Bottarelli’s “Next Major Biotech Takeover”

What options trade is Bottarelli hinting at for a stock with revenue growth, insider buying, and a new drug already approved?

By Travis Johnson, Stock Gumshoe, October 11, 2016

I’ve been seeing a groundswell of requests from readers to solve a teaser pitch about a little biotech stock, so that’s the plan for today…

… and as usual with biotech, I’ll start with the caveat: I can ID the stock for you, I’m quite sure, but I can’t tell you much else about it. Biotech doesn’t make sense to me most of the time, the financials are hypothetical and the science is inscrutable… so I leave that four Dr. KSS and our biotech discussion boards.

But we can at least ID this stock for you. So what’s the idea?

Bottarelli Research Options is fishing for new subscribers ($2,800/year), and their bait is this “Biotech Takeover Report” that they hint at in their emails… here’s what gets you to click on the link:

“We just published a new report predicting the next major biotech takeover for our top clients. Do we have inside information? No, of course not. Thatโ€™s illegal. However, this small biotech has everything a big player would want in a new acquisition. The call options recommended in our report are speculative and inexpensive, but based on recent takeover premiums they could soon be worth 28x what you can buy them for today.”

And the longer ad pulls out a few more clues for us:

  • 163 Insider Buys (vs. ZERO Sells) Over Last 6 Months
  • Revenues Up 3x Over 2015
  • FDA Already Approved the Drug, Launching Q4 2016
  • Stock Just Moved to NASDAQ, Yet Nobody Realizes It

So who is it?

I put the Thinkolator to work, despite the frosty New England morning requiring a bit of extra inducement, and the “probably” answer popped up pretty quick…. so are there any other clues to make it a “certain” ID?

“Itโ€™s the only drug on the market that will serve 26 million people in the U.S. and millions more overseas.”

and

“Right now, you can buy the stock for $10.91.”

and finally…

“Iโ€™m advising my top clients to buy January 2018 call options for $2.50.”

So… hoodat? This is almost certainly our old friend Opko Health (OPK), helmed by biotech entrepreneur/investor Dr. Phillip Frost.

And it is Dr. Frost who is responsible for essentially all of those “insider buy” transactions — if you break out the purchases into the tranches bought you’d get a far higher number, since his buying often amounts to four or five trades a day, but he generally buys shares at least two or three days a week. I haven’t matched that precise “163 buys” number over the last six months, and there have been two insider sells in the last six months (two different Directors sold shares in May), but I can’t find any healthcare stocks that have insider buying transactions even within a stone’s throw of that number other than Opko.

Some companies have very aggressive insider buying programs that seem designed to either institutionalize that ownership mentality or, if you’re looking at it more cynically, take advantage of the fact that some investors search for “insider buying” as a reason to invest — searching for that kind of behavior gets you firms like Con Ed or International Speedway, with pretty much every member of the executive team buying a small number of shares every month or two, but it doesn’t get you any pharma or health care stocks. Biotech and health care insiders are, other than Dr. Frost, almost exclusively sellers of stock — for health care and technology companies in general, stock is a standard part of compensation, and you have to sell that stock if you want to buy that boat or send your kids through college or whatever.

Other matches? They do have an FDA approved drug that is indeed launching (they expect) by the end of the year — that’s Rayaldee, which has been partnered with a dialysis company in exchange for milestone payments and a royalty (double digit tiered royalties, they say).

And Rayaldee does indeed aim at chronic kidney disease (CKD), which Opko reports as afflicting 26 million people in the US (though that’s all forms of CKD, and Rayaldee is only approved in a subset of those patients).

And yes, Opko did list on the Nasdaq a few months ago… which might help a little bit with visibility, since more biotech stocks are on the Nasdaq… but it’s not like this was a new listing or an IPO or even an “uplisting,” they were on the NY Stock Exchange before that.

The Revenue for Opko is close to “up 3X over 2015” — though you have to decide how precise you want to be about that. For the trailing twelve months revenue is just over a billion, and the full year 2015 revenue was about $490 million… for the most recent quarter, revenue was up severalfold ($357 million this year, $42 million last year in the June quarter)… and for the full year 2016 the analyst estimate is that revenue will be up about 160% over last year. You can make “over 3X” match, but it’s not precise. That revenue growth is overwhelmingly caused by their acquisition of Bio-Reference Labs, which is the cash-flowing lab business they bought last year — Bio-Reference Laboratories is the third largest diagnostic lab in the US, Opko bought them for about $1.5 billion worth of shares last Summer (though OPK shares were far higher then, in the mid-high teens).

And you could have bought the stock for $10.91 a week or two ago when this ad first started rolling… as, likely, you could have bought the January 2018 $10 call options for about $2.50 when the stock price was near $11. If you’re excited about the company for other reasons, you’re in luck — it’s “on sale” from those prices, the stock is down to about $9.70 and that same option is changing hands for for $1.80 (you could buy the in-the-money January 2018 $8 calls for about $3 today if you wanted).

That’s not to suggest you should buy the stock or the option, just noting that it’s lower.

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Why is Opko falling over the last week? That appears to mostly be related to their biggest current revenue driver, diagnostics — they acquired Bio-Reference Labs last year and are hoping to roll out more diagnostics products, including the 4kscore test for prostate cancer, leveraging the Bio-Reference sales force (and, later, their new Claros diagnostic testing machine system), and they got word from one of the Medicare administrators, Palmetto GBA, recommended a “no coverage” decision for the test. Since prostate cancer risk is extremely correlated to age, Medicare coverage is seen as a substantial issue — but there is apparently no certainty that this one decision will be followed by other Medicare Administrative Contractors (MACs), so I don’t know if that’s a small deal or a huge deal. If you’d like the company’s basic overview of where things are, you can check out the presentation that they made to an investor conference here (it’s about two weeks old).

And with that, I’ll leave it to you to cogitate and decide whether Opko works for your portfolio, whether a long-term options trade like Bottarelli recommends or any other exposure. But first, I can’t resist a note about options trading services.

For what it’s worth, Bottarelli does post their options “track record” here, if you’re curious, I have no way of verifying it or knowing what trades make up that track record, but the numbers look like what you would expect from a decent options trading service that doesn’t go highly speculative with out-of-the-money calls or puts — average gains of 10% or so per trade, holding period of ten days.

I would guess that those numbers don’t include commissions (they don’t say), which could eat up a substantial part of the gains for relatively low-return trades that you’re in and out of in a matter of a week or two, and they’re probably also “paper” gains, meaning the numbers might be hard to match if you’re trying to get a “fill” on an order at the same time that a few hundred other subscribers are also trying to make the same specific trade. Even the relatively liquid OPK options wouldn’t be easy for a large group to trade — the January 2018 $10 LEAP options on OPK have open interest of about 6,000 (that’s how many contracts exist right now, it could have been substantially different a week or two ago) and volume today of only about 250 contracts. That means there’s only $50,000 or so worth of trading in that particular options contract happening today ($180 per 100-share contract times 250 contracts traded), which is actually quite a bit for a relatively small $5 billion company… but not a lot if you have 400 subscribers who all want to buy or sell at once.

One newsletter alert to buy or sell for a contract like that could have a huge impact — if 400 subscribers (I’m just guessing at that number) each have $5,000 in the trade, that would be roughly 25 options contracts per subscriber… if they all wanted to sell at once, that’s selling pressure of 10,000 contracts, and if most of the open interest was created by that same newsletter’s original buy recommendation there may not be anywhere near that many interested buyers who can take the other side of the trade at prices anywhere near the quoted price. That’s the danger of options trading advisories, and I’m sure all of them warn their subscribers of this problem and push them to be careful about being patient and waiting for limit orders to fill at good prices, and are careful about mostly choosing pretty liquid options contracts… but I’ll be they almost all use bid/ask or closing prices for their “track record” calculations, and the bid on those options may not be so sturdy as you might hope (right now, for example, there are 585 contracts offered to sell the OPK January 2018 $10 call options at $1.90… but only five offering on the bid to buy at $1.75… and I don’t know how far below $1.75 you’d have to go to get that buy offer up to 20 or 50 or 100 contracts).

That’s just me taking the opportunity to point out a problem that many readers complain about when it comes to options trading advisory services — that’s not a Bottarelli-specific problem, and I don’t know whether they’re unusually good or bad at managing the impact of their subscribers on the market. If you’ve tried out this options service or other similar services and have any input to share on your experience, feel free to share with a comment below… and, of course, if you have an opinion about Opko or Phillip Frost, good or bad, you have the floor, just use the friendly little comment box below. Thanks for reading!


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DrKSSMDPhD
October 11, 2016 2:56 pm

We’ve warned people away from Opko in the biotech threads for some time. Two years ago we said its prostate diagnostics were lousy and derivative, and so coverage denial is no surprise. But lousy and derivative pretty much is a good descriptor for everything else Frosty is purveying with this dead-end company.

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Worldlyview
Member
Worldlyview
October 11, 2016 3:06 pm
Reply to  DrKSSMDPhD

Dr. KSS: could you briefly remind me why you think this is a dead-end company. Thanks.

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David B.
David B.
October 11, 2016 5:28 pm
Reply to  Worldlyview

“lousy and derivative” products and pipeline and poor management

๐Ÿ‘ 856
Smith
Member
Smith
October 11, 2016 3:52 pm

Tried the Bottarelli on a trial service after seeing their posted results. I’m an at home trader and would enter a trade as soon as I saw an alert come through. Most of the time I was unable to get the target strike they posted. Most trades were losers so I cancelled the service. Just my 2 cents.

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Edward
Guest
Edward
October 11, 2016 6:54 pm
Reply to  Smith

I found the same thing. Not one alert was a fillable price

Burt
Guest
Burt
October 12, 2016 5:39 am
Reply to  Edward

I have had a similar negative experience. Adam Lass writes nice copy to hook a fish but that’s about it….

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Fabian
Fabian
October 11, 2016 9:54 pm
Reply to  Smith

I almost subscribed and had the nose to check StockGumShoe’s blog before, for once because I’m impulsive and I use to like their technical weekly market comment Long live SGS.

lottomax
Member
lottomax
October 16, 2016 1:06 pm
Reply to  Smith

Hi Smith,

I’m also an at home trader. Any suggestions for subscriptions service to newsletters with alerts with their new picks that has been working for you?

thanks!

portland6
Irregular
October 11, 2016 9:30 pm

The newsletter writers have been “suggesting” an OPKO takeover for years – it had a good run a few years back – up to approximately $21 back then but obviously fallen… yet Frost keeps buying although his purchases are lower volume recently

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hendrixnuzzles
Irregular
October 11, 2016 10:38 pm

May I ask: What are Mr. Bottarelli’s scientific and medical qualifications, that we should follow his advice and recommendations in this field ?