Is MannKind an Underdog -- or Just a Dog?

Short-sellers and hedge funds may be shadowy, but sometimes they are the smartest guys in the room. They've done their homework, and they're willing to bet their capital against the crowd -- an investing strategy that can be as lucrative as it is contrarian.

On Motley Fool CAPS, we've also got leading analysts who find the chinks in a company's armor and correctly call its fall. Our "underdogs" have earned 100 or more CAPS points by correctly predicting that one or more stocks would underperform the market.

Today, I'm looking at biotech MannKind (MNKD 2.19%), whose shares fell sharply last week after announcing a warrants and stock offering at $2 a share.

It's been an up-and-down ride, so if there are investors who've scored big by correctly predicting which stocks will fail, it may be worth our while to check out those they think will succeed. Yet it's hard to swim against the tide of negativity, and nearly a quarter of the All-Star CAPS members weighing in on the drug developer think it will lose to the Street.

MannKind snapshot

Source: FinViz.com. N/A = not applicable; MannKind doesn't pay a dividend. TTM = trailing 12 months.

Of course, not every short sale goes as planned, which makes shorting a risky proposition. Stock prices can be irrational longer than you have money to stay in the game. And you don't want to end up with fleas by lying down with dogs until you do your homework.

All or nothing
As it's always been with MannKind, it's all riding on Afrezza, the biotech's inhaled insulin therapy that's in phase 3 trials again to treat type 1 and 2 diabetes. It hopes to complete its studies by the second quarter of next year, with a new drug application submission by the third quarter. If all goes according to plan, MannKind could be successfully selling Afrezza by late next year.

As much as it's an all-in bet on the diabetes treatment, it's also a case of it getting to market before it runs out of cash. A partner would go a long way toward shoring up those financial deficiencies, but they say the burned hand learns best, and after Pfizer (PFE -0.06%) lost $2.8 billion on its own inhaled insulin treatment Exubera a few years ago, and Eli Lilly (LLY 1.94%) and Novo Nordisk (NVO 2.45%) couldn't achieve success, it seems big pharma partners are a bit gun shy about stepping into the breach before the biotech can prove itself. Hence the need for the offering that sent MannKind's stock lower.

The biotech has substantial debt right now, and proceeds from the offering will go toward canceling that debt. It needs to reduce its expenses since its cash burn will quicken as the year gets later and as it goes through the trials. MannKind anticipates it will burn cash at a rate of $10 million to $12 million a month. 

Better than nothing
I'm actually hopeful the drug developer is successful in its trials. Afrezza looks more promising than Exubera, which was developed with Nektar Pharmaceuticals (NKTR 3.68%), but MannKind got a complete response letter from the Food and Drug Administration to conduct these new trials using the new inhaler it developed. The prior trials were run with the older style inhaler, and the FDA wants to ensure it will achieve the same positive results with the new one. The new trials will pit the new design against the older one and a control group.

That MannKind was able to complete enrollment in both studies for type 1 and 2 diabetes achieves a real milestone and is why the company's hopeful it'll speed through to the end game as quickly as forecasted. Enrollments can be a time-consuming process.

I suspect not only will MannKind be successful and get the FDA's nod of approval, but that a major partner will step forward  quickly enough if for no other reason than because its Dreamboat nebulizer is a superior drug delivery method than either current injection systems and particularly Exubera's clunkier device. That should be all the difference between success and failure, so I've rated MannKind to outperform the broad market indexes on CAPS, but tell me in the comments section below if you think it will get the green light for growth before it runs out of money.