Crazy Idea

Crazy Idea

This morning MannKind (NASDAQ: MNKD) issued a press release which stated;

“MannKind Corporation (NASDAQ:MNKD) today announced the restructuring of certain of its outstanding debt obligations, reducing outstanding principal by an aggregate of $14.5 million along with the corresponding interest expense.”

Now it’s not really important to go into the gritty details of this latest debt restructuring but is did get us thinking. Which is a real accomplishment given that it’s NCAA tournament time and like millions of others that means time to fill out my brackets. And we’ll go on the record right now that in sheet one we picked the Kentucky Wildcats to cut down the nets. Honestly, we have no idea why we picked the Wildcats, but we did then again this is just sheet one.

Anyway, this latest move by MannKind got us thinking about all the companies is our wacky world which have had similar experiences. The story goes something like this. A company comes up with a way cool idea then finds some seed money to develop this idea. Here MannKind is the exception as right from the get go they had the backing of their founder the late Al Mann who invested his personal fortune to make MannKind a reality. But in most cases after the seed money comes in, next comes venture money and next public money.

Along the way one of two things happens, this idea turns out to be a good one and the company finds a talented management team. This team manages the company well and creates shareholder value. Dexcom (NASDAQ: DXCM) is the prime example of this. However, on the flip side more often than not this idea while a good one does not find a talented management team and hence shareholder value is destroyed. Tandem (NASDAQ: TNDM) falls into this category.

Yet as we have seen over, and over poor management decisions are not punished. Rather they are given a second, third and sometimes a fourth chance. These teams share some characteristics as they burn through capital recklessly while deflecting blame for their poor decisions. Rather than take ownership of the mistakes they have made and fix them they blame everyone else. They are enabled by the investment bankers who in the quest of large fees find ways for this team to raise even more money.

Now at this point one of two things happens, either the company’s Board of Directors recognizes that it’s a time for a change and replaces the team that created this mess, or they continue to bet on the same losing horse. Insulet (NASDAQ: PODD) is an example of the former as after years of mismanagement the Board canned the old team. Thankfully for Insulet stakeholders the new team has performed well, and the company seems headed in the right direction. Tandem unfortunately is an example of the later as the Board is letting the team that created the mess stick around.

Now is it possible this team will experience an epiphany and find religion. It’s also possible that a 16 seed will beat a number 1 seed in the tourney. Just because it has never happened in the history of the NCAA tournament does not mean it cannot happen.

Think of it this way based on what the experts are saying this could be one of the wackiest NCAA tournaments ever. While there are some excellent teams there is no clear-cut favorite no one team that everyone sees cutting down the nets on April 2nd. Lots of these teams have talent and strong credentials but few have talented combined with proven coaching. This is one reason we picked Kentucky to win it all, Kentucky not only has some great talent it has a coach who’s been there done that.

Now as we have seen in past tournaments superior talent combined with proven coaching does not guarantee anything. Just ask the Iowa State Cyclones who as a number two seed in 2001 were upset by the number 15 seed Hampton Pirates.

While its fun to watch upsets in college basketball it’s no fun watching companies in our wacky world play this game of Russian roulette. Listen we hope we’re wrong about Tandem as the last thing we need is another Animas. However, we see the company at the fork in the road. They now have enough money to make it through this year and likely next year. They have a good product and some nice products in the pipeline. The question is can the team that created the mess be trusted.

Listen this does not have to be a lynching. Why not bring in a new team, give the old team a nice severance package and let this new team have a go at it. Back in 1989 Bill Frieder was the head coach of the Michigan Wolverines basketball team who in the last week of the season agreed to the job at Arizona State. Bo Schembechler, the famous Michigan football coach and then AD fired Frieder and replaced him with Steve Fisher who lead the Wolverines to the National Championship.

Let’s be very clear here there is no guarantee even with a new team Tandem can compete and win. As we have noted on many occasions the insulin pump market is ultra-competitive and getting more so. However just based on past performance it would seem to make sense that if a change is to be made now is the time to do it. This won’t guarantee that Tandem eventually cuts down the nets but by our way of thinking it gives them a much better chance.