This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Quick! Everybody out of the pool!
Suddenly, it seems that everybody hates MannKind (Nasdaq: MNKD). As you've probably heard by now, the maker of the Afrezza inhaled-insulin product got a bit of bad news from the FDA yesterday. Declining to approve the therapy, regulators instead sent MannKind back to the drawing board and demanded that it run two new clinical trials, including a comparison test between the company's revamped inhaler and the inhaler it previously proposed using.

Result: a 45% (and counting) plunge in the share price, and a spate of analyst downgrades. R.W. Baird is now advising clients to sell the stock. Likewise with Bank of America. JMP Securities, Wells Fargo, and Rodman & Renshaw all downgraded the stock to "hold."

Rodman was particularly scathing … toward the FDA, in arguing that the agency had "moved the goalposts" by demanding that MannKind conduct new clinical trials, a request not made in the previous rejection notice. While others say "sell," Rodman insists that MannKind's stock is still worth holding.

Let's go to the tape
Rodman has been right about MannKind before. Even after yesterday's selloff, the analyst has managed to rack up a 21-percentage-point advantage over the S&P 500's performance with its early call (in October 2008) to buy MannKind. What's more, Rodman has enjoyed exceptional success on other moonshot biotech plays:

Problem is, these picks are almost literally one-in-a-million success stories. Rodman's proved itself entirely capable of messing up a good thing by counterbalancing each winner with more than a few losers. Belying the success stories you see above, fully 65% of the analyst's biotech picks underperform the market. As a result, across the sector, Rodman has racked up a combined 1,202-point margin of underperformance on its biotech recs. And call me a skeptic, but I'm not convinced that MannKind won't turn out to be a loser as well.

Why do I say this? Well, consider Rodman's own words: "We view the agency's decision to bring up a new issue in this second complete response letter, that had not been brought up in the first complete response letter, as further evidence of the FDA's current conservative and, in many cases, unpredictable stance." Worse, this unpredictability won't be soon resolved; in issuing its downgrade, Rodman warned that it could be 18 more months before Afrezza reaches the market -- assuming it ever reaches the market.

As we well know, Mr. Market absolutely abhors uncertainty. I'm not at all certain he's going to wait around 18 months for an uncertain prospect of success at MannKind. Remember, during those 18 months, rival diabetes treaters Eli Lilly (NYSE: LLY), GlaxoSmithKline (NYSE: GSK), and Novo Nordisk (NYSE: NVO) won't be sitting still. They'll be moving heaven and earth to improve existing products, and rush new products to market, while MannKind is stymied.

Meanwhile, with every passing month of no new product to market, and no revenues to profit from, MannKind's financial position deteriorates. In echoing Rodman's downgrade, Wells Fargo noted that even though it believes MannKind probably "has the resources necessary to fund operations through 2011 … additional fundraising will be necessary" eventually. Wells posits "a 2011 loss per share of $1.34" versus previous expectations of $0.46 per share in profits. With those profits now delayed, the chance that MannKind will be forced to take on more debt, or embark on a dilutive share issuance, increases.

Foolish takeaway
Make no mistake -- I'm not saying MannKind is a bad company, or even that Afrezza is a bad product. To the contrary, from what I've heard, the therapy works, and it should eventually be approved.

Then again, as Rodman said, the FDA is unpredictable. In the end, you pays your money, and you takes your chances on this one. That's what you get when you invest in a moonshot.

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