Opko Health: Setting Up For A Big Short Squeeze?

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By Scott Matusow   
Wednesday, 03 October 2012 04:45
icon_insiderbuysThose who listen to my online show know that I believe short side traders tend to be better technical traders in the short term, with their biggest weakness coming in the form of greed -- which ultimately gets a lot of them into deep financial trouble because many of them wait too long to cover their shorts.

Long side traders if they are cash only in, can ride out bear raids and hold "bags" indefinitely. Short sellers cannot because they are 100% borrowed. I once had a friend who made over $5M dollars in a very short period of time shorting stocks. He thought he could never lose and would indefinitely continue shorting and holding his shorts -- until he got "squeezed" on 2 huge short plays and lost that $5M in about 3 weeks. Opko Health Inc. (NYSE: OPK) looks like a strong short squeeze candidate.

Opko engages in the discovery, development, and commercialization of novel and proprietary technologies primarily in the United States, Chile, and Mexico. It develops a range of solutions, including molecular diagnostics tests, point-of-care tests, and proprietary pharmaceuticals and vaccines to diagnose, treat, and prevent various conditions. The company is developing molecular diagnostics tests to identify molecules or immunobiomarkers for Alzheimer's disease, non-small cell lung cancer, and pancreatic cancer, and other cancers.

Let's get right down to it -- Opko has been severely over-sold for awhile now. Investors/traders have sold short about 25% of the company's float, which in my opinion, is over-sold at the current price level.
Yes, I have heard the short thesis on it and they make some decent points -- but at a higher price level than where it is currently trading at. With roughly $40 million in annual revenues and a $1.25 billion market capitalization, at first glance, the company does seem over-valued.

However, I cannot help to wonder if the short sellers in Opko have considered the possibility that Dr. Phillip Frost might just get impatient with his buying the company shares slowly over time and decides to buy back a monster block at once, say 20M shares or so. I have to wonder what the short sellers think their upside is in this one. I feel the downside risk for short sellers is very high, and if this runs on them because Dr. Frost decides to get more aggressive in his buying, I can see the shorts getting super squeezed, with many facing potential margin calls. At some point, Dr. Frost will just own too many shares and he is not likely to sell -- which would leave the shorts scrambling to cover at much higher prices.

Dr. Frost's history in brief:

Frost bought Key Pharmaceuticals, Inc. in 1972. Dr. Frost was Chairman of the Board of Directors of Key Pharmaceuticals from 1972 until its acquisition by Schering-Plough in 1986 for $600 million. Frost's share was $100 million

He also served as Chairman of the Board of Directors and Chief Executive Officer of Ivax Corporation since 1987, and sold the company for $7.4 billion to Teva Pharmaceuticals (NYSE: TEVA) in January 2006.

Frost was also one of the first and largest investors in Protalix BioTherapeutics (AMEX: PLX), investing $24 million in the company that would later go on to develop a U.S. Food and Drug Administration-approved treatment for Gaucher disease. He resigned from the company's Board of Directors in 2007.

Dr. Frost is a billionaire -- He alone if he so chooses to do so, can buy up the entire Opko trading float himself potentially causing a monster short squeeze.

The short squeeze can be a very profitable trade, in fact under the right circumstances it can return massive gains in less than one trading day. A recent example is Peregrine Pharmaceuticals (NASDAQ: PPHM), which opened at $0.83 on September 24th after the company told analysts they should not rely on recently disclosed data about its lead product, the potential lung cancer treatment bavituximab.

The company said that it discovered "major discrepancies" between some patient sample test results and treatment code assignments when it reviewed mid-stage trial data. The company is studying bavituximab as a second option for non-small cell lung cancer.

The big mistake many short sellers made on Peregrine is that they shorted the open after the stock plunged from a prior day's session price of over $5. The smart short sellers were in much higher, when the company had much more downside potential -- those shorts covered at the open and many went long in anticipation of institutions quadrupling down on their long positions and other short covers. In the same trading session, the stock ran to a high of $1.57 on 9/24/12, as many shorts raced to cover.

*Recent Insider Transactions


I have to stop at July 1st, otherwise this article would be as long as a standard non-fiction novel. Obviously Dr. Frost has been buying up a ton of short sellers and is slowly eating up the available trading float. Yet the shorts still short away, and I do not think many of them understand the potential danger they are putting themselves in.

For those comparing Opko with MannKind Corporation(NASDAQ: MNKD), I would point out that the situation is very different. With Mannkind, Billionaire owner Alfred Mann has added shares to the trading float via dilutive financing. He has not bought shares as Dr. Frost has been engaging in with Opko.

Many Mannkind insiders have actually been selling their shares:
 
opkchart2


Also, Mannkind has yet to produce any revenue, and still have not gotten its lead product candidate, AFREZZA inhalation powder, an ultra rapid-acting insulin therapy delivered via an inhaler approved by the FDA after receiving a complete response letter from the FDA on Jan 19, 2011.

Don't get me wrong, I am not fully bearish on Mannkind, I just list it here to show a clear contrast between 2 billionaire owners and how they approach supporting their respective companies.

Also, shorts should take into consideration that Opko announced on October 1st that its strategic partner, International Health Technology (IHT) headquartered in Cambridge, UK, launched the OPKO 4Kscore™ in Europe as part of IHT's ProstateCheck™ program being offered as an early detection service.

The OPKO panel has demonstrated in over 10,000 patients the effectiveness of predicting the probability of cancer-positive biopsies in men suspected of having prostate cancer. Extensive studies have shown that the use of the panel could eliminate a significant number of unnecessary prostate biopsies, a possible reduction of over 50%, along with a high frequency of associated pain, bleeding and infection, sometimes requiring hospitalization. With this significant reduction in biopsy rate, the probability of delaying diagnosis of a high grade cancer is only 0.6%.

A few people I have spoken to feel this product might be worth up to $2B in future sales. A prostate test like this would be an obvious choice compared to a biopsy. Last month, Genomic Health, Inc. (GHDX) announced positive results from a large clinical validation study of its biopsy-based prostate cancer test. Although this is positive news for diagnosing this disease overall, patients clearly would much rather avoid the pain associated with this type of treatment.

In addition to this prostate cancer test, another product capable of huge sales is its diagnostic test for Alzheimer's disease. At least one analyst projected as much as $3B in annual sales for this blood test which will do the following according to OPKO's website:

  • ·    Stratifying patients for ongoing clinical trials of potential Alzheimer's drugs
  • ·    Confirming Alzheimer's diagnosis in a clinical setting
  • ·    Tracking the progression of the disease
  • ·    Tracking the effectiveness of an Alzheimer's therapeutic in a clinical trial

I have to ask myself why Dr. Frost continues to buy up shares like a binge drinker sucks down booze -- is he crazy? Is it because he is growing senile? -- I would not bet on that. It's my opinion that Dr. Frost has something up his sleeve that will ultimately squeeze the shorts like a Boa-Constrictor squeezes it's prey.

Let's take a look at the Opko chart (click to enlarge):



As we can see from above, the stock has been in a downtrend for some time now coming off an extended head and shoulders back in July. it's my opinion the stock will see a head and shoulders bottom bounce and a short squeeze based upon the fundamental factors mentioned prior in the article.

While Opko has seen its fair share of perceived failures, don't bet on this trend to continue -- not when there is a billionaire taking a massive amount of shares as the insider trading data shows.

I don't think Dr. Frost is spending millions of dollars to lose here. It's a good bet that when someone sells Opko short, Dr. Frost is on the other end of the trade, and I don't think he is going to stop -- not until he potentially buys up most of the trading float.

*Data sourced from Yahoo Finance.







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