This morning the hedge fund Lakewood Capital which is run by Anthony Bozza published a bearish article on Opko Health (OPK), which in combination with the bad day in the overall market dropped the stock roughly 15%. While previous bearish articles on Opko have been shown to provide a temporary pullback in the company's share price, their effects have always been extremely short lived, typically lasting a day and providing just enough time for the short author to cover their shares. In terms of the Lakewood Capital article, along with painting an already frequently argued case against owning shares in Opko Health, the company fails to disclose a very pertinent aspect of their investment in Opko Health which is that as well as losing money on their short position, Lakewood has also initiated a long position in shares of Opko.
Reasons Lakewood Should Be Panicking
If there were ever a time for short sellers of Opko Health to be panicking, now would be it. Over the next 4 months several key catalysts are in store for the company and the prospects of them being achieved are to say the least, very high. This month, any day now, the Phase III results for Opko's partnered Cancer drug Rolipitant™ are due to be released. Any positive news on the results of this trial should have a significantly positive effect on the company's share price. If I was short Opko, this would be my first cause for concern. The next near-term catalyst in Opko's pipeline is the company's planned launch of its next-generation Prostate Cancer test known as the 4K Score™ which is planned for launch in the next 1-3 months. This diagnostic test has been estimated to potentially generate $1.5B annually in the US alone, yet in taking into consideration the global market access which Opko has acquired, this estimate could be considered a low-ball. Currently The 4K Score™ is in its last round of testing before launching and if the results are more impressive than previously thought, the share price effect of the 4K Score™ launch could be much greater than anticipated. Yet if these two catalysts weren't enough, there is more. Coming up in January is the JP Morgan Healthcare Conference which Opko has previously announced significantly transformative news at. Last year on the day of this conference the company utilized the opportunity to announce its $100M take-over of the privately held pharma company Cytochroma. What Opko may have in store for this year is a mystery, but there are certainly a wide range of engagements I could opine on. Last, but certainly not least of the catalysts over the next 4 months are the Phase III trial results of Opko's most advanced drug Rayaldy™ for vitamin-d insufficiency and Chronic Kidney Disease. This drug will be entering a $24B+ market globally if approved and has shown to be the best in class by far of any competitor. If the Phase III results for Rayaldy™ are positive, which the odds are very good for, I expect Opko's share price will move north of $15 a share and that is modest.
Short and Long?
While Lakewood Capital was eager to talk about their short position in Opko Health, what the company failed to disclose was the fact that it has also reported a long position in Opko Health which it initiated at $11.50 a share. If Lakewood truly feels that Opko Health is overvalued, then I wonder why it would initiate a long position in Opko just a few dimes away from the company's 52-week high? According to Lakewood's 13F filing, the firm has a new long position in Opko for a value of $2,661,000. However the fund has noted that this was not a net-long position. Recent cases where short sellers have gone out of their way to publicize their short positions have turned out disastrous and should be seen as a red flag. An obvious example of this is Bill Ackman's publicized short position on Herbalife (HLF). It is an odd coincidence that the Soros Fund went long Herbalife after this publicized short position since it has gone long Opko after its initial short volume as well. Various sources disclosing Lakewood Capital's long position are provided below:
The bear case against Opko Health has been a losing game for shorts since the 2009 recovery and aside from a few pullbacks on occasion, the overall trend for Opko points significantly higher. I don't blame Lakewood for frequently publicizing its short position on Opko Health because if I was short a company that went up over 150% in less than a year, I might do the same. Lakewood's article makes the case that Opko's pipeline is of less value than the company claims, but Dr. Frost's track record for making extremely profitable biotech investments speaks for itself. Examples of this are widely known such as his sale of IVAX to Teva (TEVA) for $7B and his sale of Key Pharma to Schering-Plough prior. The real question on hand is what does Lakewood plan do with the millions of dollars in Opko shares it went long? If shorts fail to cover their positions during this pullback window, they could well likely find themselves deeper in losses than prior to today's window of opportunity.