Opko Shorts Should Know That For Every Short Seller, There’s a Buyer

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Frost Opko

If you invest on the short side, it is generally considered sensible to do so when a stock is at its highs. But there’s one other criterion that needs to be met before shorting at a high can succeed. That is, there must be no reason, or at least very little reason, why shares of a particular stock are rising at all. If they’re rising for a reason, they will likely keep doing so, squeezing shorts on the way.

Opko Health (NYSE:OPK) may fit the first condition of being at or near its highs, but it does not fulfill the second. Those short Opko don’t seem to mind all that much, being that 44.92M shares are currently held short, constituting 67% of the float. That’s about a million more shares than last month, representing over $15M in capital spent on shorting the stock in one month, at least.

While shorting itself may tend to discourage some retail investors from taking a position, institutional investors as well as company insiders are usually astute enough to know that for every short seller, there is a buyer of those shares on the other side. Close to 70% of Opko’s float is held by either insiders or institutions, and it is doubtful that any of those shares will be put on the open market any time soon. And even if some are, the company’s founder and CEO, Dr. Phillip Frost, is picking shares at the same pace that shortsellers are borrowing them to sell.

As mentioned, about one million shares have been sold short in one month (1,050,000 to be exact). In that same timeframe, counting from May 13, Dr. Frost has picked up a total of 990,662 shares. The ongoing battle is almost one to one, and could very well exceed that ratio any day as Frost has been buying shares nearly every day this month.

Aside from Frost absorbing nearly all the short bets himself for a month, the fundamentals behind Opko continue to strengthen. Besides having deep pockets, if you know a little about Frost’s history, the fact that Opko remains near its highs specifically now is no surprise.

By the tone of Opko’s last conference call, it’s apparent that Opko’s Charles Bishop, CEO of the Renal Division, is practically certain that the company’s lead drug candidate Rayaldee will be approved. A new drug application was submitted at the end of May already, and from this point it should take another 11 months maximum for official FDA approval. Rayaldee’s target patient population is the estimated 84,000 patients per year in the US that are diagnosed with secondary hyperparathyroidism due to vitamin D insufficiency, most of whom are on or near dialysis. The estimated market size is $12B. Here are some of the more telling lines during the call:

Rayaldee has been clearly shown in four clinical efficacy studies to correct vitamin D insufficiency in virtually every treated patient. The response rates are essentially maximum. These studies taken together also show that effective and long term correction of vitamin D insufficiency causes a gradual but progressive reduction in elevated parathyroid hormone levels with increasing numbers of patients achieving the ultimate outcome which is normal parathyroid hormone levels…

Rayaldee’s gentle efficacy is unaccompanied by any significant side effects. In fact, the adverse event profile for the product is essentially the same is that for parallel administration of placebo. Most surprising, Rayaldee’s efficacy is unaffected by the progressing of kidney disease.

There was also one more paragraph that should ring some bells for those more familiar with Dr. Frost’s early career. 40 years ago, Frost bought Key Pharmaceuticals and helped get its lead asthma drug Theo-Dur approved by removing its cough suppressant, putting it in a capsule to control release instead of administration via inhaler, and most importantly, marketing the drug directly to doctors with technical material rather than lay marketing to consumers.

With that in mind, this paragraph is telling (emphasis added):

As you know our intention is to sell Rayaldee with our own dedicated sales force that will be targeting nephrologists and endocrinologists. In parallel with that effort, we have a lot to do to prepare for marketing of Rayaldee. Those preparations line areas of assembling the right message together to nephrologists and endocrinologists, so that uptick of the product is accelerated. We also have significant work to do with the payers in order to make sure that we can have Rayaldee on the formulary as quickly as possible. And we are also contemplating beginning more development efforts to expand the approved indications for Rayaldee and one of those is already going as I mentioned in the oncology area.

This outlines the play-by-play plan of a company that is confident, organized, targeted, and ready to hit the ground running. Its marketing plan is falling into place a year in advance, and it worked for Frost in the past. Opko believes it will work again.

In terms of balance sheet risk, that used to exist for Opko before last December when it announced a payment of $295M from Pfizer for its Long-Acting Human Growth Hormone. That prevented dilutive financing, and was basically the equivalent of an investor purchasing $295M of stock in the middle of a short position. Opko now has close to $400M in current assets and over $1.5B total. Its quarterly burn rate over the past year is only $60M, which means it has nearly two years of capital, well within the time Rayaldee should hit its potential $12B market running.

Its recent acquisition of Bio-Reference Labs (NASDAQ:BRLI) had the predictable effect of knocking Opko shares down a bit, but that is typical on an all-stock transaction like this. Bio-Reference absorbed that market value, as the two stocks look like mirror images since the acquisition. This means that the market has not valued Opko any less since, despite share dropping. That value was merely transferred over to Bio-Reference labs. Eventually the two stocks should start trading together again, signs of which are evident even in the last few days. Additionally, the Bio-Reference acquisition works well with the release of Opko’s diagnostic platform including 4Kscore and Claros 1, which can take advantage of Bio-Reference’s specialties in marketing diagnostics. This is probably why Opko bought the company specifically now.

All this considered, there is little evidence that the market is valuing Opko any less despite a heavily shorted float, or even its acquisition of Bio-Reference Labs. If that market value was not transferred over to Bio-Reference shares which will eventually be merged in to Opko anyway, OPK would still be at its high. Shorting a company with a potential blockbuster within a year of approval that has completed phase 3 with flying colors is quite a risky bet, especially when that company’s CEO has been personally absorbing nearly the entire shorted float over the last month alone.

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