Opko Health Inc (OPK)

[WiseFool]

OPKO – Performing Consistently

Samreen Agha
Small-cap, value, growth, healthcare
Aug. 31, 2015 1:15 PM ET

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Summary

OPKO is successfully performing on its business model with pipeline advancement, revenue generation and strategic investments.

According to estimates, it is expected to turn profitable by next year.

Multiple important catalysts approaching, including PDUFA date of Rolapitant, conferences, and trials.

OPKO Health (NYSE:OPK) has had a good year, so far. It has risen almost 13.7% since I last wrote about it, and declined a lot more during the year; however, it still has a number of catalysts left for the year. The catalysts throughout the year and into 2016 are instrumental for turning the company profitable in a year or so. Yes, OPKO is this close to turning profitable and the business model is soon going to pay off. Dr. Frost’s able management, strategic investments and consistent insider buying has only increased the trust in the company.

Recent Investments

OPKO on June 3, 2015 entered into a merger agreement to acquire Bio-Reference Laboratories, Inc. following which the company’s shares declined. The share decline was attributed to the fact that OPKO is overpaying for this acquisition. However, the long-term benefit that this acquisition will unlock is substantial, since it provides a remarkable sales force to better market its 4Kscore test. The value that this deal adds is best explained in Dr. Frost’s letter to shareholders as:

“The strategy behind the recent Bio-Reference acquisition is twofold. First, it is a business whose revenues and profits have grown consistently since its launch by Dr. Marc Grodman in the 1980s, primarily through organic growth, to become the third largest full service reference laboratory in the United States. It has built a reputation of innovation with recognized franchises in women’s health, cancer and, more recently, genetics, helping physicians worldwide to diagnose rare genetic disorders and to identify special features of a patients genetic material to select more effective chemotherapy. Second, it provides an infrastructure for marketing and sales that reaches approximately 10 million patients a year. Reimbursement is an important factor for the success of diagnostic products and Bio-Reference has a large team of experts who can complement our efforts to be sure that payors recognize the value of our tests for reimbursement purposes.”

Another significant investment made by OPKO is that of EirGen Company in Ireland. EirGen has a very rich pipeline with 10 applications filed with the FDA, 3 of which have been approved, an additional 4 filings in Europe all of which are approved, and 4 out of 5 approved in Japan. Not only this, the company has 24 drugs in development. From the strategic point of view, this acquisition is the first of OPKO’s investment in Ireland, and Dr. Frost did emphasize that Ireland is a good place to concentrate the company’s efforts, thus more investments in Ireland are expected. The benefits of investing in Ireland include the low tax rate and the government paying for the R&D work going on.

Oxyntomodulin (MOD-6031) on to Phase I

OPKO is expected to begin the Phase I clinical trial for its obesity and diabetes drug – the long acting Oxyntomodulin (OXM) MOD-6031 – by early 2016. OXM is a peptide hormone which is secreted following food intake and induces fullness after reaching the brain. Thus, it is a powerful appetite suppressant, which also increases glucose tolerance. The reduction in food intake is also accompanied with an increase in energy expenditure.

In addition, OXM also activates the glucagon receptor (GCGR) and the glucagon-like-peptide-1 receptor (GLP1R). Activation of GCGR increases the production of glucose which may pose as a hyperglycemic risk; however, the simultaneous activation of GLP1R counters the effect by release of insulin. Thus, these two receptors together can provide a superior treatment option for diabetes and obesity. However, the benefits of OXM have been limited due to its relatively short life, which requires frequent administration. This is where OPKO is working by linking the natural OXM to a proprietary hydrolysable linker and substance to increase biological half-life, thus, forming a long-acting OXM which will require weekly injections. In preclinical trials, the candidate MOD-6031 was administered to obese mice and rats, and they shed almost 20% of their weight without any worrisome side effects. OPKO expects to begin human trials for this candidate early next year. Earlier, the Phase I trials were expected to begin in the second half of 2015; however, in the recent letter to shareholders by Dr. Frost, it is mentioned that the trials will be beginning early 2016.

Various studies evidence the weight-shedding effect OXM has on the subjects, but thus far the utility was limited due to the short life of OXM. OPKO got the drug when it acquired Prolor Biotech in 2013. Dr. Frost believes that the drug can achieve $100 billion potential, and that OPKO will be able to tweak it to be a successful obesity drug. Dr. Frost even went on to claim that the companh may be able to control obesity. His exact words are:

“We are taking technology that extends the life of the hormone, which itself has already been proved in previous studies to reduce weight. With a single injection a week, we think we can control obesity.”

Obesity Drugs

To date, an effective treatment for obesity eludes pharmaceutical companies. Those drugs already in the market claimed of blockbuster potential, but are nowhere near proving that potential. Obesity drugs are tricky because they must be free from serious adverse events and also must be fast-acting to keep the patients on the drug. However, the drugs already approved do not fulfill these criteria, as can be seen in the table below. And it is early for OPKO even to expect that MOD-6031 may come out without any glitches, but with Dr. Frost and his history with re-engineering drugs, there is a fair chance of success.

As evidenced from the table, the already approved obesity drugs require frequent doses and their mechanism of action is varying. Not only this, they have a number of side effects, which may be responsible for the lower uptake of the drugs. However, OXM in mice has shown marked weight loss and also decreased the food intake. The native OXM reduced food intake for around one hour; however, OXM-5CTP maintained this inhibition for about 80 hours or 3 days. This not only means that the biobetter OXM is effective but also increases the prospects of the candidate.

Competition in OXM Space

There are a few other pharmaceutical companies which are using the dual GLP-1 and GCG agonists to develop candidates for obesity, and are already in advanced stages of development.

Zealand Pharma (OTCPK:ZLDPF) (OTCPK:ZLDPY) requires administration of its candidate on a daily basis, which in a way excludes it from the competition. As for Hamni Pharmaceutical, it is administrating once weekly, and expects to file NDA for the obesity indication by 2020, if all goes without glitches. The trials in mice showed a 23% decrease in body weight, which was driven by fat mass reduction and not by body lean mass. Furthermore, blood glucose levels also witnessed a decrease; however, the food intake inhibition was not measured. As for Eli Lilly’s (NYSE:LLY) TT401, the Phase I trial reported body weight loss and glucose levels reduction. However, it also reported mild side effects such as nausea and vomiting, which is a common side effect of GLP-1 activation. The results of the Phase II trial have an estimated completion date of August 2015. Given the positive results of the trial, it should be able to commence Phase III trials pretty soon. Thus, it is not entirely out of question that the drug may be in the market in the next 3-4 years.

Updated Pipeline

OPKO has included two preclinical candidates in the updated pipeline. One is the AntagoNAT platform aimed for the indications cancer, CV, metabolic and orphan diseases. The animal models have shown that these AntagoNATs have enhanced the mRNAs expression that are responsible for certain genes transcriptions into functional proteins. The most advanced program is CUR-1916 for SCN1A (sodium channel protein) for treating Dravet Syndrome, and OPKO aims to file an IND once the toxicity studies in animals are completed. And an orphan designation for the candidate will also be requested from the FDA.

The other program is the CYP24 inhibitors being developed for the indications Secondary Hyperparathyroidism (SHPT), Chronic Kidney Disease (CKD) and cancer. A Phase I trial is targeted for the fourth quarter of 2016, and the market size is estimated by OPKO at $1 billion.

Upcoming Catalysts

The PDUFA date for Rolapitant, the treatment for chemotherapy induced nausea and vomiting (CINV), is set at September 5, 2015. Rolapitant will be competing in a $1.5 billion market, and in my previous article, I put a modest estimation that it should be able to capture about 15% of the market, which brings the estimated potential to about $0.23 billion. OPKO will receive milestone payments and double digit royalties from Tesaro (NASDAQ:TSRO) upon approval and commercialization. An approval is extremely likely, and will result in a price hike for OPKO.

OPKO will be participating in the Barrington Research Fall Investment Conference on September 1, 2015. These meetings have a positive impact on share price and the general investment sentiment. Additionally, OPKO will be presenting reports in the 54th Annual Meeting of the European Society for Pediatric Endocrinology (ESPE) on October 3, 2015. Two abstracts accepted for presentation are the additional data for hGH-CTP pediatric Phase II trials. One is for the pre-pubertal growth hormone deficient children, while the other is for the Growth Hormone Deficient (GHD) children. These oral presentations will have a positive impact on the stock price based on the news relayed.

The Phase IIa trials for Factor VIIa-CTP for Hemophilia is also expected to begin dosing in the next few months. The candidate has been granted orphan drug status in the US and Europe, and has a market size of $1.7 billion. The current product for hemophilia, NovoSeven, requires 3-4 doses a day during bleeding episodes, and 1-2 times a day for prophylactic treatment. However, OPKO’s candidate demonstrated in the pharmacological studies a dosage frequency for prophylactic treatment 2-3 times a week.

OPKO’s 4Kscore test was included in the National Comprehensive Cancer Network (NCCN) guidelines, which was a notable feat for the test. The company is fervently pursuing its effort to gain reimbursement by targeting highest CPT code i.e. a category 1 CPT code, which will further solidify the position of 4Kscore. The application submitted to the AMA CPT Editorial Board on July 15 will be reviewed by October, and OPKO expects a favorableresponse by the beginning of 2016. This catalyst is of importance not only for the 4Kscore test’s validation but also for the revenues the increased insurance coverage will bring.

Another major NDA related catalyst is that of the PDUFA date for Rayaldee on March 29, 2016. OPKO will be submitting the 120 safety updates to FDA by September 25, 2016. Rayaldee is a blockbuster potential drug and its approval will result in a price hike. On the contrary, any negative comments or delays from the FDA will obviously be detrimental to OPKO’s stock price. However, my bet is on the approval of the NDA and the subsequent commercialization will take place as expected.

Other catalysts for 2016 include the expected 510(k) filing of the Claros 1 platform for the testosterone testing, and a PMA filing for PSA testing, both in the first half. The PSA test will complement the 4Kscore test and will be marketed by the Bio-Reference sales force. A PSA test result raising suspicion will call for a 4Kscore test to help the physician in making a decision as to the condition and subsequent treatment. Furthermore, the final global Phase III study protocol for Fermagate, the calcium phosphate binder, is also expected in the first half of 2016.

Financial Condition

Financially, OPKO is stable given the various revenue generators, including the diagnostic tests and the approved candidates. A major chunk of the revenue will come from the 4Kscore test, given its strong uptake and the reimbursements. The recent acquisitions of Bio-Reference Laboratories and EirGen are also set to bring in healthy revenues. Bio-Reference alone had $432 million of revenue in the first half of 2015, with an operating profit of $30.9 million. As for EirGen, it reported a profit of $1.1 million in 2014. This will bring in healthy revenues for OPKO over the years. Analysts estimate that OPKO would turn profitable by 2016, with an estimated EPS of $0.03.

OPKO had a cash balance of $221 million at the end of quarter 2, which also included the upfront payment from Pfizer (NYSE:PFE) of $295 million, and excluding the acquisition made of EirGen. The cash position of OPKO is expected to stay stable, as the company will again be eligible to receive a $110 million milestone payment from Tesaro on the expected approval of Rolapitant’s NDA next month. Tesaro expects annual sales of over $1 billion for Rolapitant, of which OPKO will receive double digit royalties.

Insider Buying and Market Performance

Management, led by Dr. Frost, has consistently purchased shares of OPKO, and in the last three months there have been a total of 29 buys, and 127 in twelve months.

OPKO has a year-to-date performance of approximately 14.3%, with a year high of $19.12. However, Friday’s closing price was at $11.42 and, in my opinion, OPKO is significantly undervalued. The price declined following the Q2 financial results, as OPKO didn’t meet the expectation of the analysts. Further price decline was owed to the general market correction that took place. And OPKO has now started to recover, and is expected to witness significant price increase. In addition, looking at the technical charts, it is slowly exiting the previous oversold territory with an RSI of 30.93.

Additionally, OPKO has a consensus price target of $17.67, which represents an upside of almost 55% from Friday’s close. The consensus rating is a Buy, and the highest price target is $22 by Laidlaw.

Risks

There have been a number of instances where OPKO has delayed the already announced timelines by a few months or so. This has a negative impact not only on the stock price but also on the investor sentiment in general. The company ultimately does perform on the new set timelines, and this is not a risk in itself, but rather a matter that may impact the stock price and sentiment.

MOD-6031, the obesity drug, is in very early stages of development and is targeting a condition which has previously not generated a blockbuster drug. Though Dr. Frost is sure of his re-engineering and believes the drug will be a success, but there are still chances of either failure of the drug achieving its target or serious side effects that may render the drug not fit for approval. Although OXM has already proven to be safe and effective in various studies, both on mice and humans, the inherent risk of trial failure still exists.

OPKO has two NDAs pending approval, one is for Rolapitant PDUFA on September 5, 2015, and the other is for Rayaldee with PDUFA date of March 29, 2016. Approval is highly likely for the both the candidates since they have strong clinical data. However, a negative response from the FDA in either delay, additional data or clinical trials will result in negative price reaction.

Conclusion

All in all, OPKO still remains an excellent investment, and the current dip in the price is merely an opportunity to invest more for the long run. The company is on its way to profitability and will keep growing under Dr. Frost’s able management. OPKO is financially sound, has remarkable products in the pipeline, equally remarkable subsidiaries and acquisitions, and an excellent business model. Thus, I remain bullish on the prospects of OPKO.

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