OPK – With Opko Health Hammered, Should You Run or Buy?

by Ethan Roberts | December 17, 2013 10:45 am

What in the world is going on at Opko Health (OPK[1])?

For those who don’t know, Opko Health is a biotech company with multiple pharmaceutical product lines in its pipeline. And OPK stock was sailing for most of 2013, as biotechs and other health care stocks were all booming thanks to recent drug approvals, mergers within the industry, and a feeling that Obamacare would increase revenues from millions of newly insured consumers. OPK stock climbed from $5 at the start of the year to a closing high of $11.63 on Dec. 9.

But suddenly the bottom dropped out. As the accompanying OPK stock chart shows, Opko Health slid 26% lower in just a few days, currently going for under $9.

opk-stock-chart-opko-healthClick to Enlarge

What Stalled OPK Stock?

While this is not uncommon for a speculative biotech stock, it was not a poor earnings report, FDA rejection, nor an analyst downgrade that caused the swoon. Instead, OPK stock got hammered by a brutally negative article entitled “Opko Health: The Placebo Effect.” It was published by Lakewood Capital Management — a hedge fund that has publicly acknowledged a very large short position on shares of OPK stock.

The Lakewood article alleged that Opko Health was “grossly overvalued,” and challenged the worth and potential of several of its pipeline products. It suggested that the company might never make a profit and that OPK stock is worth no more than a quarter of the current price. The article even attacked the most promising phase 3 drug in the Opko Health pipeline — Rayaldy, which treats stage 3 and 4 kidney disease.

Immediately after the 45-page report was published, investors fled OPK stock in droves. But Dr. Philip Frost — the billionaire who owns Opko Health — didn’t just defend his company a few days later. He also supported his position by purchasing another 1.2 million shares at prices ranging from $9.44 to $10.90 over a two-day period … and that’s on top of the millions of shares of OPK stock he already bought on the open market throughout 2013,.

How to Play OPK Stock Now

So what should investors in OPK stock do now — sell, hold or buy more shares at depleted prices?

The answer to that question depends on your tolerance for risk and your time horizon. OPK stock has always been extremely volatile, and will most likely continue to be. Aggressive swing and option traders could find a great deal of value in OPK stock at present levels, especially if Dr. Frost continues his insider purchases.

Dr Frost said in a recent interview[2] that he continues to buy OPK stock because he believes the product line will eventually create tremendous appreciation. Plus, Frost has never sold any of the shares of Opko Health he purchased.

And it’s promising that Opko is a well-diversified company, whose research includes everything from developing molecular level diagnostic tests to identify biological markers for treating Alzheimer’s disease and several types of cancers. In addition to U.S. sales, many of products are sold overseas in Israel, Mexico and Chile … to name a few.

Plus, an FDA decision is due soon on the company’s Phase 3 Rolapitant drug, which prevents chemotherapy induced nausea and vomiting. Opko says that Rolapitant, once fully approved, has the potential to gross up to $1.25 billion.

OPK Stock Remains Risky

Despite those tailwinds, investors should keep in mind that OPK is a high-risk stock right now for several reasons, including:

  1. There is no guarantee of FDA approval of any of the drugs, and should approval be delayed, OPK stock could take another dive.
  2. OPK stock fundamentals are still very mixed. There are negative earnings of 31 cents per share and thus no P/E ratio. Plus, the price to book ratio is high at 4.41, there is a negative 19.4% ROE, and Opko Health pays no dividend. Net operating cash flow is a negative $37.8 million, much worse than the biotechnology industry average. (Of course, on the other hand, the company has revenue growth of 11.2%, above the industry average, and a 75% growth in revenue over the past year. They also have a very low debt-to-equity ratio of 0.26 and a quick ratio of 3.02.)
  3. Opko Health has competition from other biotech companies, such as L.G. Life Sciences, which is working on similar treatments. Plus, the iShares Biotechnology ETF (IBB[3]) has risen from $135 to $214 per share this year, and remains a much more diversified and safer investment.
  4. Short interest on the stock remains high and will likely continue until and unless one of Opko’s drugs receives FDA approval.

The bottom line is that OPK stock is mainly for investors who are more risk tolerant or have a longer term view.

The company’s endeavors and funding sources are quite well diversified, so should any one of its products be delayed, it still has plenty of other successful business ventures to fall back upon. And of course there is always that ongoing insider buying to provide fodder for momentum players.

As of this writing, Ethan Roberts did not own a position in any of the aforementioned securities.

  1. OPK: http://studio-5.financialcontent.com/investplace/quote?Symbol=OPK
  2. in a recent interview: http://seekingalpha.com/article/1899701-opko-health-standing-bullish-following-q-a-with-dr-phillip-frost?source=yahoo
  3. IBB: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBB

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