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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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.