Buy, Sell, or Hold: Opko Health

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Opko Health (NYSE: OPK  ) today, and see why you might want to buy, sell, or hold it.

Founded in 2006 and based in Miami, Opko Health is a pharmaceutical and diagnostics specialist, with a market capitalization of about $2.1 billion. Its stock has soared more than 40% over the past year, and has averaged annual growth of 28% over the past decade.

Buy
Opko's field of business is a key reason to be interested in it – with our planet's population growing and aging, the demand for health-care products and services is likely to keep growing. The company is developing diagnostic tests for conditions such as Alzheimer's disease, lung cancer, pancreatic cancer, and prostate cancer, among others.

Better still, while Opko has plenty of treatments in development, unlike many other biotech concerns, it also has products actually selling on the market. That's a plus. For example, it's selling pharmaceutical, nutraceutical, and veterinary products throughout Europe; pharmaceutical and nutraceutical products to private, hospital, and institutional markets in Chile; and ophthalmic and other pharmaceutical products to private and public customers in Mexico. Opko also has equity investments in a host of pharmaceutical companies.

Opko has been adding to its mix, too, such as via a purchase earlier this year of several drugs in Phase-3 trials (meaning they're relatively close to an approval decision from the FDA). These drugs aim to treat kidney disease, vitamin D insufficiency, and more. Opko also recently bought a Brazilian company, which can boost its business in Brazil's massive market, and also bought a chain of phlebotomy labs. Opko has been an aggressive buyer of other companies.

If you like rapid growth, Opko has that for you – sort of. Its annual revenue has surged from $9 million in 2008, to $37 million recently, with a hiccup along the way. Operating income has been negative, though, as has earnings per share (EPS). Losses have generally been shrinking , though – again, with a hiccup.

Partnerships are another positive for Opko, as they can bring financial support and reduce risk (though partners also take some of a success's upside, as well). Opko has been working with Bristol-Myers Squibb (NYSE: BMY  ) on is diagnostics for Alzheimer's, and is expanding that relationship further. LabCorp (NYSE: LH  ) has signed on to also develop the Alzheimer's diagnostic test in North America and the UAE.

Insider buying of shares is a bullish sign, and CEO Phillip Frost recently bought more than $450,000 of company stock. He bought nearly $3 million of stock just in December. There's more to this story, as Frost has run and sold companies before, and is currently chairman of the board at Teva Pharmaceuticals (NYSE: TEVA  ) . That might be a negative if you think his attentions are spread too thin, but it might also suggest that the company will end up acquired, probably at a premium price.

Sell
A glance at Opko's financial statements offers some concerns. Its bottom line is in the red, for example, as is its free cash flow . Its cash burn is around $20 million to $30 million per year, meaning that at its recent cash level of about $72 million, it can stay afloat for quite a while. In addition, it sports no long-term debt.

The stock's valuation is also not as fetching as one might prefer. Its price-to-earnings (P/E) ratio doesn't exist, due to negative earnings, and its price-to-sales ratio tops 50, well above its five-year average of 35, and far above the industry average of 2. Remember that this not-yet-profitable company is sporting a market cap of more than $2 billion.

You might think about selling Opko because many people are bearish on it. Its short interest has risen in recent months, and its days to cover is close to 10, with about 20%  of its float shorted. Of course, the pessimists may be wrong and, if so, they'll eventually be buying back shares on the market to cover and exit their short positions, thereby driving up the share price.

Share dilution is something to watch with Opko, too. Its share count has risen from about 129 million in 2007, to 296 million recently. That's worrisome, as more shares means a shrinking stake in the company for existing shares -- but it's not necessarily a deal-breaker, if the funds generated by the new issuances are used to effectively build value.

Hold (off)
Given the reasons to buy or sell Opko Health, it's not unreasonable to decide to just hold off on it. For example, you might want to wait for some Phase-3 trial results to prove positive, or for FDA approvals. Opko's rolapitant, for example, is a Phase-3 drug targeting chemotherapy-induced nausea and vomiting, and it might be a $1 billion drug for Opko, if all goes well. You might also want to wait for the company to become profitable and free-cash-flow positive.

You might also check out some other interesting biotech companies, to see if they seem like better bargains than Opko Health. Perhaps take a look at Exelixis (NASDAQ: EXEL  ) , which received FDA approval for its thyroid cancer drug, cabozantinib, and has just launched it. That drug may also get approved to treat prostate cancer, and Exelixis is looking at treating as many as nine different cancers with it.

The verdict
I'm holding off on Opko Health for now. Everyone's investment calculations are different, though. Do your own digging, and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

Another biotech idea
Every in-the-know biotech investor has an eye on Celgene. Shares have skyrocketed this year as the company outlined a plan to almost triple its profits in only a few years. But should you buy the story Celgene is selling? Make sure you understand the key opportunities and risks facing this company by picking up The Motley Fool's brand new premium report on Celgene. To claim your copy today -- along with a free year of updates -- simply click here now.


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