In the midst of a winless 1976 campaign, Tampa Bay Buccaneers coach John McKay was asked what he thought of his team's execution. His reply: "I'm in favor of it."
I couldn't help but think of that pithy quote when I saw the news that MannKind (MNKD) CEO Hakan Edstrom had resigned his post this morning. He will be replaced by MannKind founder, executive chairman and resident billionaire visionary Alfred Mann. He celebrated his 90th birthday a few weeks ago, and this clearly was not his choice of how to spend his twilight years. Given his age, Mann is not a permanent successor as CEO, and the company's press release noted that a search for a new CEO has begun.
Quite frankly, the bar for the person succeeding Edstrom is quite low, as MannKind's execution has been horrible. I've probably listened to 10,000 conference calls in my 23 years of analyzing equities, and if MannKind's third-quarter conference call on Nov. 9 was not the worst among that bunch, it was pretty darn close.
MannKind recognized $4.1 million in deferred product sales to its marketing partner, Sanofi, in the third quarter (Afrezza sales do not yet meet the criteria for revenue recognition), down from the $5.9 million recognized in the second quarter. While there must have been some inventory channel-filling earlier in the year (MNKD management did not break that out), to see such a sharp sequential decline in product sales for a product that was only launched in February was truly disheartening.
On the conference call, instead of going through unit shipment data or offering any real market insight, management blamed Afrezza's lack of quick uptake on insurance companies' slowness to add Afrezza to their formularies. This after blaming the slow uptake in the previous quarter on endocrinologists' lack of proper equipment (spirometers) to perform lung function tests on potential Afrezza patients.
The excuses were legion and every question about marketing was essentially met with "that's Sanofi's job." Sanofi is responsible for 65% of Afrezza's profits/losses while MannKind bears the rest.
But one questioner did bring up the elephant in the room: Sanofi has the right to exit the Afrezza partnership as early as January. Management thinks that's unlikely, and given Sanofi's focus on diabetes treatment -- their No. 1 revenue generator -- that prospect does seem remote. But I'd like to hear a little more confidence from management than "if Sanofi exited the agreement, we would not have to repay them (milestone and development payments) for at least 10 years."
So, it was a bad conference call; really bad. And that, my friends, is what can happen when you buy a stock.
The massive short interest -- 120 million or 20 trading days' worth of volume as of Oct. 30 -- positions MNKD for a huge short-squeeze bounce based on any good news, and we've already seen that several times in 2015. The company's recent decision to raise capital via a listing on the Tel Aviv stock exchange was clever, but financial engineering alone is not going to kill the MNKD shorts.
I don't believe Sanofi is going to dump Afrezza and I don't believe Afrezza is going to go down in the annals of history as a colossal medical device failure like Pfizer's Exubera of 2007, to which it is often compared. Exubera was large and unwieldy -- it earned the infamous moniker of "the insulin bong" -- while Afrezza's delivery system fits easily in the palm of one's hand.
That delivery system also opens up inhalable medications to a wide variety of other medical conditions. This is the focus of MannKind's Technosphere development program. The first non-insulin application under Technosphere will likely be pulmonary hypertension, and while Edstrom mentioned that on the most recent conference call, he also -- true to from -- offered zero in the way of specifics as to timing of the rollout.
The stock market wants and needs more than that, and Mann must certainly want more for his legacy -- after revolutionizing pacemakers, introducing the cochlear implant and creating new insulin measurement systems at prior Mann companies -- than to have Afrezza land as an epic fail.
A new perspective from a new CEO will really benefit MannKind, and unlike an army of shorts, I'm not going to bet against Al Mann. MannKind shares recovered nicely after an initial dip after the CEO resignation news broke Friday morning, and I believe there is at least 50% upside left from these levels.
