OPKO Health's BioReference Labs is one of the largest patient testing laboratories in the United States. On March 5, it announced plans to roll out a test for the COVID-19 coronavirus, which sent OPKO's shares soaring. The rapid run-up in its shares prompted Hindenburg Research, a short-seller that's been bearish on OPKO Health since 2018, to reassert its belief that it will trade significantly lower, not higher.
Specifically, Hindenburg alleges that OPKO Health's COVID-19 testing news is a pump-and-dump scheme designed to boost shares and potentially force short-sellers to cover. As of Feb. 14, 23.03% of shares available for trading, or the share float, were held short.
Hindenburg also suggests OPKO Health could use the recent rally in its shares to announce a stock offering to bolster its balance sheet, which has been hamstrung by ongoing operating losses.
As evidence, the short-seller points out that OPKO Health's founder, Phillip Frost, its biggest shareholder, has been the subject of investigations into similar stock schemes. Hindenburg also cites OPKO's $82 million cash balance as its reason for anticipating a dilutive stock offering.
As a refresher, Frost is a well-known biotech entrepreneur. His resume includes transforming Key Pharmaceuticals into a major asthma treatment player that was acquired for nearly $800 million by Schering-Plough in 1986; founding IVAX, a major generic drug maker that was acquired by Teva Pharmaceutical (TEVA 1.53%) for roughly $7.5 billion in 2006, and serving as Teva's chairman from 2010 to 2014. Currently, he is OPKO's chairman and CEO.
The Securities and Exchange Commission filed a suit in September 2018, alleging Frost engaged in pump-and-dump schemes in microcap stocks. Frost settled with the SEC in December 2018, agreeing to pay a $5.5 million penalty without admitting wrongdoing.
There's no question that OPKO Health is burning through cash. In 2019, the healthcare company reported a $315 million net loss on revenue of $224 million. As a result, OPKO's cash balance slipped to $85.5 million from $96.5 million exiting 2018, despite raising $81.3 million via an underwritten public stock offering in Q4.
Nevertheless, BioReference Labs is a leading provider of lab services. And its footprint, including relationships with healthcare providers in key markets, including New York, California, and Florida, could mean it generates significant test volume from COVID-19 screening. In South Korea, hundreds of thousands of people have been tested, but U.S. screening is only now beginning to ramp up. Currently, estimates are that testing capacity is a little shy of 8,000 per day. Arguably, that's insufficient, suggesting there's room for BioReference Labs to win patient share.
The bulk of testing is likely to be done by larger competitors, including LabCorp (LH 1.71%), which already has a test available. But BioReference Labs test could be available next week, and since that business unit accounts for 80% of OPKO Health's revenue, investors might want to avoid shorting shares.