Short-sellers usually have good reason when they jump into a stock with both feet. That said, shorts aren't always correct in their assessment of a company's prospects, potentially setting up a highly profitable phenomenon known as a "short squeeze" for investors who are long the stock in question.
A fierce battle between longs and shorts is under way for MannKind (MNKD 0.28%), and so far longs are winning as shares have risen spectacularly year to date. Even so, the latest short numbers show bears still think they will win the war, with shorts compiling a noteworthy 29% stake in the biopharmaceutical company. With that in mind, here is a look at the bull and bear perspectives on MannKind.
MNKD Year to Date Price Returns data by YCharts
The bull case
MannKind's inhaled insulin product, Afrezza, recently received a positive vote from an FDA advisory committee, setting the stage for the agency to hopefully approve the drug for sales. The drgu's scheduled target action date is July 15, and the FDA will be deciding whether to approve it for type 1 and/or type 2 diabetes.
What has set the stock on fire of late is Afrezza's commercial potential. The global diabetes market is ridiculously big, with the potential to top $100 billion in annual sales by 2018. The market already boasts two megablockbuster insulin products and their respective delivery devices: Eli Lilly's Humalog/KwikPen and Novo Nordisk's NovoLog/FlexPen.
If approved, Afrezza likely won't be used as a complete replacement for these injectable insulins, but rather as a supplement. And therein lies the crux of the debate. Bulls could easily view this as a positive as users of either type of injectable may also want access to an inhaled insulin product. Viewed this way, it's fairly easy to see how Afrezza and its delivery apparatus, dubbed "Dreamboat", could be blockbusters in the making.
The bear case
Short-sellers, by contrast, view Afrezza as a niche product with limited commercial potential. Specifically, they are betting it will appeal to only a handful of diabetics who suffer from phobias related to needles and injections.
I think many bears also expect a partnership that is back-loaded with incentives, instead of up-front milestone payments, which MannKind desperately needs. It's no secret that MannKind doesn't have enough cash to launch Afrezza itself and needs an infusion of cash soon to meet its hefty financial obligations. Unfortunately,a partnership is not likely to be signed prior to an approval, forcing investors to play the waiting game for a few more weeks and see if Afrezza's third time in front of the FDA will be the charm.
Foolish wrap-up
MannKind's long road to FDA approval for Afrezza is hopefully coming to an end. Even so, the situation has only fanned the flames of the ongoing battle between the bears and bulls. Presently, I think there are too many unknowns to make a judgement call either way. The sheer size of the diabetes market lends at least some credence to the forceful arguments made by the bulls, but bears certainly have interesting points that should be considered as well. Investors with a long-term outlook should wait on the sidelines until Afrezza's FDA approval is in hand and a partnership is inked. That way, you will have a better understanding of MannKind's growth prospects.
