2012-10-03 13:14:57 -
By Scott Matusow
Those 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. That ultimately gets a lot of them into financial
trouble since many of them wait too long to cover short positions.
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
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
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
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:
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(TM) in Europe as part of IHT's
ProstateCheck(TM) 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
* · 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
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
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.
Disclosure: Long OPK
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