OPKO Health: Expecting More Strength On Pipeline Developments

It hasn’t been a good year for short sellers betting against the rapidly growing healthcare conglomerate OPKO Health (OPK) and its CEO/Chairman – Dr. Phillip Frost. Since the start of the year, OPK common stock has more than doubled in value. Since our article on their pipeline product hGH-CTP (link), the stock is up about 61%.

Trading volume has also increased significantly, suggesting that new people are getting interested in this company/stock.

Although OPK is trading about 23% off its 52-week high of $12.95 per share, it seems that the market doesn’t want to bring the stock below $10/share based on the cumulative value of the company’s new pipeline.

Even though a lot of money has already been made with Opko’s expansion this year, we believe that the company’s momentum should continue going into 2014 on a number of pipeline developments that should increase the intrinsic worth of teh company. Based on Opko’s behavior in 2013, we also believe that the company will retain its appetite for deals and investments that add value for the shareholders.

Since Opko’s pipeline has expanded tremendously this year, we thought it’d be helpful if we made a quick rundown of the company’s most prominent programs.

Top Programs
Rayaldy: this is a very interesting Vitamin D drug that is in the middle of a Phase III trial. It has received a lot of attention in recent months, and should have data before the end of the first half of 2014. Rayaldy is being designed as a treatment for patients with stage 3 and 4 chronic kidney disease (CKD).

We estimate that Rayaldy might be on the market as early as Q2 2015. The drug will target approximately 3-4 million patients in the US alone at a price of ~$4,000 per year per patient. Based on this, we can calculate an approximate total market size of ~$14 B. For us, the market penetration rate for Rayaldy will be tough to determine without efficacy results from the Phase III.

hGH-CTP: this was the crown jewel taken in the acquisition of the Israeli biotech Prolor earlier in the year. hGH-CTP is an orphan drug in the US/EU, and has a very good chance at FDA approval after the collection of necessary clinical trial data. It is designed to be a substantial upgrade to traditional human growth hormone replacement therapy.

The CTP (carboxyl terminal peptide) platform that this product is based on can be compared to extended-release technology for capsules. Patients on hGH-CTP only need one injection per week versus one injection per day with traditional therapy. Given that the efficacy/safety is proven comparable in Phase III trials, we expect hGH-CTP to take a large chunk of this $3 B market.

Rolapitant: This drug was licensed to the oncology pharma development company Tesaro, although Opko will benefit if this drug succeeds. $100 M in milestone payments (to Opko) are still waiting, along with double-digit royalties on all sales of the drug. Existing clinical trial data suggest that Rolapitant is the most effective treatment developed up to this point, which implies a very high rate of market penetration. Peak sales for the drug may be as high as $1.5 B.

Rolapitant is a treatment for CINV (Chemotherapy-Induced Nausea and Vomiting), which is an increasingly common disease in patients with cancer. Use of chemotherapy also continues to grow quickly, which only increases the need for highly effective treatment for CINV. The Phase III trial for this drug has been completed, and investors should expect data before the end of the year. This should pave the way for commercialization in 2015.

4K Score Test: current diagnostic tests for prostate cancer are lacking, which is why the 4K Score Test has a good chance at commercial success. The PSA test, which is used in roughly 30 M patients per year, is overly sensitive and has a false positive rate of ~70%. This huge false positive rates result in a very large number of unnecessary biopsies (roughly 1 M per year in the US), which are both invasive and expensive.

The 4K Score Test is designed to predict the result of biopsies using specific biomarkers that can determine risk for the development of prostate cancer. The 4K Score Test does not hold much pricing power, but it will target a very large niche market. Based on an estimated $300 price for the 4K Test, we can estimate peak sales north of $300 M per year.

Financials
Although Opko has been a bit aggressive this year, the company’s financials are still solid. On September 30th, 2013 the company was holding $156 M in cash – a sum large enough to keep the company running smoothly well into 2015 on the current budget. We believe that top-line growth may shrink losses in 2014, which will allow the company to save more money before expanded commercialization efforts in 2015.

Opko did issue ~$209 M worth of convertible senior notes in the last year, although we believe that the proceeds were put to good use. The value added from the expansion of Opko’s pipeline was greater than $209 M, and it seems that the stock market is in total agreement.

Notes on Opko’s Strategy
Although a rundown on the company’s major development programs may seem comprehensive enough, investors also have to realize that a large part of Opko’s strategy for value creation is done through substantial equity investment in smaller companies. There are also technology licensing agreements that have difficult-to-determine valuations, and other things that generate hidden value for the company. Opko is a very complicated company with many moving parts, and it really cannot be boiled down to a pipeline image or income statement.

Investors are encouraged to perform their own due diligence on each company they are considering. This includes Opko, which can be difficult to understand at first.