MannKind's Huge Short Interest Sets Up Contrarian's Dream Buy

Even in the always wild-and-woolly medtech sector, there are few companies as controversial as MannKind. MNKD's inhalable insulin powder delivery system, Afrezza, is a potentially game-changing treatment for diabetics. MannKind's executive chairman, Al Mann, has amassed a billion dollar fortune over the past 45 years by revolutionizing pacemakers, cochlear implants, glucose monitoring and other devices

Mr. Mann has not had it all his way. The market has been betting against MNKD ever since the initial exuberance of FDA approval last June had worn off. I used the term exuberance intentionally, because MNKD's shares will always bear the burden of Pfizer's epic fail with its own inhalable insulin drug, Exubera. Pfizer pulled Exubera in 2007 after 15 months in the marketplace, and took a $2.8 billion dollar charge to cover that disaster.

Nonetheless, it is possible to build a better mousetrap, and, believe it or not, science has advanced in the past eight years.  Mr. Mann's genius has always been in solving hardware problems, and I believe he has done so again with Afrezza.

Early take-up of Afrezza in the U.S. has clearly lagged expectations, but the key word there is early.  MannKind's marketing partner, Sanofi , only launched Afrezza here on February 3, 2015 (so far the US is the only market in which Afrezza is approved) and there have been roll-out issues.

Chief among them is the fact that before a patient is prescribed Afrezza, he or she must be given a spirometry test, and many endocrinologists lack that basic piece of equipment. Afrezza can be harmful to patients with chronic respiratory issues like COPD, and even though, any prescribing doctor would know that, the lung function test must be performed per FDA rules. Spirometers are not expensive, however, and Mr. Mann has estimated that the cost of a spirometer as equivalent to the revenue generated for an endocrinologist from writing a single prescription. Also, Sanofi has stepped up to the plate with a co-pay assistance program for Afrezza, and I believe that will great help consumer acceptance.

Thus, I believe the inflection point for MannKind has been hit for both technical and fundamental reasons, and I'm buying the shares.

When there is any good news, short-covering will power MNKD shares, and in fact that is exactly what we're seeing in the last two days' trading action. Jefferies issued a positive note on MNKD on Friday morning (their research showed high awareness of Afrezza among endocrinologists) and the shares have risen 21% in the last two trading days.

Fundamentally, the key to the story is that MannKind is adding value through the delivery system, not the insulin itself (I believe that MNKD eventually will source all its insulin from Sanofi). It is the inhalable-delivery architecture, that the company calls Technosphere, that is the true value here.

That's why MNKD shares have upside, and that's how a company that generated $7mm in revenues and has a $1.8 billion market cap can be considered cheap.

I've written about Mr. Mann's other public vehicle, Second Sight Medical Products (he's the non-executive Chairman of EYES) and MannKind shares the same virtues. Much like Second Sight's Argus II system is, once implanted in a patient's retina, a base for future value-added improvements in software, the Technosphere technology behind Afrezza is a base for dry delivery of many different kinds of medication.

MannKind is working on delivering four different types of drugs via Technosphere, with one already in pre-clinical trials: pain management. That's basically the Holy Grail for the pharma industry, as existing pain alleviation products have severe side effects and some are quite addictive. Delivering a safer product in a non-invasive way is a huge opportunity for MannKind. MNKD management has also mentioned pulmonary treatment as another application for Technosphere, a logical extension of the Afrezza inhaler.

I think the stock market has been overly harsh on the very, very early sales of a revolutionary delivery system in Afrezza. The fact that MannKind is partnered with the world's leading company in diabetes treatments in Sanofi is a huge benefit, and also has huge financial implications as MNKD management has noted that future potential milestone payments from Sanofi for Afrezza could total $750 million (MNKD has received $50 million to date.)

Also, many biotech/medtech companies are shorted due to financial concerns, but MNKD's balance sheet is quite strong. The company had $120 million of net cash as of 3/31 and Sanofi picks up 65% of the operating losses of the joint venture. As MannKind triples production capacity for Afrezza at its Danbury, CT manufacturing facility (that expansion is scheduled to be completed by the end of June) the ability to generate meaningful revenue is upon them.

Now, it's just up to the doctors to prescribe it, and Sanofi's formidable marketing machine will take care of that, in my opinion. Also

's marketing efforts have received a helpful assist from positive reviews on  social media. That marketing channel was still in its nascent phase when Pfizer tried to push its excessively large Exubera (it was 10 inches tall while Afrezza fits easily into the palm of one's hand) on the US consumer 8 years ago.

So, MannKind is a perfect short-squeeze candidate, and I believe that's what we are seeing in the market today. Given the stock's huge pull-back in the last few months, I do believe this squeeze will be long-lived.  I'm buying more MNKD for my risk-tolerant clients this afternoon.