# Valuation Model For Opko Health: \$14.88

He did it again! Richard Pearson wrote an article for Seeking Alpha that moved the stock in his direction (down). There are many aspects of his article that warrant correcting including the significance of the CEO dollar cost averaging into his company, the institutional ownership percentage of the available common stock, and the valuation of the company. But this last one is most important.

Beware of uneducated bloggers that claim to know an accurate valuation without describing their methodology.

Here is a model to value Opko Health (NYSEMKT:OPK) and similar companies that don't have meaningful current sales or earnings. The inputs are: future valuation as a multiple of sales, potential sales, likelihood of those sales, time to sales, and a discount rate.

One can argue about the values of the inputs, but not on the methodology. I have examples below for two products, and I encourage others to expand this model to include more accurate inputs, a range of inputs, and inputs from more potential Opko products.

Future Valuation (for both products) = 2 times Sales.

 Product Prostate Cancer Test CytoChroma Potential Sales 2.5B 6.5B Probability 50% 25% Time to Sales 1 Year 2 Years Discount Rate 12% 12% Present Value (PV) \$2.23B \$2.59B
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PV of Prostate Cancer Tests = (2 x (2.5B x 0.50))/1.12 = 2.23B

PV of CytoChroma Products = (2 x (6.5B x 0.25))/1.12^2 = 2.59B

Total: 2.23B + 2.59B = 4.82B That is \$14.88 per share.

This is an expected value calculation, discounted to present value. The risk is embedded in the probability. If you think the likelihood of these sales figures are different, then change them. If you think the potential sales figures are different, then change them. I used the 6.5B figure from Josh Ginsburg's article on Seeking Alpha, but that may be too low because he made adjustments for the overall market share. The prostate cancer potential sales number is potentially too low as well. For example, perhaps the potential CytoChroma sales are really 18B but the probability is only 10%. That would actually increase the overall value.

25% is a reasonable probability for a Phase III drug to be successful. Here is a study that puts the range between 25 and 50%.

A milestone payment should be treated similarly, with a possible amount, a probability, and a higher valuation multiple because it is all profit.

In conclusion, contrary to what Mr. Pearson believes, it IS possible to rationally value Opko's stock. 16.4% of the stock is owned by institutions. That is over 30% of the float. How do you think they are doing it?

Disclosure: I am 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.