Any day now MannKind (NASDAQ:MNKD), is expected to launch its lead product Afrezza, an inhalable form of insulin. The company’s founder and namesake, Alfred Mann, has invested almost $1 billion of his own money to bring this product to market. Nate Pile’s best idea for 2015 is to invest alongside this successful serial entrepreneur as Afrezza brings MannKind to fruition.
Nate Pile is a Marketocracy Master and the Editor of Nate’s Notes which Mark Hulbert ranks #1 for the last 15 and 10 year periods, and #2 for the last 1, 3, and 5 year periods. Nate’s Marketocracy portfolio was up almost 34% last year, but perhaps more impressively, he has beaten both Warren Buffett and the top performing U.S. mutual fund manager for the last decade. Click here to review Nate’s track record.
Ken: Why is Afrezza better than insulins currently sold by market leaders Novo Nordisk (NYSE:NVO) and Eli Lilly (NYSE:LLY)?
Nate: To be sure, the advantage that gets talked about first – and usually with the most enthusiasm – is the fact that it is inhaled rather than injected, and while this will admittedly play a bigger role with newly diagnosed diabetics going forward, than it will with existing patients who are already used to injecting themselves several times a day, my own very small (and admittedly unscientific) survey suggests that a sizable portion of this patient population would also be more than happy to skip the injections, despite the fact that the needle sticks have become ‘tolerable’ as smaller and smaller needles have become available over the years.
In addition, a number of people I have spoken with have expressed excitement at the thought of being able to take their insulin during lunchtime meetings (or any other restaurant situation, for that matter) by simply taking a discrete puff on their inhaler, rather than leaving the table to give themselves an injection or playing the old “jab their leg under the table” game in order to spare others from watching the injection.
However, along with this “ease of use” feature, I believe an even more important piece of the puzzle is Afrezza’s pharmacokinetic (PK) profile, something we can talk about a little later in the interview.
Will Afrezza be a successful inhalable form of insulin? (Photo credit: www.smallcapnetwork.com)
Ken: If memory serves me correctly, there was another inhalable insulin on the market a few years ago, and it failed badly.
Nate: Well the last attempt at an inhalable insulin, Exubera, which was marketed by Pfizer (NYSE:PFE) did, in fact, go down as perhaps one of the greatest flops of all-time in pharmaceutical history. Pfizer pulled the plug on the product after it generated only $12 million in sales in its first nine months on the market! Needless to say, its resounding failure has been a cloud hanging over MannKind ever since.
Ken: What makes you think Afrezza is not going to suffer the same fate?
Nate: What really sets Afrezza apart from other existing meal-time insulins is the fact that it enters and leaves the body in a manner that is much more similar to how the body actually produces and uses insulin, than anything else currently on the market. In contrast, Exubera had the same PK profile as existing mealtime insulins already on the market. I believe this “fast in, fast out” mechanism of action is going to allow diabetics to achieve a much higher degree of success in controlling their blood sugar levels… and this is a big deal not only for patients and their quality of life, but also for physicians and insurance companies as well.
In addition, it should be noted that Exubera’s delivery device was the size of a small fire extinguisher – it was hardly convenient to carry around, and definitely not the sort of thing that anyone would want to whip out in public. Afrezza’s delivery device is roughly the size of a small whistle and requires virtually no effort to load and use. Putting these two pieces together – the convenience factor and especially the improved PK profile – I think there is a good chance Afrezza could quickly and quietly become the mealtime insulin of choice.
Ken: How many patients are there who could benefit from Afrezza?
Nate: The general consensus is that roughly 350-400 million people around the world have been diagnosed with either Type 1 or Type 2 diabetes, and this number is currently forecast to grow to over 550 million in the next 20 years. Not everyone who is diagnosed with diabetes ends up needing to take insulin to control their condition, but we are still talking about a very large potential patient population.
Ken: I am guessing that with the new technology involved, manufacturing Afrezza can’t be cheap – won’t pricing be an issue? And will insurance companies be willing to pay for “convenience”?
Nate: While it remains to be seen exactly where MannKind’s marketing partner Sanofi (NYSE:SNY) decides to price Afrezza, MannKind has been saying all along that it believes it will priced competitively with the existing “pens” that are on the market… and early indications suggest that this is, in fact, the price range that the product is starting to show up in at pharmacies around the country.
As far as “paying for convenience” goes, I think it is important to keep a couple of things in mind when looking at Afrezza through the eyes of an insurance company. While the idea of “no needles” can be thought of as merely being a convenience, the bottom line is that paying for the complications that arise when diabetics are not taking their insulin properly is far more expensive than simply providing them with insulin in a form that increases the odds they will use it correctly… and I have been hard pressed to find anyone who has said they would prefer a needle over a deep breath. Naturally, if folks are more willing to stay on top of their insulin needs, they are less likely to suffer the complications that arise from poor blood sugar control.
So, assuming Afrezza does, in fact, get priced competitively versus existing delivery systems... but also ends up promoting better patient compliance (which, in turn, means fewer complications)… I believe it will end up being a winner in the eyes of insurance companies.
Ken: There is a rather large short position in the stock – 75 million shares out of the roughly 400 million that are outstanding. In my experience, short sellers generally don’t bet big unless they think they’ve got a sure thing. What are the shorts looking at?
Nate: While it looks like 75 million shares are short against 400 million outstanding, roughly 40% of the stock is held by Al Mann, so the short interest is actually even quite a bit larger that it first appears relative to the available float. It is worth noting that a sizable chunk of the short position was already in place before the company released its clinical trial results back in the summer of 2013. I think those who are still short believe that Afrezza will, in fact, be as big a failure as Exubera. For all the reasons discussed above, I think Afrezza is likely to fare much better than Exubera did, and, though I’m not predicting it with certainty, I do believe the odds are pretty good that it could end up becoming the mealtime insulin of choice as time goes by.
Ken: What else does MannKind have in their pipeline?
Nate: Although Afrezza has been the primary focus for both the company and investors alike for the past couple of years while the drug has moved from clinical trials to commercialization, I believe it is worth noting that Afrezza is actually just the first in what should eventually be a long line of drugs that will be brought to market using MannKind’s Technosphere drug-delivery platform, a proprietary system for formulating and delivering drugs to a patient’s bloodstream via the lungs in an extremely fast and convenient manner.
In particular, chronic pain medications and migraine medications have been mentioned by management in the past. In addition, drugs to treat conditions in the lungs would be obvious candidates, as would just about any other situation in which “lots of needle sticks” could be reduced or eliminated if an inhalable version was available instead.
Ken: Do you have any final thoughts you’d like to share?
Nate: One of the most valuable lessons I’ve learned over the years is that it almost always pays to "follow the smart money”… and, in this case, I am more than happy to have my own money invested alongside Al Mann’s $960 million.
Not only do I believe Afrezza has the potential take a serious bite out of the existing mealtime insulin market, but future applications of the Technosphere platform have the potential to be game changers as well.
In addition, with the abnormally large short position that exists in the stock, I believe there is far more upside potential than downside risk in the stock from current price. In fact, I’ll go so far as to say that for someone with a three- to five-year time horizon, I believe we’re looking at losing $2-$4 on the downside, if things don’t work out, but making $25-$40 (or more?) on the upside, if things do go our way. I like that set-up a lot.
Honest-to-goodness short squeezes do not come along all that often on Wall Street, but when they do, they can be spectacular indeed. Putting this observation together with my belief that the price action we have seen in MannKind’s stock over the past six months may represent one of the most extreme examples of an “inefficient market” that I have seen in my 26 years of following the biotech sector, and I think it will only take a piece or two of good news to really set this stock on fire.
I consider MNKD a strong buy under $6 and a buy under $9.
Ken: Thank you Nate.
My Take: Nate’s track record alone is reason enough to pay attention to his best idea. I agree with Nate’s arguments for the next 3 to 5 years, but I see Wall Street’s huge short position as an interesting short-term catalyst. After adjusting for Al Mann’s holdings, Wall Street is short over 31% of the shares available to trade! As Nate points out, a large portion of the short position has been there for a long time. Until now, the opinions of Wall Street analysts have been sufficient to influence investors to avoid the stock. From Wall Street’s perspective when your own opinion creates enough doubt to drive a stock down, shorting the stock is a pretty good bet. Things change, however, when there are real facts (such as sales) for investors to consider. As more facts become available, Wall Street analysts are generally at a disadvantage to informed investors such as Nate who have the expertise and track record to make judgment calls about what the facts mean. If Afrezza does better than Exubera (a very low performance bar) the shorts will start closing out their positions. Given the size of the short position as a percentage of the float, it may literally take only take a few pieces of good news to really set this stock on fire.
Nate Pile is a Marketocracy Master whose portfolio is available to clients of Marketocracy’s Separately Managed Account program. You can view Nate’s top five holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month by visiting our website.
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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
