On April 16th I wrote an article titled,"Opko Health: This Biotech Short Bites Back" in which I urged short sellers of Opko Health (OPK) to cover their underwater short positions and go long the stock to re-coup their losses. While on that date Opko was trading at $7.13, this week Opko is trading in the $8.75 range and shows no signs of slowing its momentum. Unfortunately, my past message to short sellers was not received well, as on 7/31/13 Opko's short interest was reported at a near all time high of 32,813,208 shares sold short. Regardless of short sellers seemingly masochistic investment decisions however, I have found new interest to write further on Opko Health, as today the company sits in a significantly stronger position than ever before and will likely rise into double digits in the next few weeks to come.
Short, Mid and Long Term Value
In my most recent article on Opko Health I provided a detailed breakdown of Opko's near term 43.5B+ market which the company sits to enter in the next few months/years. You can reference this for a clear-cut breakdown of the company's near term pipeline. In terms of Opko's mid-term pipeline, a rather large group of drugs and diagnostic tests entering billion dollar markets are further in store. Below is a valuation breakdown of Opko's mid-term drug pipeline and market sizes (this will not include diagnostic tests due to unannounced launch time frames):
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|Total Mid-Term Market =||$36.3B+||-|
In my near-term product breakdown in my previous article it was estimated that the closer term market size Opko sits to enter is roughly $43.5B. In the mid term estimate shown in this article I have come up with a market valuation for the company's Phase I and II drugs as totaling roughly $36.3B. This brings the combined near and mid-term market sizes to an estimated $79.8B+. Opko's pre-clinical pipeline also is set to compete but it deserves its own article and will be reviewed sometime in the future.
Opko Health's purchase of Israeli biotech outfit Prolor Biotech (PBTH) is expected to close in the next month pending the finalization of a shareholder vote. In my opinion there is little doubt that this deal will go through for various reasons. First and foremost, Prolor Biotech shareholders are getting an amazing deal which has turned out to be significantly more lucrative than previously expected and arranged. Prior to the buyout announcement of Prolor on April 24th, its shares traded in the mid 4 and 5 dollar range, and shares of Opko were trading in the high 6 to mid 7 dollar range. The deal was expected to convert shares of Prolor Biotech to Opko based on Opko trading at $7, but currently Opko is trading in the high $8 range which already gives Prolor Biotech shareholders an almost 80% gain on their investment as a result. For shareholders of Prolor Biotech to not approve a vote for the merger would be illogical, especially since the average public buyout premium has been evaluated as being 36.2%. On top of this fact, regardless of the clearly obvious reason to approve the buyout, the reality is that the majority shareholders of Prolor Biotech and Opko Health are in fact executives and board members of these companies. That being the case I see a close to zero chance of these particular shareholders casting a vote not to approve the buyout which they themselves have arranged.
Diagnostic Market Comparison
In the past I have shown how Opko's current price to sales ratio of 34 is in the same P/E range as similar newer pharma companies such as Regeneron (REGN), Celgene (CELG), Biogen (BIIB) and Gilead (GILD). What I have failed to compare however is Opko Health's price/sales ratio to new biotech companies which actually market diagnostic tests. Being that Opko's diagnostics division on its own sits to enter numerous multi-billion dollar markets such as Cancer, Vitamin-D, Testosterone, Alzheimer's, etc., the following is a breakdown amongst current newer diagnostic companies. Two newer companies that I have recognized as pushing the edge in the field of cancer diagnostics are: 1) Genomic Health (GHDX) and 2) Exact Sciences (EXAS). Genomic Health, which has three tests for early stage breast cancer, stage II/III colon cancer and post biopsy prostate cancer, has reported net income totaling only $3.71M over the past four quarters. Currently Genomic Health has a P/E ratio of an astounding 689, showing that Opko's current P/S ratio and future P/E ratio has enormous growth potential ahead of it to catch up to in comparison to this similar diagnostic company. Likewise, Exact Sciences, which is working to develop a new test for colon cancer, while not profitable yet, boasts a price to sales ratio of 205.41. Clearly there is an enormous gap for Opko to catch up to these similar new diagnostics companies valuation multiples, and it is only logical that it will.
Potential New Teva Partnership On The Horizon
While numerous partnerships with Teva (TEVA) could be in store for Opko Health down the line due to the companies' numerous synergies and close executive/board ties, one particular opportunity that has just recently presented itself is in regards to one of Opko's Israeli subsidiaries, FineTech. FineTech, which was 100% acquired by Opko in recent years. develops, manufactures and commercially produces specialty active, high potency pharmaceutical ingredients for larger drug companies. Teva, which was recently working with a company called Lonza (LONN) to produce its pharmaceutical ingredients, was recently forced to sever ties due to Lonza's net profits taking a steep fall this year. As a result, Teva is in the market for a new API producer, which could open the door for Opko to take the contract. Whether or not a partnership will materialize for Opko and Teva from this opportunity is unknown, but I would not doubt that some level of discussion has or is currently occurring.
In my opinion, there is little doubt that Opko's share price will soon ascend into double-digit territory. The question on hand remains when. Based on the upcoming closing of the Prolor Biotech buyout and numerous catalysts which Opko has on hand before year's end, it is my opinion that the company's share price will break into the double digit territory within the next 1-2 months. Before year's end Opko plans to launch its new prostate cancer diagnostic test the 4K Score™ here in the US and also plans to launch the test in Latin America, Eastern Europe and other countries through its foreign subsidiaries sometime in the near future. My opinion is that the 4k Score™ should generate on the low side around $384,000,000 in revenue annually if it captures 5% of the US PSA test market and charges $256. More realistically however if the company can manage to capture just 15% of the US market then it should generate north of $1B annually. If we take into account global market populations than attaining $1B annually for Opko appears to be even more likely. In looking at this figure from a shareholder's perspective, if in the future OPK can manage to net in this $1B range with a P/E of at least 30 and 415,000,000 shares outstanding, this would equal a share price of $72.28. Yet if we take in to consideration other near term product revenues, or assign a P/E or P/S ratio the likes of the similar diagnostic companies highlighted above, investors could realistically see Opko Health go on to graduate from double digits to the next tier.