Why we remain bullish on Mannkind

M2 Capital HoldingsAuthor: Patrick McFadden, M2 Global

Covestor model: M2 Global

Anyone watching the markets will clearly notice the lack of volume and volatility during the first week of 2012 versus the near record volatility, a virtual volatility bridge to nowhere, experienced during 2011.  What has happened?  I would call it the Silent QE3, but it really is not silent.  The European policy makers have created so much noise and bluster that market participants are plain dizzy and worn out.  In this environment, the Fed and ECB have been able to execute nearly a 100 billion USD for euros swap which can be seen at federalreserve.gov in their latest H.4.1 reports.  This position first appeared on the reports at the very end of December.  In tandem, the ECB has “lent” out to hundreds of European banks nearly $600 billion via 3 year swaps.  This program is outlined by The Economist magazine.

What is interesting is that many banks, especially French, German and Italian firms have packaged up tens of billions worth of “assets” into new unlisted bonds that the ECB allowed into the swap transactions.  FT.com outlines this here.

These assets are likely “distressed” assets that the banks could not sell, securitize or finance adequately in the open markets.  Given the trouble many European banks have had financing and creating liquidity on U.S. dollar based assets, it would appear that there is a high possibility that the Fed agreed to the Euro/Dollar swaps as a way to help these banks finance such dollar based assets.  Such participation would clearly be welcomed and appreciated by the Europeans and the spectre of dollar based assets being sold in the open market at chop house prices averted.  Not exactly a silent QE3, but with so many moving parts…who would blame the mainstream media from tackling the issue?

The results are clear.  Italy and Spain have been able to access the bond markets at levels well below open market rates for their respective government paper. But Europe is not out of the woods.  Hundreds of billions in sovereign and private debts will mature over the first quarter of 2012 and Greece needs another 14 plus billion prior to April.  We believe that the markets will remain range bound until it is clear how much support the ECB and Fed will provide and until the situation with Iran becomes less threatening.  For this reason, we think there will be another buying opportunity in the first quarter, but the Fed is likely to err toward QE4 before letting the economy roll over in a Presidential election year.

With this backdrop, we have continued to stay cautious and prefer to stay fully invested in biotech stocks such as Mannkind (MNKD) where we believe the story, believe the companies will have adequate financing over the medium term, and have binary events out in the future that will not necessarily correlate with the general market response to macroeconomic stimulus.

Regarding Mannkind,  the following excerpt from an online discussion board was posted recently and does a good job explaining the logistic, human and financial difficulties of Type I Diabetes.  Given that some experts believe nearly 50% (!) of all American adults will have diabetes or early onset of the disease within a decade or two, we wanted to share this insight:

I have posted on this board before to mention my son has Type I diabetes. If anyone wants some insight as to what it is like to deal with multiple-daily insulin injections, I can assure you it is no picnic.

We have used Levamir in the past in conjunction with Humalog shots, but now use humalog via insulin pump. He has to wear the pump 24 hours a day, and still checks his glucose levels 5-7 times a day. He changes port sites every 3 days (where the insulin is injected), but sometimes changes more often because over time the port sites get tough and the insulin won’t absorb.

The pump is nice, and convenient, but very expensive (over $6,000). it is about the size of a deck of cards. The “support” equipment to go with it (cannulas, insulin reservoirs, etc.) cost a couple hundred / month. The test strips (which are necessary regardless of the type of insulin used) cost about $50 / week.

Managing blood sugars is complex, and even though he does a great job, it is intensely variable depending on activity levels and other factors.

there is a new pump available (but still somewhat in development)that provides constant monitoring of blood sugar levels, but it is even more expensive and in addition to wearing the pump, requires the user to wear an additional monitor, about the size of a half-dollar and half-inch thick. This also has to be relocated every few days.

IMO as a close party to an insulin user, if there was an effective, discrete, convenient and economical alternative to the pump/injections, we would use it. As a life-long asthmatic, I can also state from experience that carrying a small inhaler is no big deal.

As I understand it, Exhubera (and other attempts at inhaled insulin) was a failure because of the inhaler device, not the drug itself.

Whether Mannkind can pull this off is TBD, but I think they are on the right track.

Mr. Mann, the founder of the company, gave a presentation at the JPMorgan Global Healthcare Conference conference in California today (1/12/2012) and the stock price has moved up, likely because he reiterated his support for the company.  I suggest anyone interested listen to the presentation and read the slides located here.

An interesting note; Mr. Mann indicated that the primary cause for the FDA requiring additional studies was due to the pulmonary group within the FDA requesting additional studies with Mannkind’s newly redesigned inhaler (which had not gone through previous trials).  According to Mr. Mann, the FDA has not indicated any issue with the drug itself, the inhaleable insulin, called Afrezza.  The reason we mention this is because we find this situation somewhat ironic, not to mention a great opportunity in our view.  Prior to our investments, we consulted numerous pulmonologists, including pediatric pulmonologists, to get their views on the safety of inhalation of insulin into the lungs.  To our surprise, none showed much concern and all indicated that the lungs were very resilient.  The ability of lungs to recover from smoking, considered much more dangerous, was given as an example.  Doctors did think that very young children and persons with respiratory conditions would need to be studied carefully with Afrezza, but noted that people have now been successfully using inhalers for decades. The doctors interviewed seemed to be more concerned with the unpredictability of the FDA.  We’re investing accordingly.

Good luck for 2012.