by James Brumley | April 2, 2014 4:37 pm
Congratulations to anyone who owned a stake in MannKind Corporation (MNKD) before Wednesday’s opening bell rang. MNKD stock was catapulted following the Tuesday evening announcement that its inhalable insulin — Afrezza — had won a key advisory panel’s recommendation to the Food & Drug Administration for approval.
While the FDA isn’t required to abide by the advisory panel’s recommendation, the agency takes the panel’s advice about three-quarters of the time. All in all, it’s a huge step forward for MNKD stock owners.
On the other hand…
It’s admittedly going to be a feather-ruffling premise, but for those investors lucky enough to own MNKD stock now, you might want to consider making an exit sometime between now and April 15. That’s the FDA’s scheduled decision day for Afrezza.
Why in the world would anyone who’s lucky enough to own MannKind shares for less than $6.20 want to dump that position in front of what’s almost sure to be a victory for the company in a couple of weeks?
In a word, history.
Biopharma speculation can be a quirky game. Unlike any other sector, biotech fortunes are won and lost in an instant, as the drug business is black and white, not to mention immediate. Either a drug works, or it doesn’t. Either the FDA approves a drug, or it doesn’t. One press release can make or break a stock overnight.
That’s not the only quirk with biopharma stocks, however.
The other tricky part of the biotech speculation game is the fact that it’s rarely actually about a drug’s or a company’s prospects. It’s a chess match, ultimately rooted in guessing how the rest of the market is going to feel about a drug’s or a company’s prospects at a particular date in the future.
In other words, the “trade” here isn’t a bet that MannKind will hear good news on April 15.
The bet here is that the majority of other interested traders will plow into MNKD stock at the moment any good news is unveiled on the 15th, forcing MannKind shares even higher than they are now, thus giving today’s owners a perfect chance to lock in a big profit when the time comes.
Well, here’s the bad news: Most everyone else who has been watching MannKind for a while and has been waiting for the right trading opportunity to present itself is employing the same strategy.
It’s a problem because if that swath of would-be buyers is actually already in their positions (and Wednesday’s 80% rally from MNKD certainly implies that’s what’s happened), then there aren’t likely to be many buyers left to deliver that big pop on April 15.
Oh, there might be a respectable jolt around that time, as there are always a handful of investors who only step into a trade once the perception of any real risk has been whittled down to nothing. By and large, though, the bulk of the speculators willing to take a shot on MannKind Corporation will do so between now and its proverbial D-Day, and many of those might already be in position.
Whatever the case, I suspect the best day — highest valuation — MNKD stock is going to see for weeks to come is going to be on or before April 15th. Getting in or staying in following that day could be awfully painful.
How can I suggest such a ridiculous idea? Like I said above, history.
I recall making the exact same argument about Arena Pharmaceuticals (ARNA) right as its lorcaserin drug (now Belviq) was up for the FDA’s final approval. The critics were merciless, and the fans were hyper-confident in ARNA too; check out the comments at the bottom of this article.
Well, sure enough, ARNA shares peaked at $13.50 that day — June 27, 2012 — jumping a decent 52% from the previous day’s close.
Problem: Arena Pharmaceuticals started to fall that very day, closing at $11.39, then proceeding to a low of $4.05 by late 2013. It’s never even been close to that peak of $13.50 since then. ARNA has only rivaled the $11 mark once since … briefly in January 2013.
So much for all those expectations of Arena becoming a $20 stock.
I made the same basic prediction regarding Vivus Pharmaceuticals (VVUS) in July of the same year, suggesting there was no bullishness left to tap into for the Qnexa (now Qsymia) Prescription Drug User Fee Act date with the FDA. Many fans and owners of VVUS stock “colorfully” disagreed. Yet, it happened again.
Qnexa was approved on July 17 of 2012, and VVUS shares gapped higher the next day (opening up 14%), and at one point were up 18% the day after the approval, peaking at $31.21.
It has been nothing but downhill for VVUS stock ever since. In fact, the stock began to tank the day after the post-approval surge.
These weren’t isolated incidences, either. I pointed out five other post-approval disappointments on June 20 of that year. I could find 50 more such outcomes if I really wanted to dig.
The point has been made, though … the lion’s share of any drug-approval-related gains tend to come before the actual approval.
It’s unlikely MannKind is going to be any different.
With all of that being said, one thing needs to be made clear — this isn’t a judgment call on the drug, nor is it a judgment call on the company. This is simply a judgment call on the way most traders tend to think, and a judgment call on the disconnect between the stock’s price and any semblance of “value.” Eventually, the dust will settle and the price of MNKD will reflect the underlying value of Afrezza.
In the meantime, though, it’s nothing more than a psychological chess match, and history says the bulk of any gains will be made before April 15.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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