Opko, Bristol-Myers, Teva And A Frosty Debate In The Mix

| About: OPKO Health, (OPK)

There's a bull/bear war brewing over Opko Health (OPK), one that seems to be turning on the persona of its billionaire CEO Dr. Phillip Frost. He's buying tens of thousands of shares of his own company according to recent SEC filings and it has both sides speculating. One side says that Frost is a losing bet because he makes bad trades, therefore OPK should be shorted. The other side says that Frost is a winning bet because he makes good trades, so you should buy it, not to mention that Frost's personal wealth exceeds Opko's market cap, so he could theoretically buy every share anyway.

Either way, this is a bizarre way to make or break a case about investing or shorting any company. Even stranger is that the naysayer's website is registered to a privacy protection firm located in Kuala Lumpur. What's going on here? I say both sides are basing their positions on appeal to authority rather than taking a look at the stock itself and deciding if Opko is, in fact, a good company or not. So let's put Dr. Frost aside for a moment and take a look.

The first thing to notice is their financials. Here's a table from Google that will give you an idea of trajectory and what's been going on under the hood for the last 4 years.

What this shows is that, while Opko has been operating at a loss, their revenues (blue) have been going up and their operating expenses (orange) have been going down. Meaning, fundamentally, they're going in the right direction. The question is, can they keep growing enough to justify their stock price?

For that they will need partnerships and products. They have both. For one, there is Bristol-Myers (BMY) which signed a deal last year with Opko for continued development of an Alzheimer's diagnostic. The partnership is starting to show signs of progress now that Labcorp (LH) has licensed exclusive rights in North America and the United Arab Emirates to develop and commercialize it. There is also the fact that the executive boards of Opko and Teva (TEVA) have close ties, especially since Dr. Frost, CEO of the former, is actually the chairman of the board of the latter.

As for products, consider Opko's Claros Point-of-Care Diagnostics Platform. This is a platform that can produce lab-grade results for blood tests in 10 minutes. Imagine changing the diagnostic center in a hospital from an external lab that costs staff, equipment, real estate and everything else, right to the patient's bedside. Talk about saving hospitals substantially in operating costs and time.

Claros is pharmaceutical hardware. What about pharmaceutical software? Meaning, what about drugs, medication? Last April, Opko's Rolapitant began Phase III clinical trials, the final testing phase before consideration for FDA approval. Rolapitant is designed to treat chemotherapy-induced nausea and vomiting, known as CINV. Phase II results were a success, showing patients treated with just 1 dose enjoyed a 5-day window of relief from the condition.

Do these advances justify a $1.3 billion market cap? Well, that depends on Claros and Rolapitant going to market. In one market you have every hospital, and in the other you have every chemotherapy patient. And at the risk of sounding hypocritical, Phillip Frost certainly thinks his company is worth its share price.

The flip side of the coin is that, with only $62MM in cash, cash equivalents, and marketable securities and $231.5MM in total assets according to their May 2012 10-Q, Opko may find it challenging to bring their products to market. In order to effectively commercialize, they will either have to partner with big names as they have done with Labcorp, or issue more public offerings that could dilute existing common shares for investors.

While investing in Opko or any other small cap biotech firm subjects oneself to their risks - enough cash to successfully bring a product to market, or delayed FDA approval, Frost definitely knows what's going on in the company more than any of us do. And who knows what surprises Teva's chairman will come up with next? With so many shares at stake, things are starting to remind me of the Dukes' attempt to corner the frozen concentrated orange juice market in the 1983 blockbuster Trading Places.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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