Editor's Note: This article was updated to remove mention of a stock -- Adaptimmune -- whose short interest was significantly overstated in the article. The Fool regrets the error.

Biotech stocks are some of short-sellers' favorite targets because one misstep on either the clinical or regulatory fronts can lead to a dramatic downturn in share price. The flip side, however, is that positive catalysts can force shorts to run for the hills in an infamous "short squeeze."

Source: Wikimedia.

With this in mind, let's consider if MannKind Corp. (NASDAQ: MNKD) might be a good contrarian buy in light of its enormous short interest. 

MannKind has too much debt and too little income
MannKind has long been one of the most heavily shorted biotech stocks, often sporting a 50%-plus short interest. The bear thesis is basically that MannKind's only product, an inhaled insulin called Afrezza, will be a commercial flop, making it unable to justify the company's $2.4 billion market cap. Unfortunately for longs, the limited sales data for Afrezza so far supports this notion, with the drug generating just a little over $1 million in revenue during its first two months on the market. 

Source: MannKind.

Looking ahead, MannKind hopes that its marketing partner for Afrezza, Sanofi (NYSE: SNY), can work some magic via a direct-to-consumer ad campaign expected to launch later this year. While it remains to be seen how much impact additional advertising will have in boosting sales, MannKind is facing a serious cash crunch in the not-so-distant future. 

At the end of the first quarter, the biotech had about $120 million in cash and cash equivalents but was burning over $10 million a month due to Afrezza's launch and ongoing clinical studies. That's not a great financial picture, and it gets worse when you factor in some of the company's senior notes that are due in August. In short, MannKind must either rework these notes or raise a substantial amount of capital through a secondary offering to meet its debt obligations. Neither one of those scenarios is exactly investor-friendly, showing, in part, why short-sellers are so bearish on this stock. 

Is MannKind a compelling buy right now?
As for MannKind, I'm content sitting this one out because there are simply too many headwinds working against Afrezza's sales at the moment. It might turn out to be a winner down the road, but I'd prefer to see the company shore up its balance sheet before initiating a position.

All told, MannKind is probably best viewed as a watchlist candidate, given its unfavorable risk-to-reward ratio. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.