The letter notes how a similar product, Pfizer's Exubera, was a failure and Afrezza is even more likely to flop given strong negative warnings on its labels, including one about the potential for lung cancer. It also notes that Afrezza will be more expensive than standard insulin injections.
Karp added that it's unlikely for MannKind, which is manufacturing-focused, to sign a lucrative sales partnership for Afrezza.
"Based on our analysis, we believe the stock implies that MannKind can secure a royalty deal where the partner is convinced that the drug is going to do $5 billion in sales—the entire size of the short-acting insulin market," the letter said.
"While Exubera has previewed what will happen with Afrezza, the market has had a way of ignoring this drug's past failures until it actually launches," the letter added. "When and if this happens, we believe that MannKind will ultimately trade down 90% to a value around $500 million or $1/share."
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Matthew Pfeffer, MannKind's chief financial officer, strongly contested Karp's thesis. In particular, he said that comparing Afrezza and Exubera wasn't fair. He noted Afrezza's much smaller physical size, saying it was about as large as a pocket-sized whistle. By comparison, he said that Exubera was the size of a tennis ball can and resembled a bong.
He also said that Afrezza is likely to be priced at around the same level as injectable insulin; Exubera was far more expensive. Pfeffer added that cancer fears were overblown and that the warning label was expected by the company and specific to certain at-risk groups.
"We think it's a much improved, next generation product," Pfeffer said.
Pfeffer was also optimistic on MannKind finding a partner to market Afrezza, a deal he hoped would be in place to launch the product late this year or early next. "We have every reason to think we will have a partner," he said.
"There's a lot of upside potential still here," Pfeffer said. "It wouldn't take much of this market to be very, very large in sales," he added.
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Tourbillon is not the first to bet against MannKind; the company was the 15th most shorted stock as of July 10. Short interest has risen steadily over 2014.