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The Strange Case Of Lakewood And Opko Health

Whitney Tilson is disclosing shorts right and left these days. Now his third short position in less than a few months happens to be in Opko Health Inc. (OPK - Get Report). Tilson got the idea of shorting Opko from the Robin Hood Conference that took place on November 21-22. At the same conference, Tilson presented his own short attack on Lumber Liquidators Holdings Inc (LL - Get Report), which is is doing well for him so far.

Opko Health

Lakewood is short or long Opko?

Anthony Bozza presented his short thesis on Opko Health Inc. (OPK - Get Report), a pharmaceutical research company that also develops diagnostic tests, at the Robin Hood Conference. We covered what Bozza had to say about the company briefly before and will go into more detail this time. However, what we find more intriguing is that Lakewood initiated a new position in Opko Health in Q3, according to the 13F filing H/T to one of our readers for pointing it out back in November. The hedge fund bought 302,065 shares of Opko’s common stock in that quarter, meaning that Lakewood was long Opko until the end of September. Interestingly, we have also heard that Lakewood has shorted Opko Health before in the first quarter, however we could not confirm this.

Also see: Whitney Tilson Up 5.4% In October; Gains On GMCR, K12 Shorts

In response to this confusion about whether Lakewood is long or short Opko Health Inc. (OPK - Get Report), the hedge fund said that they had never had a net long in Opko Health. Their reason for acquiring a small long position in the company as stated on Seeking Alpha,

“In the case of a stock that may be difficult to borrow like Opko was in September, it is often prudent to ensure your borrow is secure by shorting more than your desired position size and offsetting it partially with a smaller long position in the event the borrow becomes less available. As a hypothetical example, if you desire a $10 million short position, you may decide to short $12 million and offset it with a $2 million long position, thereby maintaining your desired position size $10 million net short exposure while having ample shares available to meet any possible stock borrow recalls that could ever occur i.e., if the shares ever become less available to borrow by short sellers.”

Lakewood further said that it has now discarded its long position as the stock became more easy to borrow, and the fund has maintained its net short position size. Had Lakewood explained its reason to be long, it would have helped in eliminating a lot of confusion.

Interestingly, the hedge fund did not discuss the short position in their Q3 letter, a copy of which was obtained by ValueWalk. The fund discusses at length many other short positions, including Tesla Motors Inc (TSLA - Get Report), Westport Innovations Inc. (WPRT) (WPT), InterOil Corporation (IOC), Rackspace Hosting, Inc. (RAX), Tangoe Inc (TNGO), Geospace Technologies Corp (GEOS), Mellanox Technologies, Ltd. (MLNX - Get Report) TLV:MLNX, Fusion-IO, Inc. (FIO) and Clean Harbors Inc (CLH). However, there is no mention of the controversial stock in question here.

Also see: Whitney Tilson Follows Up Says K12 'VERY High Conviction Short'

The short case for Opko Health

Lakewood’s short case is based on Opko Health Inc. (OPK - Get Report)’s history of making empty promises and under-delivering on forecasts. To back its allegation, the fund says that out of 30 investments/products that Opko has claimed to be working on, 25 have seen delays and disappointments. Lakewood also thinks that the company’s Latin American business is partly worthless and that it cannot account for the bulk of Opko’s revenues, like the company says. Opko’s showcase, a diagnostic test for Alzheimer’s that accounted for most of its net asset value back in 2012, is now an old story. The unique blood test did not give promising results and it appears the company has moved on, writes Lakewood.

Bozza’s presentation on Opko Health criticizes the company’s history of creating hype over small things. He said that one of its acquisitions, Claros Diagnostics, makes one product which doesn’t work. Furthermore, Opko Health Inc. (OPK - Get Report) is unlikely to see any success in its diagnostic test for prostate cancer and there is also no future for Rayaldy, a drug used to treat chronic kidney disease. Lakewood also expressed no confidence in Opko’s CEO Phillip Frost, because of his curious associations with stock promoters and penny stocks that turn out to be fraud. Given all the stated flaws in the company’s business with an overly-swollen market cap of $5 billion, Lakewood sees 75-100% downside in Opko. Lakewood ended their short thesis by adding,

“We believe Opko Health’s shareholders have unknowingly been fed a placebo, a mere sugar pill of insider share purchases, overhyped opportunities and bullish analyst forecasts. The problem of course with a placebo is generally of confidence. As long as people believe in the efficacy of a placebo, it has remarkable powers, but once people realize the supposed wonder drug is just a sugar pill, its powers can suddenly disappear.”

And here’s a fun fact: in Lakewood’s presentation, they mention that Opko Health Inc. (OPK - Get Report) frequently gets bullish reviews from the financial blog, Seeking Alpha. They go on to say that stocks that are highly covered by this blog tend to be volatile and act as day trading vehicles. Whitney Tilson, also short Opko Health, happens to be a popular blogger on Seeking Alpha. To his credit, Tilson has lately only discussed short ideas there. Lakewood Capital also chose Seeking Alpha to disclose their short publicly, where they said,

“Lakewood has never published its research and analysis in a public forum, in this case, we feel compelled to do so as all investors deserve fair access to the research that underscores the cautious view that we have expressed.”

We’re just saying.

See full letter here- Opko-Health-report-Lakewood-Capital-12-11-13.pdf

-By Tabinda Hussain

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