Opko Health's CEO Is Buying -- Should You Sell?

Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically buy only for one: They think the price is going to go up!

Today I'm highlighting medical device maker Opko Health (OPK -1.60%), which saw its chairman and CEO buy almost $2.9 million worth of stock so far in December. Now this wasn't an option grant either, but purchases made on the open market just like you or I would do. Is it a sign he thinks Opko is ready for a big jump higher?

Opko Health snapshot

Source: FinViz.com. N/A = not available; Opko Health doesn't pay a dividend.

Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.

Funhouse mirrors
There's a lot to like about Opko's prospects for developing diagnostic tests that can detect the early onset of Alzheimer's disease and prostate cancer, but there's also a heckuva lot to be skeptical of. And while the medical device maker has seen the number of shares sold short drop from a lofty 43 days to cover this past summer down to just under 30 days in the latest reporting period, that's still a significant number of people betting against Opko, and it's worth exploring why they think it will fail (The Motley Fool believes anything over seven days is generally considered to be a lot, but even shorting Fools would be worried about these levels, since any uptick could lead to a massive short squeeze).

Bigger is better
Considering the size of its market cap, Opko generates very little revenue. Last quarter, it brought in just $11.8 million, up 73%, but virtually all of the increase came from the three acquisitions it made this year. Losses, though, widened to $10.2 million from $8.8 million despite the greater revenue as expenses shot higher because of the deal-making. Now it's just closed on another purchase of a CLIA lab, which are labs that perform tests on humans and are regulated by the Centers for Medicare and Medicaid Services. Opko anticipates the lab will support its near-term commercial launch of its novel biomarkers and associated algorithm for the detection of prostate cancer.

Opko does have new products coming to market, such as a new Alzheimer's diagnostic test that it's partnered with Bristol-Myers Squibb (BMY -0.27%), which LabCorp (NYSE: LH) licensed to develop in North America and the UAE. But some aren't so sure that the Alzheimer's test will live up to its promise, and test results have been shown results less than what were originally touted.

Yet Opko was also recently awarded a contract by NASA to implement its point-of-care diagnostic platform -- which can return blood results in just 10 minutes -- for use on the International Space Station, and it received a $1 million grant from the Bill and Melinda Gates Foundation to develop a diagnostic test to tell the difference between latent and active tuberculosis.

Testing the market
If Opko is as successful with the Alzheimer's diagnostic test as CEO Frost suggests it will be, it will mark a period of significant price for the stock. But as Frost has done with IVAX, which he subsequently sold to Teva Pharmaceuticals (TEVA), he may really be grooming the company for a sale. He did the same thing with Key Pharmaceuticals, which was sold to Schering-Plough before Merck (MRK 0.10%) acquired it.

No doubt Phillip Frost is putting his money where his mouth is, buying up millions of dollars worth of company stock. While that lends credence to the buyout theory in certain respects, it also doesn't mean you should follow him in. A strategy of growth by acquisition is fraught with risk that could implode before someone comes along to make an offer.

I'm not certain Opko will succeed with its plan, but tell me in the comments section below if you think there are bigger things in the works.