Opko Health Inc.(OPK)’s Massive Insider Buys: Should Investors Follow Suit? – Alnylam Pharmaceuticals, Inc. (ALNY), Merck & Co., Inc. (MRK)

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If the stock price does indeed stagnate, or even goes down, or if Frost stops his insider buying spree, many investors might become impatient and jump ship. This would cause the stock price to drop further, perhaps triggering more sales, and even some serious shorting activity.

Some believe that Frost’s continuous buying might be creating a short squeeze. However, Frost, while still buying, has slowed down his purchases, and the amounts tend to be lower. Furthermore, the daily significant buying can’t go on forever. If, for whichever reason, he decides to stop, the stock could tumble as its main bullish sign disappears.

Frost now owns more than 121 million shares of Opko Health Inc.(NYSE:OPK), for a total value of almost $850 million. Due to economies of scale, the price surge OPK has experienced mainly due to Frost’s insider buying has benefited him enormously, since he already held very significant number of shares. The unrealized prize gains arising from this price surge outweigh the cost of his almost daily insider purchases.

This is not to say that Frost’s goal is to drive up the stock price and increase his shares’ value. But investors should take that into account, and not believe that Frost is just spending his own cash without seeing any profit. The big risk, of course, is that Dr. Frost would sell his shares and pocket the profits from the price surge. I think that is very unlikely, and there is no denying Frost’s personal loyalty to Opko and sincere belief in its bright future. But he could do just that, and the main losers would be the investors holding the shares, not Dr. Frost.

Bottom line

Opko Health has had great momentum since August 2011, mainly thanks to Frost’s massive insider buying. The stock’s fundamentals are not especially attractive, but that is not uncommon for biotechnology stocks. If Opko Health Inc.(NYSE:OPK) comes up with a breakthrough product, its shares should climb.

So should investors join the buying frenzy? I think there is no clear answer. On one hand, Frost has unique insights into the company, and his purchase of such a large amount of shares is significant.

On the other hand, investors should be cautious: The stock has risen very significantly in a very short time, so it could experience a correction. Furthermore, the company is not yet profitable, and does not expect to be so in the near term. Eager Opko investors could end up with a dormant stock for some time.

The article Opko’s Massive Insider Buys: Should Investors Follow Suit? originally appeared on Fool.com and is written by Alex Bastardas.

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