In-Depth Article: “The Next Big Biotech”
OPKO Health (Ticker: OPK)
“The Next Big Biotech”
When it comes to investing in biotech stocks, it is extremely important to evaluate management, the pipeline, and the company’s ability to bring products to the marketplace. While most biotech companies are lacking in at least one of those categories, OPKO ($OPK) excels in each.
Dr. Phillip Frost is a physician, gone entrepreneur. In 1972, Dr. Frost and a partner bought Key Pharmaceuticals that was sold in 1986 for $600M. Dr. Frost earned $100M from that transaction. Dr. Frost served as Chairman of the Board of Directors and CEO of Ivax since 1987 and in January 2006 he sold the company to Israeli-based Teva Pharmaceuticals for $7.4 billion dollars. In 2006, Dr. Frost became Chairman of Teva, and in 2010 he became Chairman of the Board and was recently re-elected to that position. Dr. Frost became CEO and Chairman of OPKO upon the merger of three companies in 2007. Dr. Frost is a self-made billionaire on Forbes top 400 richest people. Dr. Frost clearly has what it takes to make OPKO the next big biotech.
OPKO currently has a 1.3 billion dollar market cap with 298M shares outstanding of which there is a 132M float. Dr. Frost currently owns 118M shares. Moreover, Dr. Frost literally buys 50,000-200,000 shares almost every single day. If you look at his purchases, he is literally buying the entire float. OPKO has about 230M in assets and little debt. Naysayers believe OPKO is overvalued given it only has 31M in annual revenues this year resulting in 31M shares shorted which is 23% of the float. Given the amount of shares Dr. Frost continues to purchase in the open market, the short interest should be much higher than 23%. What the shorts do not realize is that OPKO is not the typical biotech company. Dr. Frost has made many strategic investments and like other biotech stocks that receive FDA approval, OPKO is about to turn the corner generating significant revenues in a variety of billion dollars markets.
What makes OPKO’s pipeline so valuable? First, OPKO has a Diagnostics Point-of-Care System. It is a diagnostic testing device that can be used in doctor’s offices, patient homes and emergency settings. Testing has shown to be extremely accurate, they only take 10 minutes to get results, and it is significantly cheaper than sending to the laboratory. The tests under development are: Prostate-Specific Antigen (Total PSA) Test, 4KScore Prostate Cancer Test, Vitamin D test, Testosterone Test, Alzheimer’s Disease test. Results of the early Alzheimer diagnostic test showed a diagnostic specificity of 100% as announced in July 2012.
OPKO’s diagnostic testing is extremely accurate based on IgG autoantibodies as disease specific-biomarkers. This discovery platform is also potentially applicable for next generation testing for diabetes, cancer, multiple sclerosis, Parkinson’s and Alzheimer’s. Other testing applications include fertility, menopause, D-dimer, BNP, CTnl, HIV, Hepatitis, Syphilis, folic acid and others.
In 2011, OPKO entered into a nonexclusive license agreement with Bristol Myers to further develop an Alzheimer’s disease diagnostic test. The benefit of this test is that not only will it assist in early diagnosis, it can also be used to test the effectiveness for the treatment of Alzheimer’s patients.
Each of these diagnostic tests represent billion dollar market opportunities. Imagine going to your doctor’s office where they have the ability to obtain your test results within 10 minutes without having to outsource to laboratories. Furthermore, the tests being performed are next generation tests that improve accuracy. According to OPKO’s website, approximately 700,000 prostate biopsies can be avoided per year with their biomarker test.
In August 2012, OPKO was awarded a NASA contract for their diagnostic device. On October 1, 2012 OPKO launched 4Score in Europe and it is estimated to generate 1.8 billion annually. This next generation test is 99.4% accurate.
In June 2012, OPKO entered into a definitive agreement to acquire a 45% stake in a private Israeli company (also where Teva is based). This company has third generation hepatitis B vaccines. We all know the value of hepatitis vaccines as evidenced by Bristol-Myers acquisition of Inhibitex (INHX) in January 2012 for 2.5 billion.
OPKO is also developing small molecule and biological therapeutics to treat asthma and COPD, Parkinsons, CINV & PONV, and protein up-regulation for various diseases including cancer, heart disease, metabolic disorders, neurologic disorders, and genetic disorders. OPKO is also developing protein vaccines for influenza.
OPKO also acquired a variety of companies, some of which are profitable and puts OPKO at the forefront in emerging markets. OPKO Finetech was derived from a profitable company that has proprietary peptides and small molecule therapeutics. OPKO Mexico is researching cervical cancer vaccines, uterine cancer vaccines, human influenza vaccines, west nile virus vaccines, commercial APIs and other research. OPKO Chile is a profitable company that imports, commercializes, and distributes over 100 medical products in Chile including ophthalmology, diabetes, gynecology, and hypertension. They are also developing a line of pharmaceutical bioequivalents. OPKO EU is engaged in the development, manufacturing, marketing and sale of phamaceutical products, nutraceutical and veterinary products in Europe. OPKO Curna is developing unique therapeutic modality focusing on targeted up-regulation.
OPKO has also made a variety of strategic investments and partnerships, in addition to protecting many patents. OPKO owns rights to leading preclinical candidate SR-3306 and related molecule compounds that could be the first drug to protect the brain from Parkinson’s, MS, ALS and AD. OPKO acquired rights from a Taiwan company for vaccines against influenza and other viral infections. OPKO owns global rights to heparin-derived oligosaccharide for asthma and COPD.
What is also interesting is that both OPKO and Teva invested in Cocrystal Discovery, a privately held biopharmaceutical company focused on the discovery and development of novel small molecule antiviral therapeutics tailored for the treatment of serious and chronic viral diseases. It is currently developing oral, small molecule, antiviral therapeutics for Hepatitis C and influenza. OPKO has a strategic investment in Fabrus, a privately held company with next generation therapeutic antibody drug discovery. OPKO is aligned with Neovasc that is another private company developing and marketing various treatments for refractory angina and cardiac reconstruction. OPKO is strategically invested in Biozone whereas OPKO now holds a world-wide license for the development and commercialization of ophthalmology and other therapeutic fields. OPKO is also aligned with Teraro, Sorrento Therapeutics and ChromaDex Corporation for other products.
In 2010 OPKO out-licensed Rolapitant for the treatment of nausea and vomiting due to cancer treatment. Over 1000 patients have been evaluated in phases 1 & 2, with great results, and phase 3 results are expected in 2013. OPKO would be entitled to payments up to $121M and double digit tiered royalties.
To give you a general idea as to valuation for only 2 of the above items, world wide testing for next generation prostate markers is a 2 billion market. European approval of the Vitamin D test is expected in 2012 with US approval expected shorter thereafter. 100M tests per year equates to a 5 billion market. The aforesaid estimates were taken from the companies website. Amazingly, this is only the tip of the iceberg.
For more detail regarding all of the above go to: investor.opko.com/index.cfm and click on investor presentation.
With Dr. Frost at the helm of OPKO and currently sitting as the Chairman of the Board of Directors at Teva, OPKO’s management is second to none. Dr. Frost has a proven track record of building successful businesses and selling them. The fact that he is literally buying the OPKO float, to me, is a sign that he believes his company is going to be a huge success. With the vastness of the pipeline, new products now coming to the market, Dr. Frost literally buying the float, and a large short position, OPKO could also become one of the biggest short squeezes ever seen. As with any other company, there is always the speculation that Dr. Frost would sell OPKO, perhaps again to Teva where he is chairman of the board. While Dr. Frost is clearly an elite businessman and entrepreneur, at his current age of 75, one can assume he will be retiring soon. Perhaps it is a coincidence that OPKO acquired an Israeli company and Teva is an Israeli company. Maybe OPKO and Teva talk regularly as evidenced by the fact that both companies invested in Cocrystal Discovery. No matter what thought or speculation one has on OPKO, it clearly has the potential to be the next big biotech.
Disclosure: This article represents my own opinion. I have not received any compensation from the company. I may initiate a position in OPK within the next 72 hours. Everyone should do their own due diligence before investing.