Are Investors Wrong About Opko Health?

A rapidly increasing short interest can be a worrisome sign that a stock is about to head south. At the same time, it's important to understand the details of a so-called "short thesis" prior to making an investing decision, as they aren't always spot on in their assessment.

Opko Health (NYSE: OPK  ) is a multinational pharma and diagnostics company that has seen a steadily rising interest from short-sellers over the past few months, evinced by the chart below. What's intriguing is that a handful of insiders have also made large purchases on the open market in tandem with this increasing short interest.

Insiders and short sellers obviously see things quite differently when it comes to Opko's future prospects. So with these diametrically opposing views in mind, let's take a look at two reasons why shorts are pushing into this mid-cap health-care company. 

OPK Chart

OPK data by YCharts

Reason No. 1
Diversification is often times a good thing, but spreading yourself too thin can lead to problems as well. When I look at the scope of Opko's business and its vast geographic diversity, it's not hard to imagine how the company could run into logistical problems.

Specifically, Opko's business spans point-of-care tests, molecular diagnostics, pharmaceuticals, and vaccines. For a company with a market cap of less than $4 billion, that's a lot to take on and perhaps even more difficult to pull off successfully. By contrast, most companies of similar size tend to focus on one or two core areas of expertise, helping them to carve out a profitable niche in a highly competitive industry.

Additionally, Opko's geographic diversity probably doesn't help matters, with offices and facilities spanning several countries. In short, it takes significant resources to coordinate such a truly multinational operation and do it efficiently.

Looking ahead, Opko is hoping its newly established Irish holding company and global supply chain will help coordinate all of these diverse businesses .    

Reason No. 2
Opko's fundamentals are simply not in good shape. For the first quarter of the year, the company reported losing $45.1 million, a noteworthy 23% increase in loss year over year. And Opko only had $156.4 in cash and cash equivalents at the end of the quarter.

The bigger issue, however, is that Opko shares are presently trading somewhere in the neighborhood of 40 times annual revenue. Although sales from the recently launched 4Kscore test for prostate cancer should lower this figure, it's hard to see how this single product will generate enough top-line growth to put a serious dent in this valuation gap in the near term.  

Foolish wrap-up
Opko shareholders are presently awaiting the top-line results for Rayaldee as a treatment for vitamin D insufficiency associated with chronic kidney disease, which are expected to be released soon. Because the drug would likely compete against Amgen and NPS Pharmaceuticals' blockbuster drug Sensipar, there is growing anticipation that a positive read out could push shares higher.

That being said, I think Opko's fundamentals are simply too far out of line with the rest of the sector for the stock to benefit substantially from this pending clinical catalyst. And although Rayaldee has blockbuster potential, there are a handful of other treatments already available for this indication and Amgen and NPS aren't exactly going to let market share go without a fight.

I am also skeptical that 4Kscore sales can shrink this valuation gap fast enough before other issues, such as its dwindling cash position, become a major problem. Keeping with this idea, Opko's valuation problem appears to be reflected in the company's low institutional ownership, which stood at a mere 17.59% at last count.  

Overall, I understand the optimism surrounding large insider buys, a pending clinical catalyst and a newly launched product that could be a decent revenue generator moving forward. By the same token, Opko's share price seems to have gotten well ahead of the company's underlying business. In short, investors with a long-term outlook may want to remain on the sidelines for the time being. 

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Comments from our Foolish Readers

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  • Report this Comment On June 18, 2014, at 10:07 PM, Prov2120 wrote:


  • Report this Comment On June 19, 2014, at 7:35 AM, NewLegend wrote:

    bla bla

  • Report this Comment On June 19, 2014, at 7:45 AM, TTime0917 wrote:

    This is just wrong!

  • Report this Comment On June 19, 2014, at 12:01 PM, reaching27 wrote:

    Don't agree with your premise. The CEO is in charge of the largest world-wide generic pharmaceutical company.

    I AM SURE HE HAS CONNECTIONS!!! to grow Opko.

    Sure means positive.

  • Report this Comment On June 19, 2014, at 6:30 PM, k9uwajohn wrote:

    I notice your quick to point out what you think the shortcomings of Opko Health are. But very short in the facts of the company.

    #1 are you aware that the Company officers presently own 51% of the outstanding stock. And they continue to purchase almost daily on the open market buying additional shares? Check out the Sec Form 4's available on the Opko Health website. Dr Phillip Frost CEO purchased this week alone over $1 million dollars worth. Although Doc is a multi billionaire I doubt he would spend this type of money if he didn't think there was a future gain to be made. His own record in fact suggests that he has done this same thing in the past building and later selling at great profits the whole company to large Pharma.

    Yes I am LONG Opko. Have been since the mid 3's. It has a long ways to run before I sell.

    John k9uwa

  • Report this Comment On June 19, 2014, at 6:32 PM, k9uwajohn wrote:

    Are you aware of the 15M payment due Opko this week as their annual return on investment ... invested 27M to become part owners in this company a couple years ago. Not bad to get 15M this year as their portion of the profit of that company.

    The pipeline of Opko products is much longer than the few you mentioned.

    Lets see now about the percentage of available stock. 51% to insiders directors of the company + 17% institutional ownership = 68% of all the available stock in the hands of those who know what they are doing. Lots of other shares in the hands of people like me who have owned this one for a couple years or more. I am IN at around $3.50 pps.

    Did I mention the incoming 100M Milestone payment due this quarter from another company that Opko has coming? Guess that will bolster up the income for sometime to come.

    As to the International involvement of Opko Health. Looks good to me. Or is there some problem selling products in the UK and EU + South America and now also into Taiwan?

    Appears to me that this article is either written by an Author with an "Agenda" some friend of some scared to death short. Or else the Author didn't really do his DD prior to writing it.

    You be the Judge after doing your own DD.

    My Money is on Doctor Phillip Frost, MD who is #170 on the Forbes list of Wealthiest people in the World. Doc didn't inherit that money folks. He made it doing exactly the same thing he is doing again. Building a VERY prosperous Company.

    John k9uwa

  • Report this Comment On June 19, 2014, at 8:13 PM, wisdominvest wrote:

    Reaching27 wrote:

    "Don't agree with your premise. The CEO is in charge of the largest world-wide generic pharmaceutical company."

    Are you sure ? Larger than Mylan and Teva for example ?

  • Report this Comment On June 20, 2014, at 8:45 AM, igriv wrote:

    @Reaching27 DID mean Teva.

  • Report this Comment On June 20, 2014, at 10:30 AM, wisdominvest wrote:

    Ok, iqriv. But with Opko succes depends also on the results of clinical trials. Let's hope for some good news next week.

  • Report this Comment On July 16, 2014, at 5:47 PM, dondoskilos wrote:

    IT'S ONE (1) word folks...LAGOVA,,PHASE 3 GOING AND YOU GROW 6 inches...yes...documented...MOVE OVER PROZAC....(In height, that is). One shot a wk....and you GROWWW.

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George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

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