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Opko Health: Time to Short or Stay Long?

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Pundits who weigh in with an unfavorable view of Opko Health are hard to find, yet the short-term negatives are clear.

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Even with its powerful pipeline of therapies, pharmaceutical and diagnostic biotech company, Opko Health Inc. (NYSE:OPK) looks overvalued to short-sellers who focus on the company's still-negative earnings per share and rising net loss. Last week, after Lakewood Capital's Anthony Bozza made a short call at a well-attended analyst conference in NYC, Opko's share price dipped below its 50-day moving average of $9.91 to $9.50 per share. It has since recovered and opened at $10.09 on Monday morning.

Admirers of Phillip Frost, M.D., the company's CEO, analysts, and even physicians with a longer-term view, remain positive, citing Opko's impressive lineup of promising diagnostic tools and breakthrough drug candidates, which look mature enough to justify the stock's current valuation. Among its ardent supporters, John Cannel, M.D., founder and executive director of the Vitamin D Council, reported, "Three weeks ago, I invested all my available funds in Opko Health Inc. I did that when I learned about its new vitamin D drug, Rayaldy." Currently, Harvard University is testing the efficacy of Rayaldy in a 20,000-patient Phase 3 clinical trial.

In recent interviews with Jim Cramer, former hedge fund manager and the host of CNBC's Mad Money, Frost focused on the diagnostic segment of Opko, noting the development of novel diagnostic tools, including a point-of-care test to detect prostate-specific antigens currently approved for use in Europe. Also in the pipeline are innovative diagnostic tools for Vitamin D deficiency and Alzheimer's disease.

Cramer called it a "Buy."

Nov. 1, 2013 -- Jim Cramer called Opko a "Buy" on his popular Mad Money show. "I mean, this is Phil Frost. Buy! Buy! Buy!" said Cramer, a fan of the former dermatology professor and self-made billionaire who ranks No. 166 in the Forbes 400, and is known for his exponential success in pharma industry ventures. On a separate occasion, Cramer remarked, "Dr. Phillip Frost, you have delivered as you always have in the 25 years I've followed your career."

Seeking Alpha writer cited some negatives.

Nov. 1, 2013 -- A Seeking Alpha contributor who goes by the name "Stock Whisper" highlighted some of Opko's trouble spots: "The company has some potential risks, which include its net losses over the years and negative earnings growth. The company also has low cash when assessed over its expanded operations, and may pose a problem in the future." A few weeks later, "Stock Whisper" reported after Opko released third-quarter numbers that its cash had increased by 6.9% from the previous quarter: "The company has sufficient cash to sustain itself. However, the company will need excessive cash for the launch and commercialization of its prostate cancer test 4Kscore."

Barron's Bill Alpert examined both sides (one year ago).

Nov. 12, 2012 -- "Whether or not Frost's ambitions for Opko pan out, he's a hazardous guy to bet against – and not just because the company's crowded short-interest invites a squeeze."

Alpert also suggested that "...prospective investors might want to wait for the validation that comes with real fundamentals."

And the Analysts say...

Nov. 13, 2013 -- Equities researchers at Ladenburg Thalmann issued a research report raising their price target on Opko Health from $10.00 to $14.50. Analyst Kevin DeGeeter weighed in: "We are updating our financial forecast on Opko to include the acquisitions of Prolor Biotech Inc. (acquired in August) and the Fermagate phosphate binder program from CytoChroma Inc. (acquired in Q1/13). Separately, we believe it is appropriate to transition our valuation methodology from a sum-of-the-parts model to a more traditional discounted cash flow model due to the maturing of Opko's pipeline."

Sept. 9, 2013 -- Jefferies & Co., analyst Eun Yang said, "...the company's valuation lies not only in its fundamental value, but also in its fluid strategy, significant insider ownership/continual insider buying, and in the unquantifiable value of [chairman and CEO] Phillip Frost."

Aug. 22, 2013 -- In an interview with The Life Sciences Report, analyst Michael Berry stated, "I have great respect for CEO Dr. Phillip Frost. Having just gone through a prostate biopsy procedure myself, I believe that he innately understands the needs and economics of the prostate cancer space, and has assembled a powerful pipeline of therapies. The 4Kscore test alone has major discovery potential, as I can personally attest, and is being readied for commercial launch. Monetizing it will take some thinking."

Summary

Overall, there is a dearth of negative sentiment surrounding Opko; pundits who weigh in with a wholly unfavorable view are remarkably absent. Yet short-term negatives are apparent: With $20.6 million in annual revenue, a net loss of $60 million in Q3 2013, and a $4.4 billion market capitalization, it looks overvalued. Current earnings per share are $-0.16 and $-0.6 for the quarter.

Should good news be released about one of Opko's breakthrough drug therapies or diagnostics, the company's significant short interest of about 20% could actually drive the share price higher. As USA Today reported, "The possibility of a short squeeze is one reason some analysts look at a high amount of short interest as a bullish indicator."

According to ShortSqueeze.com, "Short interest is the fuel; performance is the fuse."

Opko is down by more than 20% from its yearly high, $12.95, which was reached in October 2013. Sustained price movement below its 50-day moving average, $ 9.91 per share, could signal a break in the uptrend.
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