Opko Health Inc (OPK)

[WiseFool]

Lowenthal Capital Partners sees "Significant Upside Ahead for Opko Shareholders"

Insiders Are Buying Up Opko Health, Here's Why

Lowenthal Capital Partners
Jul. 1, 2015 6:05 AM ET

Summary

> Opko Health approaches multiple value-driving catalysts.

> Insiders continue to buy shares on a biweekly basis.

> I am a buyer at current price levels. For reasons I will discuss, there could be considerable upside ahead.

Introduction

Opko Health (NYSE:OPK) is an emerging biotech/diagnostics company with a deep-rooted pipeline. Its commercial focus is stretched across four high-value markets: point-of-care diagnostics, novel molecular diagnostics, and pharmaceuticals and vaccines. The company's Founder and CEO is Dr. Phillip Frost, who previously served as Chairman of Teva (NYSE:TEVA), which is the largest generic manufacturer in the world. The company has roughly a $55 billion market cap.

Dr. Frost has a well documented track record of developing companies that produce outsized returns for their shareholders. For reasons to be discussed, I have concluded that Opko is one such company. As insiders continue to purchase significant blocks of shares leading up to major value-driving catalysts, I find it difficult for any biotech investor to sit on the sidelines. At this juncture, there are compelling cases for both short-term and long-term share price appreciation in Opko stock.

The Rayaldee program approaches major catalysts

Opko recently announced a new drug application (NDA) submission for Rayaldee. The drug is targeting secondary hyperparathyroidism (SHPT) in patients with stage 3 or 4 chronic kidney disease (CKD) and vitamin D insufficiency. Rayaldee has succeeded in two late-stage studies, both of which established safety and efficacy. Patients experienced, on average, a 30% decrease in plasma parathyroid hormone (NYSEARCA:PTH) and a higher response rate as the duration of the treatment increased.

The next near-term catalyst investors can expect from this program is FDA acceptance of the NDA submission, which should come soon. Because it is the last step until a final regulatory decision on Rayaldee, investors should receive this development positively. The stock price could reciprocate with a favorable PPS boost.

I believe Rayaldee is a commercially viable asset that has the potential to acquire significant market share from marketed products. If approved, Opko would stand to market the product to an estimated 4 million pre-dialysis CKD patients in the US, and possibly 16 million more worldwide, pending additional regulatory approvals in key foreign markets. The overall CKD market itself is estimated at $12 billion through 2022, so I suspect the company has a substantial long-term market opportunity, if everything goes to plan. Opko is simultaneously developing the drug candidate in a Phase 1 study targeting adjunctive cancer - more than a $24 billion market. Positive outcomes for Rayaldee in CKD should validate, to some extent, Opko's efforts in this second indication.

Q2 2015 earnings report and 4Kscore Test

Opko's 4Kscore Test is a diagnostic which has demonstrated the ability to accurately determine the aggressive prostate cancer risk for individual patients within 20 years. In Q1 2015, the company updated shareholders on the status of reimbursement for the 4Kscore Test. The company acquired 250 additional urologists who have integrated the diagnostic in their practices - up nearly 50% over Q4 2014. In Q2, uptake of the diagnostic should be complemented by Opko's presentation at the Annual Meeting of the American Urological Association on May 14, which attracted over 10,000 clinical professional attendees.

The diagnostic market for prostate cancer is estimated to be valued around $2 billion, and is steadily growing, as thousands are diagnosed with prostate cancer each year. The company expects to participate in this market growth, and is taking the necessary steps to ensure that 4Kscore Test becomes the preeminent diagnostic for prostate cancer. Recently, for example, Opko announced that the National Comprehensive Cancer Network (NCCN) integrated 4Kscore Test into its guidelines as a recommended treatment for early stage prostate cancer detection. NCCN represents a culmination of cancer treatment recommendations formulated by the world's top 21 cancer centers. The network's recommendation of Opko's cancer diagnostic thus suggests that it will be adopted, if not already, by these top cancer centers along with many others which refer to NCCN treatment guidelines in respect to prostate cancer diagnostics.

Opko expects to terminate the out-of-pocket payment period for 4Kscore Test at the time of writing, June 30, at which time it will bill both private insurance and Medicare. The company will not realize revenues immediately after billing payers, as it will still need to negotiate terms of payment. Opko is proactively negotiating with bigger payers in order to expedite reimbursement once they are billed. Revenues generated after reimbursement is finalized should strengthen the company's bottom line. In addition, the Current Procedural Terminology code (NYSE:CPT) for the 4Kscore Test should be published already, enabling the accrual of tests inside the American Medical Association's database. This will complement Opko's efforts to receive payment for tests conducted prior to said negotiations with payers.

Reimbursement is the preeminent value-driving catalyst for Opko. Once reimbursement is confirmed for the 4Kscore Test, it is only a matter of time before the company's market valuation increases exponentially. More information will be provided in its Q2 2015 earnings report, at which time I also expect the company to report that the diagnostic has experienced exponential quarter-over-quarter market growth.

Rolapitant PDUFA date is approaching

Opko is developing Rolapitant for chemotherapy-induced nausea and vomiting (CINV). The product candidate has flourished in clinical trials, and currently awaits a September 5, 2015 PDUFA date. The final regulatory decision on Rolapitant serves as a major near-term catalyst. I believe the product candidate will receive regulatory approval. Several late-stage studies demonstrated that the product candidate may offer extended protection against CINV over a five-day period. This is a critical benefit over standard care, as existing treatments neither prevent CINV from taking effect, nor offer the same duration of protection as Rolapitant.

Opko should be able to acquire a notable market share in CINV, which is currently valued at $1.25 billion. Analysts currently predict anywhere between 70-80% market penetration for Rolapitant as compared to what is presently available to patients. It is important to remind investors that Opko has a license agreement for the product candidate with Tesaro (NASDAQ:TSRO), making the former eligible to receive the following: up-front and milestone payments valued at up to $121 million, double-digit tiered royalties on sales, an undisclosed share of future profits in Japan, and an option to market Rolapitant in Latin America.

The approval of Rolapitant should trigger a milestone payment. Opko also established an equity position in Tesaro, so it stands to benefit, should the Rolapitant approval and/or subsequent sales catalyze an increase in Tesaro's stock price. The next near-term catalyst from the Rolapitant program is the PDUFA date on September 5, at which time an additional catalyst - the milestone payment - could surface if the product candidate is approved. Subsequently, commercial launch and sales growth both serve as value-driving catalysts for Opko and Tesaro shareholders over the long term.

Bio-Reference acquisition

Opko stock faltered following the company's $1.47 billion acquisition of Bio-Reference. Wall Street's negative reaction to the acquisition suggests that Opko overpaid for Bio-Reference, despite the compelling synergies manifested in the deal. The launch of 4Kscore Test, in particular, is enhanced by the acquisition through Bio-Reference's commercial and distribution resources, such as its array of specialty laboratories and connections with healthcare providers. The latter should help Opko receive reimbursement for the 4Kscore Test. Moreover, the acquisition could enable Opko to turn a profit much sooner. Some analysts predict that it could even turn a profit next year, at which time its product candidates - if approved - and diagnostic product line could generate over $900 million in annual sales.

I expect Opko management will discuss the acquisition in more detail during the Q2 2015 conference call. Completion of the acquisition serves as an upcoming catalyst for Opko shareholders, which is expected to take place in the second half of this year.

Insiders are accumulating

Over the past three months, insiders have purchased over $6 million in Opko stock. CEO Frost continues to buy shares on the open market on a biweekly basis, with the latest purchase valued around $110,000 on June 30. This follows his earlier $110,000 purchase on June 27. I view this as a positive sign; insiders are implicitly expressing confidence in the company by investing alongside shareholders at fair market value. With skin in the game, insiders have all the more reason to perform optimally and drive shareholder value.

Conclusion

I maintain that there is significant upside ahead for Opko shareholders. There are a plethora of near-term and long-term developments aside from those listed that could add shareholder value. The company's long-term growth potential looks strong, so I believe establishing a short position in Opko is not a viable investment strategy. The world of biotech is riddled with companies with questionable prospects. Opko does not appear to be one of them.

Additional disclosure: I will continue to buy shares of OPK on any dips. The material presented in this article is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither the writer, Lowenthal Capital Partners or associates warrant its completeness, accuracy or adequacy. This material is opinion only and should not be relied upon for making investment decisions. Neither the writer, Lowenthal Capital Partners, or its associates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance and past analysis are not indicative of future results. Neither the writer, Lowenthal Capital Partners, or its associates are registered financial advisers. They may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here; the risk of loss in trading is great. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. All opinions expressed herein are subject to change without notice, and only intended at the moment of their expression. Conditions and opinions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs, and is not intended as a recommendation of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Lowenthal Capital Partners

ABOUT
My name is Trevor Lowenthal. I am the Managing Partner of Lowenthal Capital Partners, an investment group based out of Davis, California. LCP has consistently outperformed the market since its inception in 2014.

As an analyst for LCP, I focus on undervalued opportunities in the healthcare sector. I've found much of my success as an investor simply by conducting my own due diligence. I've managed to consistently outperform the market by more than 10%. I'm ranked four out of five stars by the financial analyst/blogger ranking service TipRanks, rating higher than the majority of bloggers and professional analysts. As my long-term investment theses continue to play out, I expect my success will continue.

Disclosure: I am/we are long OPK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.