Opko Health Inc (OPK)

[WiseFool]

Opko has both pharmaceutical and diagnostics operations, and buying Bio-Reference could enhance both aspects.

Opko bolsters both drugs and diagnostics with $15bn labs buy

Date June 05, 2015
Elizabeth Cairns in London

If Opko Health’s reasons for buying Bio-Reference Laboratories yesterday are clear enough, its motivation for paying a whopping 60% premium to the lab services company’s share price is harder to guess. Its own shareholders seem unimpressed, sending its stock down 15% on the New York exchange.

So poor has 2015 been for mergers in the medtech space that at $1.5bn, this deal is the third largest so far this year; last year it would have barely troubled the top 10. Clearly the double-digit annual sales growth Bio-Reference has displayed over the past several years has convinced Opko to go against the prevailing industry trend – and to pay handsomely for the privilege.

Opko is offering 2.75 of its shares for each one in Bio-Reference, valuing the latter at $52.58 apiece. Since the drop in Opko’s shares yesterday, however, this figure is closer to $45. Bio-Reference shares were trading at $39.60 at the Nasdaq’s close yesterday, an increase of 20%.

Synergy

Opko has both pharmaceutical and diagnostics operations, and buying Bio-Reference could enhance both aspects. The laboratory group has a store of genetic and genomic data, particularly in the areas of oncology and women's health, which in tandem with its sequencing technologies could aid Opko’s development of targeted drugs.

And Opko can distribute its prostate cancer test, 4Kscore, through Bio-Reference’s established sales network. The lab chain also has relationships with insurance companies,

4Kscore is a blood test that combines four prostate-specific kallikrein assays to provide the patient’s percentage risk for aggressive prostate cancer. It is already on the market in the US and Europe, and it is reasonable to believe its sales will grow. Opko’s diagnostics services are to be merged with Bio-Reference’s much larger business.

Bio-Reference is the third largest clinical laboratory businesses in the US, with revenues of $832m and profit of $47m in fiscal 2014. Since 2011 these have grown at an annual rate of 12% and 6.5%, respectively – more than respectable. In its most recent guidance, the service provider said that its sales and earnings per share would climb 10% and 20%, respectively, this year.

Opko, by contrast, is loss-making, and its revenues only totalled $91m in 2014. The Florida group has six drug candidates in phase II and III trials and the profits from Bio-Reference will come in useful for meeting development expenses.

The purchase of Bio-Reference could be truly transformative when it closes in the second half of this year, even though in market cap terms Opko is far larger than its target. Mergers seem to be out of fashion in medtech; perhaps this one may come to justify the decision to go against the flow.

To contact the writer of this story email Elizabeth Cairns in London at [e-mail] or follow @LizEPVantage on Twitter