  

There’s plenty of money available for companies with good ideas.  There’s a lot of great science going on, etc.  

However, one of the things that I learned over the years is that it’s a sector where stocks tend to only spend 10% to 15% of their lives in what you might call fair value.

The other 85%-90% of the time is spent trading from extreme undervalued levels to the extreme overvalued levels and back again as fear and greed take turns in the spotlight, the traditional investor emotions and there’s probably no sector that’s more driven by them than biotech.  

Unfortunately, we’ve been in a bull market now since 2009 or 2012, depending when you want to start measuring it from and consequently, we’re due for a bear market.  

If you look at the sector, it kind of peaked out last summer and has been declining ever since and this means that even though, for example, I still like Celgene (CELG) a lot -- a stock we’ve had in the newsletter since 1995. At $100 I think it’s cheap but my experience tells me it’s probably going to get a lot cheaper before all is said and done.  

Currently, in my newsletter, we’re only about 60% invested in the stocks that we like and that’s a lot of biotech stocks.  We love the companies but again, the sector is probably entering a bear market for better or for worse and it’s better to stand out of the way and let it run its course than to buy things today hoping they don’t get any cheaper.  

Steve Halpern:  Now, you’ve had many successes in this area and following your letter, I’ve seen you recommend stocks that have gone up hundreds of percent in value. But today we’re going to focus specifically on a stock that admittedly has failed to live up to your earlier expectations, and that’s MannKind (MNKD). Could you give us an overview of the situation from a long-term perspective?

Nate Pile:  Sure, yeah, being involved with the stock has certainly been probably the most humbling experience of my career.  However, the good news is that every time I take a second look at it and go what am I missing, I’ve come to the conclusion that I’m not missing anything.

I really do believe that the underlying premise behind my decision to recommend the stock in the first place is still intact and, in fact, is probably even getting more encouraging as time goes by.  

There were a lot of abstracts released related to the product this week at an American diabetes conference.  We’ll talk more about those in a minute.  Yes, it’s definitely been a humbling experience.  

To get to your question for those not familiar with the story, the company MannKind developed an inhalable form of insulin called Afrezza and the fact that it’s inhalable and, therefore, does not require injections is the piece of the story that most people latch onto when they first hear about it.  There’s actually a lot more to it than that and I’m sure we’ll talk about that in a minute.  

However, to fill in the rest of the background, after getting their drug approved in 2014, MannKind partnered with the French company Sanofi and gave them exclusive worldwide rights to the product.  

However, anyone who has been following the large pharma space can tell you Sanofi’s diabetes division seems to have fallen into a state of disarray over the past couple of years and unfortunately, one of the casualties of the situation has been MannKind.  Sanofi had a real difficult time selling the drug.  

A lot of people are saying it’s because the drug’s no good.  Like I say, I think a lot more of it falls back on Sanofi (SNY) and we’ll find out over the next couple of months whether that’s true or not.  

Either way, Sanofi really struggled to sell the product and because of the low sales that they were generating, MannKind, which was going to receive a cut of the profits, has seen its stock tumble from over 10 two years ago to the buck and change that it’s trading at today.  

Because it was struggling to sell Afrezza, Sanofi exercised its right to terminate the relationship in January.  MannKind got the right to the product back in April and planning on relaunching the product on their own in just about a month from now, the middle of July; they should be rolling out Afrezza under the MannKind name.  

Steve Halpern:  So, let’s look a little more at Afrezza as a product.  Could you discuss the overall potential of the diabetes market and the role that Afrezza could play in this area?

Nate Pile:  Sure, well as you know the number of folks who suffer from type one and type two diabetes, along with all the folks that are being labeled as pre-diabetic, given lifestyle or diet or genetics, it’s reaching epidemic proportions, not just in the US but around the world as well.

And the total cost of managing diabetes is much, much larger especially when you start looking at the complications that set in if you don’t manage it well for a good chunk of your lifetime.  

The total market for just insulin by itself is currently around $25 billion, that’s not just mealtime insulin, that’s all insulin, but it’s a very large market and this number is expected to grow substantially over the next couple of decades.  

Thanks to both Afrezza’s ease of use and more importantly the fact it allows patients to achieve better control of their blood sugars which in turn results in lower what are called hemoglobin A1C levels and the high numbers in that area lead to complications, so if you can lower those, you can lower the total cost of managing diabetes by a lot.  

Because of those things, I believe the product will eventually come be the mealtime insulin of choice for most diabetics.  Sanofi seemed to be targeting type 2s with the bare bones ad campaign that it did roll out while it was still involved with the story.

MannKind is instead going to focus on type 1 diabetics initially and they’ve found some, well, we’ll talk about the strategy in a bit, I think.  I think it is smart for them to be going after the type 1s because given that most type 1s are more actively engaged in managing their diabetes than type 2s, that’s not always the case, but generally because it’s been a lifelong situation for them.  

I think MannKind will find success with this approach, especially as word starts to spread about the advantages that can be gained by using Afrezza rather than a slower-acting mealtime insulin that are currently on the market.  Though, the original clinical trials that were done with the drug, didn’t show this advantage because they weren’t designed to.  

Let me backtrack a little bit; there’s no label currently for insulin that’s ultra-rapid acting, things are just called rapid acting, but with the abstracts that were presented this weekend, it’s becoming clear that Afrezza really is a different type of insulin than what’s currently out there.  

This is due to not only that it’s inhaled but it’s monomeric rather than hexameric in nature so the body doesn’t have to break down that hexamer of insulin before it starts using it.  

Afrezza’s ready to go when it gets there, so it’s got a much faster onset and perhaps more importantly, a much shorter duration in the body.  Both of those things are important for two main reasons.

The first is more and more diabetics start using continuous glucose monitors to watch their blood sugars in real time and this is a trend that’s only going to continue to grow as those devices become cheaper and less and less cumbersome to use.  

If they’re watching their blood sugar in real time, they’re naturally going to want insulin that can respond in real time and right now, Afrezza’s the only insulin out there that can do this.  

Second, the fact that it leaves the body much sooner than existing insulins helps to greatly lower the risk of diabetics developing hypoglycemia or low blood sugar which can actually be life threatening.

This is a situation that comes into play more often than patients and doctors would like when circumstances prevent the patient from getting their insulin intake matched up with their food intake at any given meal.

And you end up having this insulin floating around in the body hours after the meal, you know whether it’s not eating what they thought they’d eaten or excising more vigorously than they thought.

But it can be a very dangerous situation to have that extra insulin floating around and so using Afrezza, I think, this has also been shown, it greatly reduces the risk of hypoglycemia.  So, those two advantages, I think, are going to play nicely in demand kind strategy going forward.  

Steve Halpern:  We’ve only got a minute, but you’ve suggested that the stock after its difficult times may have finally reached a low point in sentiment.  For those who own the shares and for those who do not, could you share your current advice?

Nate Pile:  Well, obviously I wish I would have recommended the stock yesterday rather than seven years ago.  However, I do think that as mentioned at the start of our interview, fear and greed are what drives stock prices when it comes to biotech stocks and we’re clearly at the extreme end of the fear cycle right now.  

You’ve got a company with a market cap that’s the same as it had when it came public over 12 years ago.  Back then it had a product that was in clinical trial. Today you’ve got an FDA approved product and studies again that were just released at ADA showing that it’s a superior product to what’s on the market.

So whenever you can buy a company, a biotech company, for the same price it came public at with all of the risks removed, I think that’s an opportunity worth looking at.  

Obviously, I’ve got subscribers who bought the stock at $8, $9 and $10.  I’ve been encouraging them to average down and for some of my newer subscribers who are getting to buy down here at a buck or two, I think it’s probably an investment opportunity of a lifetime.  

The story has been disappointing so far, but knock on wood, come July, we’re going to start to see a turnaround in prescriptions for Afrezza and if that’s the case, I fully expect the stocks to return to a more reasonable valuation, which based on what we know at this point, I would put in somewhere in the $8 to $12 range.  

I know that seems extreme going from a buck to $8, but it can happen in biotech and so I’m telling my subscribers it’s a strong buy under $2 and a buy all the way up to $5 at this point.

Steve Halpern:  Again, our guest is Nate Pile of Nate’s Notes.  Thank you so much for your time today.

Nate Pile:  Sure, thanks for having me.

By Nate Pile, Editor of Nate’s Notes