Source: MannKind Corporation.
In the past month, market speculators have increased their short positions in Al Mann's MannKind Corp. (MNKD 1.70%), a biotechnology company that has teamed up with Sanofi (SNY -0.21%) to launch a new inhaled insulin named Afrezza this year. Those bearish bets reflect expectations that Afrezza's sales will be tepid; however, short-sellers may end up discovering that they've taken on too much risk.
A big and changing market
Insulin is used to regulate diabetes, and the number of cases of diabetes globally is expected to surge. According to the American Diabetes Association, there are more than 29 million Americans diagnosed with diabetes, and nearly 2 million new cases are being diagnosed each year. The diabetes epidemic isn't limited to the U.S., either. According to the International Diabetes Federation, there are 387 million people with diabetes worldwide, and more than 205 million more people will be diagnosed with the disease by 2035.
For decades, the standard of treatment for diabetes included the use of insulin injections in patients whose blood-glucose levels aren't adequately controlled by oral medications like metformin, which reduce glucose production and increase how efficiently the body uses insulin. During the past decade, insulin injections have become far less onerous thanks to pen-like devices developed by leading insulin drugmakers Novo Nordisk and Eli Lilly, but insulin injections continue to cause anxiety for many patients. As a result, demand for Afrezza could surprise to the upside.
Linking up with a bigger player
MannKind's circuitous route to approval for Afrezza, including an FDA rejection back in 2010, has left many investors thinking that the drug poses too many questions for doctors and patients to embrace it. However, any risk tied to Afrezza, including the potential risk to a patient's lungs, doesn't seem to concern Sanofi. Last summer, Sanofi agreed to to pay MannKind $150 million up front, and up to another $775 million in potential milestones, as well as give MannKind 35% of the profit, to license Afrezza.
Sanofi's willingness to ink that deal suggests that it's pretty confident that it can use its existing diabetes sales force to successfully make the case for Afrezza. Sanofi already markets the long-acting insulin Lantus, and that drug is one of the nation's best-selling diabetes medications, with sales of more than $7 billion last year.
Sanofi's relationship with patients and doctors, and the fact that Afrezza could serve as a fact-acting complement to Lantus, could lead to slow-but-sure prescription volume growth. If so, those betting that MannKind will drown under the weight of its debt may end up disappointed.
Questions remain
That's not to say that investors should expect that Afrezza is going to be a blockbuster for Sanofi or MannKind. It's just to say that we honestly don't know yet how demand will play out.
Regardless, MannKind still has plenty of question marks that give investors reason to worry, including its balance sheet. The company's costly research program for Afrezza saddled it with nearly $150 million in debt, and although Sanofi's cash infusion keep creditors at bay, a current ratio of 0.66 suggests that MannKind isn't in the clear -- yet.
If Sanofi's marketing machine fails in its mission to kick-start Afrezza volume, its uncertain how long MannKind could last. But that is far from a new revelation. Naysayers have been worrying about the company's balance sheet for a long time, and short-sellers have notched big profits as a result.
Those bearish bets, however, might be getting a bit long in the tooth. As of the last readout, sellers are sitting on more than 80 million shares short, and that represents roughly 35% of MannKind's share float. With a short position as big as that, any good news could cause shares to climb much faster than short-sellers anticipate, and that may mean that short-sellers have taken on more risk than they've bargained for.
