Opko Health: This Biotech Short Bites Back

Apr.16.13 | About: OPKO Health, (OPK)

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident"

-Arthur Schopenhauer

If you are one of the people short Opko Health (OPK) and stumbled upon the company's recent features in The New York Times, Bloomberg Markets Magazine and CNBC's Mad Money all in just this past month, it would make sense that you should be extremely concerned. The cause for concern is not merely the company's being featured in these major outlets, but the fact that the greater public is finally recognizing OPK as a revolutionary biotech stock that looks to be just getting started. Arthur Schopenhauer's quote listed above is all too typical of the career of Dr. Phillip Frost. When Dr. Frost brought forth his first company Key Pharmaceuticals in 1972, it became highly shorted. The company was losing money and people thought it was surely a bust. Key Pharma of course was built into a massive success and was eventually bought out by Schering-Plough. Yet for some reason when Dr. Frost was working on his next company IVAX, the same scenario found itself playing out. Why people would want to short a business who's CEO recently generated such huge success I cannot say. Yet for whatever the reason, the shorts lost enormous sums of money and IVAX was eventually bought out by TEVA (NASDAQ:TEVA), delivering early stockholders an over 6000% return. After the sale of IVAX Dr. Frost was asked to become chairman of the board for TEVA and also became CEO of his new company OPKO Health. Yet as history tends to repeat itself, an enormous amount of shorts have come to bet against OPK, and it appears to be an unpleasant situation. While shorters of Dr. Frost's newest company have clearly been in a tight bind, I'm here to insist that it's not just Frost's track record shorts should be worried about.

Revenue Has Jumped

In just a year's time OPK's revenue has grown 180.7%. Being that OPK has not even released any of its main products yet (aside from in the U.K.), this shows that the numerous products of OPK's subsidiaries in Israel, Mexico, Chile, Brazil and Spain are selling extremely well on their own. These subsidiary products were sleepers and generally looked over by most investors as not significant. Even I myself must admit that OPK's near doubling in revenue prior to major product launches was a surprise I hadn't anticipated. I expect subsidiary sales revenues to continue growing stronger as the company's profit margins are up significantly from last year, net operating cash flow has jumped 13.05% and certain subsidiaries of OPK such as those in Mexico, Brazil and Spain are operating in growing pharmaceutical markets.

Analysts Are Catching On

In the past month analysts at Jefferies have increased the company's favor of OPK, raising its growth expectations even higher than before. Jefferies analyst Eun K. Yang raised OPK's price target from $8.00 to $9.00, and stated Jefferies belief that OPK has enough cash on hand even with no growth to take it well into 2016. Likewise, all current analysts' opinions show unanimous recommendations for OPK as a "Strong Buy" with a median target of $8.50 and a low target of $7.50.

The Future of Diagnostics

If you are unaware of OPK's new diagnostics computer that contains all the abilities of a large-scale medical lab packed into a tiny computer, then you may be missing out on the most revolutionary biotech product of this decade. This device can be applied to nearly any disease and generate up to 20 test diagnosis in 10 minutes or less. Recently OPK announced that its diagnostic platform has been made to be compatible with smart phones, which will allow patient results to be sent and stored via Internet cloud sites. This "lab on a chip" technology will not only enable one to check a patient's disease status from anywhere in the world, but will also synchronize the results instantaneously with the patients online medical records from anywhere across the globe. I strongly believe this product will be a must have staple in all doctor's offices and hospitals in the near future. For a further in depth look at OPK's all in one diagnostic device please see my previous article here.

A Profitable Urology Chain

As part of OPK's preparation to launch its 4K Score prostate test the company purchased a profitable nationwide urology chain called OURLabs. The mission is to add support to the 4K Score launch by providing the test with immediate outlets for sale and integration into the market. OURLabs 18 sites nationwide and prebuilt in client base should add much fuel to the already growing interest in the 4K Score test. Since OURLabs is already a profitable entity on its own, its acquisition could become a double win for OPK and investors alike.

History And The Future Collide

As history often repeats itself, we not surprisingly find Dr. Frost's newest company OPK again being highly shorted. Seeking Alpha contributor Richard Pearson who is short OPK recommends investors consider selling their stock in OPK, yet then recommends they consider buying back OPK shares if they should fall between the $4 to $5 dollar ranges. Pearson states, "Most would agree that Opko has now assembled a very interesting portfolio of healthcare products including medical diagnostics and Phase III drug candidates." Pearson further goes on to compare OPK to a stock Ziopharm (NASDAQ:ZIOP) that fell in price due to a drug trial failure, which shared nothing in common with OPK's near term endeavors. This brings us to the inevitable question, why are people short OPK? Nearly a year ago on April 13th 2012 the short interest was 31,315,317. On this date the stock sat at a mere $4.38. Today the short interest is not much different at 28,287,657 as reported on March 28th 2013, with a share price of over $7.20. Unfortunately for the shorts, since April 13th of last year OPK has increased its revenue 180% and has yet to even initiate a global launch of any of its major products yet. Furthermore, OPK has acquired several new major drug candidates since a year ago which could add potential billions of dollars in revenue to an already strong company. The reason it appears that shorts are not yet covering their shares is due to pure hope that somehow there will be a problem in the 4K Score or OPK. Unfortunately for the shorts however, no such evidence seems to suggest this. If for some reason the 4K Score were to not succeed, any one of OPK's other large projects could easily turn this stock into a massive win. Since nearly all signs for OPK point to success rather than failure, I would recommend shorts consider covering their positions now and invest long in OPK in attempt to recoup their losses.

Moving Forward

For a more in depth run down of the countless ventures under development at OPK, see my previous articles here and here. Along with the 4K Score, other new diagnostic tests coming up in the pipeline include tests for: Vitamin D, Testosterone, Alzheimer's, Lung Cancer, Diabetes, Tuberculosis and more. Pharma giant Bristol Myers Squibb (NYSE:BMY) as well as the largest North American laboratory chain Labcorp (NYSE:LH) has teamed up with OPK to bring forth OPK's new test for Alzheimer's that is currently under development as well. In terms of this year OPK will be eligible to receive its first milestone payments from Tesaro (NASDAQ:TSRO) of up to $120 million pending good FDA trial results of Rolipitant. OPK will receive a royalty stream from this drug with territory rights to sell it in Latin America and Japan alike. Many believe Tesaro's new drug will be the best in its class. Of course OPK's most exciting drug developments include the new pipeline of 6 drugs that the company acquired via its acquisition of Canadian pharmaceutical company Cytochroma™.


The future of OPK's business ventures remains extremely bright. Jim Cramer has compared the stock to Regeneron Pharmaceuticals (NASDAQ:REGN) which he similarly recommended when just a $6 stock. Now that OPK's CEO owns roughly 50% of the shares and climbing, institutions hold 14.9%, and a short interest fluctuates at around 25%, there exists an extremely tight float in between. This type of situation is known for bringing on disastrous situations for shorts that have yet to cover their losses. While I don't like recommending people lose money, the losses shorts take today on this stock could be minimal in comparison to the losses shorts face in weeks or months to come. Only time will tell where OPK goes from here, but if history is any indicator, the answer is self-evident.

Disclosure: I am long OPK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.