This week Opko’s long suffering investors, me included, descended to the 9th level of biotech hell when both Dr Phillip Frost and Opko Inc itself were sued by the SEC. The allegations include a kind of stock market manipulation known as “pump and dump.” These shocking charges punished the share price so swiftly that share trading was temporarily halted by the Nasdaq exchange as part of a routine “cool down” policy that Nasdaq follows in such circumstances. When share trading finally resumed several days later, share prices tumbled to unprecedented new lows.
This is only the latest misfortune to assail investors unfortunate enough to have put money into Opko. The company’s prostate cancer test, the 4K score, looked great on paper but has never really taken off in the urology community. The company’s epic purchase of Bioreference lab, undertaken during much better times when the stock price was sky high, has been an exercise in frustration as the laboratory’s revenues and cash flows have persistently gone in the wrong direction. Rayaldee, the company’s first big novel pharmaceutical launch aimed at the renal market, has lately shown glimmers of promise; but a blockbuster it is not.
And now this!
Being a long time Florida resident, I intimately know both “pump and dump” stock schemes and Opko, and let me tell you, dear readers…….the only fraud here are the outlandish charges against Opko! Opko has been a poor investment up until now, but to label the entire enterprise a stock manipulation scheme flies in the face of obvious facts and common sense. Here are a few points to keep in mind as the media hurls unsupported accusations at the Miami Biotech…..
1) Opko is in every way the opposite of a “pump and dump” fraud.
This kind of fraud scheme is usually labeled “pump in dump” because sham promoters lie about a company’s prospects, benefiting from less knowledgeable investors who buy shares based on fraudulent promotion, and then dump the stock to move onto the next thing after these duped investors have driven up the price of the shares. The key hallmark of “pump and dump” is that the subject company barely exists at all, or has a true existence that in no way matches up to to the lies that the promoters spread. A classic example of a “pump and dump” scheme would be a small veterinary company that suddenly decides to coin a cryptocurrency, employing salespeople in a boiler room to tell the world, and then suddenly disappears when the cryptocurrency crashes.
Opko couldn’t be more different! Opko owns and operates the third largest clinical laboratory in the United States, with hundreds of employees, hundreds in millions in recurring revenue, and thousands of physician and patient clients. I know; I am one of those patients. I paid real money, had my blood drawn, and got real lab results. This is no fly by night fraud.
2) Stock Fraud schemes typically operate in the shadows; Opko is an exercise in radical transparency.
“Pump and Dump” schemes are typically orchestrated by sketchy stock promoters with long histories of legal and financial trouble. They often employee “front men” such as down on their luck celebrities while the true owners are less than forthcoming about their identities. This couldn’t be further from the truth with Dr. Frost and his Opko team! You can barely drive ten minutes in Miami without finding a cultural or scientific institute with Dr Frost’s name on it. The pharmaceutical mogul has a decades long track record of honest dealings in both business and philanthropy. Most importantly, Dr. Frost has gone way out of his way to directly communicate his business goals with his shareholders. I know, because I have attended Opko annual shareholder meetings in person for several years in a row. Despite being a multi-billionaire, year after year Octogenarian Dr. Frost stands in front of his most activist shareholders and allows himself to be grilled with tough questions. The same for the vice presidents and division heads who routinely work sixty hour weeks trying to move Opko forward. There is little that goes undetected or undiscussed at these recorded, open to the public meetings. These meetings are far from the clandestine boiler rooms filled with known white collar criminals making fantastical claims that would typically be associated with stock fraud.
3) Dr Frost is NOT Opko, and Opko is NOT Dr. Frost.
Even though Dr. Frost is Opko’s controlling shareholder and a dynamic force at both public and private meetings, he is still an Octogenarian who cannot live to see Opko achieve its long term goals. As such, he has a team of long tenured biotech executives who help execute the company’s vision. All of whom are shareholders who would NOT benefit from a short term “pump and dump” scheme.
The SEC’s charges actually allege that Dr. Frost liked to trade in the shares of thinly traded micro cap biotechs, and that this trading eventually because fraudulent when he began to collude with other business people to manipulate the share prices, instead of letting a free and fair market determine the share prices. Opko was named in the suits because the SEC believes that he used Opko as a vehicle to trade these smaller micro cap shares. Although these charges fly in the face of simple logic (the supposed gains from the “schemes” would have amounted to .01% of the billionaire’s net worth) it’s not impossible that Dr. Frost’s stock trading side hobby got out of control. But these allegations should be evaluated SEPARATELY from the overall merit of Opko. Opko employees hundreds of people, and many more thousands trust the company with their lives. Even if Dr. Frost somehow used Opko corporate resources for an ill conceived share trading misadventure, that DOES NOT mean that Opko has suddenly become some kind of mafia like enterprise. The news media has exaggerated the extent to which any of this news is relevant to Opko, and investors have been punished accordingly.
4) We will never know the full truth.
It’s critical to remember, that the SEC has filed CIVIL charges against both Opko and Dr Frost. These are not the same as criminal charges, in several ways. First, the allegations are currently not serious enough for anyone to go to jail. The worst that would happen are fines and prohibitions on certains kinds of professional activities for the accused. Secondly, the burden of proof is much lower than in any criminal proceedings. It’s much easier for the SEC to level unsubstantiated charges, because in Civil cases they only would have to prove that Dr. Frost was “most likely” guilty, as opposed to the “beyond a shadow of a doubt” that we all know about in the criminal world.
Most importantly, the SEC will probably never have to prove anything, and they know it. 95% of these cases are settled out of court, because it just makes mathematical sense. Although Dr. Frost has pledged to fight as long as necessary to clear his name, he knows that the very whiff of impropriety has damaged the value of his Opko shareholdings, and that his employees and fellow shareholders are in agony. Assuming he truly believes in the company that he has struggled to build from $0 in revenue, he knows that the negative publicity surrounding this incident seriously impairs Opko’s progress. The fines he would likely have to pay to settle the case will pail in comparison to the damage to the value of his Opko shareholdings. It just makes simple mathematical sense for him to settle. It will be a high publicity victory for some young career climbing attorney at the SEC, and Frost and his shareholders will be able to move on with life. Pretty good deal for the SEC, isn’t it? If you were trying to make a name for yourself at the SEC, wouldn’t you have filed charges as well?
If you choose to dump your Opko shares, do it because the 4K score test has been a commercial disappointment, or do it because you don’t want to own shares in a laboratory that keeps bleeding revenue. But think twice before you allow media induced panic to lock in any paper loses you may have. Investing in Biotech is always a roller coaster ride, and the riches eventually go to those with a strong stomach. The perilous journey that is Opko is no exception!