Opko Health Inc. (OPK) is an interesting company, and over the past couple of months, the share price of OPK has nearly doubled in value. For any company, that is very good news, and calls for deeper attention to detail. After a big climb, the stock will most definitely change direction, but the question remains whether it will be a mere correction or a complete trend reversal.
OPKO Health Inc. is a $2.2 billion dollar company that focuses on pharmaceuticals and diagnostic tools/devices globally with a special interest in emerging markets. The company has worked on marketable diagnostic tests for diseases such as Parkinson's, Alzheimer's, cancers, and various chronic conditions. Furthermore, OPK also seeks to acquire and invest in pharmaceutical and biotechnology companies that demonstrate promising returns for Opko Health Inc.
Acquisitions and Investments:
On February 15 2013, Opko announced that it completed an acquisition of Brazilian pharmaceutical company, Silcon Comércio, Importacao E Exportacao de Produtos Farmaceuticos e Cosmeticos Ltda. This acquisition expands Opko's reach into Latin America and allows for the commcercialization of the OPKO 4KScore Prostate cancer test in Brazil. The cost of the deal has not yet been disclosed.
Furthermore from 2011 to 2012, Opko spent around $80 million in acquiring foreign pharmaceutical companies such as Faramdiet (a Spanish pharmaceutical company), ALS (a Chilean pharmaceutical company), FineTech (a Israeli biopharmaceutical company), and Claros Diagnostics (also known as OPKO Diagnostics). Also, as of the nine month period ending September 30 2012, OPK has invested $15 million in the following biopharmaceutical companies (Sorrento, Cocrystal, Neovasc, Fabrus, BZNE, ChromaDex, Neovasc options, and TESARO). All together Opko has invested nearly $1 billion in acquisitions and investments.
Over the course of three years that may not be a ludicrous amount, but considering that operating margins have been negative for the past six years, $1 billion is too aggressive. I believe that it is healthy for companies to make acquisitions and investments to propel their future returns to higher levels. However, I also believe that investments are noxious if they are not made prudently, and in this case, I believe OPK has overleveraged in investments that will not pay off. The risk that OPK has exposed itself and its investors to is definitely not worthwhile.
In the last 6 quarters, OPK has reported negative earnings for 5 of them and the expected earnings for the next two quarters are also negative. Due to OPK's strategy of acquiring and investing in various biopharmaceutical companies in global markets, the revenue stream is highly volatile and inconsistent. As a result it is difficult to maintain confidence in a company that is not fully independent in terms of generating revenue. Looking at the numbers for the company only confirms my doubts about the company.
In the year ending September 30th 2013, OPK has suffered a net margin loss of 44.9% while its competitors gained 16.57% during the same period. Furthermore, OPK's return on investments during that same period is -9.82% compared to the 6.10% ROI achieved by its peers. These numbers indicate that the overly aggressive moves made by OPK have not paid its dividends, but actually have been a source of financial burden for OPK.
I will concede that OPK has the potential to generate a positive revenue stream in the future, but that is dependent on whether or not OPK's investments in its subsidiaries will pay off or not. The image of OPK is a piece of saran wrap stretched to cover a bowl that is too large. Sooner or later, OPK's investments are going to implode and the stock will sink.
Lastly, OPK has a significantly high short ratio of 6.1 compared to its peers of .12. The large percentage of short interest (19.12%) represents the negative sentiment concerning OPK, and investors should consider this factor before initiating a long position in the position.
As a company that is highly aggressive and ambitious, OPK has invested on margin but has failed to generate a positive return from those investments/acquisitions. With -$28.50 million in cash flow, OPK's finances are disconcerting as much of the company's assets are illiquid investments made in emerging foreign markets. In my opinion, this company is bound to pull back significantly soon, so I would recommend a short position while it's still at a high and profit from its eventual collapse.
Disclosure: I am short OPK.