Are Investors Wrong About Opko Health?

Opko Health has started attracting a fair number of short sellers lately. Here's what you need to know.

Jun 18, 2014 at 5:44PM

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. 

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

 

George Budwell owns shares of NPS Pharmaceuticals. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers