Market Overview

In-Depth Look at Opko Health's Portfolio and Prospects

OVERVIEW

Opko Health (NYSE: OPK) is a mid-cap pharmaceutical stock with several corporate growth strategies: clinical drugs, medical devices, and strategic acquisitions. Of particular interest to many investors is its CEO's systematic buyback of common stock in the open market,

totaling over $23 million in buys for his personal account during the past year. Because of Opko Health's multi-faceted approach to the pharmaceutical business, most casual investors are not able to quickly analyze the financial condition of Opko Health, nor are they able to write it off as a one trick pony, "FDA approval or nothing" investment. As this article will demonstrate, a cursory analysis of the company's financials cannot reveal the nuances of Opko Health's corporate initiatives, which range from cancer research to pocket-sized blood testers.

This article will help the reader to better understand this $1.4 billion company, its long-term prospects, as well as the benefits and risks of Opko Health common stock (NYSE: OPK).

KEY POINTS

Before we begin, here are some key facts about Opko Health:

  • Multiple healthcare pursuits: drugs, medical equipment, vaccines, and diagnostic kits
  • One product in each of the following FDA phase trials: pre-clinical, phase I, and phase II
  • Over 220 employees
  • Therapy areas include parkinson's, oral herpes, alzheimer's, cancer (pancreatic, lung, and prostate), avian influenza, adenovirus, herpetic keratitis, emesis, and the H1N1 flu
  • Competitors: Alcon, Allergan, Novartis, Siemens, and Regeneron Pharmaceuticals
  • Cash burn rate of approximately $20 million annually, with over $70 million of cash on hand and under $9 million in debt
  • Insider buying of over $33 million over the past year, with less than $200 thousand in insider sales
  • Institutional ownership: approximately 15%

OPKO HEALTH: THE HOLDING COMPANY

Opko Health has multiple business verticals, including discovery, development, and commercialization. In a note on November 11th, 2011, research firm Jefferies explained that Opko operates not as a typical health care/biotechnology company but as a "holding company." (That same research note initiated coverage of Opko Health with a Buy rating and $8 price target.)

Most investors are familiar with holding companies like Berkshire Hathaway which seek to maximize shareholder value through increasing the value of their subsidiaries/holdings. Indeed, Opko Health does function as a holding company in many ways, although the majority of its employees have typical pharmaceutical tasks. Nevertheless, looking at Opko Health through the lens of "holding company," as Jefferies suggests, one quickly finds that the leadership team at Opko Health is familiar with this corporate strategy and have records of success using this strategy in former businesses.

Dr. Philip Frost launched Key Pharmaceuticals in 1972, which he grew quickly through commercializing drug delivery solutions and business deals with Pfizer, Mitsubishi Chemical, and other drug companies. Ultimately, after navigating the expected years of negative cash flow, revenues at Key Pharmaceuticals soared and the company was acquired for over $600 million. Despite personally earning $100 million in this acquisition, Dr. Frost quickly continued his career with Ivax, a generic drug company that aggressively bought businesses and rights until it was acquired by Teva for $7.3 billion. To the casual investor, Key and Ivax were odd organizations with limited potential, but Dr. Frost and other early investors gained over 1,000% returns by their aggressive growth and acquisition strategy. Dr. Frost also was willing to change business models quickly, such as when Key Pharmaceuticals changed its focus from medical equipment to business partnerships and undercutting market prices for standard drugs.

'GROWTH BY ACQUISITION' STRATEGY

Dr. Frost currently leads Opko Health in substantially the same way as his former companies: constantly leading towards rapid growth through strategic purchases, drug testing, equipment development, and commercialization of pharmaceutical treatments. A brief overview of headlines during the past year reveals Opko Health's aggressive acquisition strategy, indicative of the "holding company" model identified by Jefferies' analysts:

  • Licensing deal with Arctic Partners
  • Commercial research deal with the Scripps Institute
  • License acquisition from BioZone
  • Licensing deal with Chromadex
  • Acquisition of ALS Distribuidora
  • Purchase of a variety of prostate cancer tests
  • Acquisition of FineTech Pharma
  • Acquisition of Claros Diagnostics

The list goes on, and Opko Health has already struck five healthcare deals so far in 2012. Investors should expect more of these deals if history serves as any guide.

For some people, Opko Health's growth-by-acquisition strategy is difficult to understand and is not appropriate for their investment scenario. However, other people are able to analyze Opko Health's diverse portfolio of business verticals into a comprehensive view of the value of the common stock in which they are considering investing.

INVESTMENT CONSIDERATIONS

Investors should carefully evaluate the leadership team of the companies in which they invest, and investigating the 30-year track record of Dr. Frost should be no exception. Likewise, investors should look into the history of the company's successes, such as Opko Health's purchase of a chemotherapy relief drug for under $10 million that was quickly relicensed to Tesaro for over $120 million plus royalties. Similarly, investors should consider the company's failures, such as Opko Health's losses in ophthalmology (one of its half dozen treatment areas).

Like Dr. Frost's former business successes, Opko Health's revenues have been steadily growing and he forecasts exponential growth during the next decade. Nevertheless, the company is dependent upon governmental approval for its main drug candidates. Looking at the company's financial condition, with an annual cash burn rate of around $20 million, Opko Health's $70+ million of cash will last for a couple years but will have to be supplemented with additional financing for phase III or final FDA application periods, as is typical for almost every pharmaceutical company.

FUTURE REVENUE POTENTIAL

In closing, the future prospects of Opko Health can be summarized in list form, some of which may or may not receive final governmental approval. These revenue sources, nevertheless, play an integral role in Opko Health's $1.4 billion market capitalization, as investors anticipate future revenues while appropriately discounting the uncertainty of approval. With a large pipeline of potential drug treatments and a diversified portfolio of other pharmaceutical holdings, Opko Health will continue to provide an interesting option for the pharmaceutical investor. Nevertheless, all investors should consider the nature of Dr. Frost's fast-paced corporate growth strategy and--despite his billionaire status from former ventures--fully evaluate Opko Health for its unique characteristics.

  • Commercialization agreement with Scripps Institute for SR 3306, a Parkinson's treatment
  • Revenues from emerging markets (2011 returned $21.4 million in revenues from Chile and $6.3 million from Mexico)
  • Diagnostic tests for various forms of cancer (lung, prostate, and pancreatic) with potential sales of tens of billions
  • Anti-vomiting drug for chemotherapy patients
  • Diagnostic test for Alzheimer's disease with up to $800 million in potential sales
  • RNA-based drug discovery focusing on rare diseases with potential revenues of up to $78 million
  • Claros' PSA system revenues of up to $320 million by 2023
  • Inhalation-based asthma medication delivery system targeting a multi-billion-dollar market

CONCLUSION

A few of Opko Health's deals are already secured, and it has many more multi-billion-dollar deals contingent upon governmental approval. Opko Health does hold a $1.4 billion market capitalization as a reflection of current revenue, future potential, belief in management skill, Dr. Frost's systematic buybacks of common stock in the open market (over $23 million for his personal account during the past year alone), and an innumerable amount of other market forces, such as speculation and short interest. Although Dr. Frost's other investments have gained over 1,000% each, the pharmaceutical industry contains a significant amount of volatility, and news about cancer or major disease can result in sudden spikes in stock prices. In all, it is hoped that this essay has helped the reader understand the nuances of Opko Health and its exposure to a variety of healthcare revenue opportunities.

As always, investors should perform their own due diligence and consult with a financial advisor as to the suitability of Opko Health common stock for their portfolio. Neither this site nor the author recommend that you buy or sell any security.

Posted-In: Jefferies & CoLong Ideas Short Ideas Trading Ideas Best of Benzinga

 

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