It's been a volatile few days for Opko Health (NYSE: OPK) as bear and bull articles duke it out over the growing company run by billionaire entrepreneur Dr. Phillip Frost. TheStreetSweeper's gotten a little bruised in the melee (thanks, Anthony Bozza and Lakewood Capital Management!) but we're back to say we stand by our original report supporting our rare long thesis. We feel the company is poised for further growth under the leadership of Dr. Frost.
TheStreetSweeper respects Mr. Bozza and more often than not has agreed with Lakewood Capital. We're sure we'll continue to view most companies in a similar light in the future as we examine and expose poor management, accounting games and outright scoundrels infesting public companies. But this time, we disagree with Lakewood and the other shorts.
1. Please tell us about your top two or three products that represent key catalysts, including timeframes and market expectations.
Dr. Phillip Frost: First is Rolapitant that we licensed out to Tesaro. They announced they expect to have results of the phase 3 trial to report sometime this month possibly. We have no reason to believe it'll be anything but successful.
This is an important drug to treat nausea and vomiting associated with chemotherapy. The advantage it has compared to its competitors is a single tablet will suffice to cover the patient for four or five or even six days, whereas the competitor's have to be taken every several days. Also, it is a highly effective anti-nausea and vomiting drug. And we're hopeful it will show superiority, particularly with respect to the nausea part of the equation.
That should be coming along. And the company is expecting peak sales of over $1 billion, and our royalties are in the teens. We also get milestone payments of as much as $110 million as things move along. We're very optimistic about that product.
Second, within the next few months, we'll be introducing our 4Kscore test for prostate cancer. We bought a special laboratory in Nashville, Tenn. to perform the tests. They have been gearing up and … we're doing the final tests to permit us to use our laboratory to perform the tests for blood samples that will be sent in from far and wide.
The advantage, which will initially be a confirmatory test for a positive PSA (prostate-specific antigen) to try to avoid needless biopsies … The biopsies are expensive. They're painful. They have side effects of bleeding and infections. So to avoid 60 percent of the biopsies that are now performed would be very important. Ultimately as things go on, because it's a more precise test, we hope we'll have the opportunity to perhaps even replace PSA as a screening test, in addition to the confirmatory use for it.
Third … other product is in late phase 3 trials. It's Rayaldy, the Vitamin D compound for phase 3 and 4 chronic kidney disease. The Vitamin D levels in these patients are difficult to keep at a normal level. Because the Vitamin D levels are low, they tend to make more parathyroid hormone ... which causes demineralization of the bone and hypercalcemia, which is a problem in that calcium deposits in the kidneys and the vascular system. And that's often the cause of death in these patients rather than the kidney disease itself.
The problem with currently available, over-the-counter products is they're not very useful in raising serum Vitamin D levels, particularly in kidney disease patients. And the prescription product have a possibility of causing hypercalcemia.
In order to avoid the hypercalcemia, physicians tend to give lower doses than really required. With our product I think we have the advantage of greater safety with respect to hypercalcemia. Very high efficacy.
Because the present products sell for as high as $5,000 per year and as low as $3000, with 8 million patients in the US with stage 3 and 4 kidney disease that suffer from low Vitamin D levels as well, the potential market even in the United States alone is quite large - in the billions of dollars. We don't expect to capture that amount of sales initially. It will take awhile, like with any product, to … have it reach its peak levels.
Those are three products that are within sight of coming to market. And we're quite enthusiastic.
(TheStreetSweeper questions Lakewood Capital Management, which insisted it spoke with "numerous nephrologists" who were skeptical, and then chose to focus on Dr. Jeffrey Giullian, a "veteran nephrologist" to try to dispute Rayaldy's value. This "veteran" began his clinical practice in 2008 or 2009 and has apparently published only three peer-reviewed papers in his whole life. Take a look at his web site, here. With all due respect to the doctor, one of our physician sources said Dr. Giullian was incorrect in stating (per quotes on pages 4 & 28 of Lakewood's report) that over-the-counter Vitamin D causes side effects and that Rayaldy is just a bit better than existing OTC treatments.
Also, page 27 of the report states, "The side effect of vitamin D is that it can raise calcium and phosphorous too much, which can become a problem in later stages of CKD (when the kidneys are really struggling). So in more advanced stages of treatment, physicians switch patients to other vitamin D analogs such as Zemplar and Hectorol. These treatments have the beneficial effect of bringing down PTH without bringing up calcium levels." One of our doctor sources said it is patently absurd to state that vitamin D analogs are less calcemic than OTC vitamin D.)
2. Adding those products you discussed, Dr. Frost, what is the potential?
Dr. Phillip Frost: It is in the billions of dollars, without being specific. We don't have to have $20 billion in sales for all three or even $10 billion, for that matter, for the present stock value to be extremely low … with the possibility of appreciation being very high. That's the reason I continue to buy shares.
3. The author of the Lakewood Capital report suggests you may be consistently buying Opko stock in an attempt to entice investors into also buying. Comment?
Dr. Phillip Frost: I can't keep people from being influenced one way or another. All I know is I invest because I don't know of another investment I could make that I would be more comfortable with. It's not part of a marketing strategy. Because if I didn't believe in it I would be throwing away an awful lot of money. I'm not the type of person who throws away money.
(TheStreetSweeper notes that Dr. Frost has consistently bought Opko stock, including 13 purchases totaling 296,600 shares averaging $9.44-$10.53, spending nearly $3 million on the stock just in the past month. The most recent buy recorded was Dec. 12.)
Steven Rubin: Dr. Frost is a self-made guy who buys because he's a believer. Look at his history. He has never sold a share of this company. It's been consistent buying of Opko and that's his history. For example, he never, ever sold a share of IVAX until the day it sold. He puts his money into his own companies.
4. The author said Opko has 30 products or investments and contends 25 ended in delays, disappointment or failure. Is that right?
Dr. Phillip Frost: I don't know where he's getting his numbers. There are very few programs we have dropped. Some have taken the back burner because others have become more important. We keep all these products and look for the right opportunity to exploit them from a commercial point of view. We can't address 20 projects at once but we can certainly do all kinds of interesting things and we are working out all kinds of ways to commercialize them. Some by ourselves….by out-licensing or just keep them in abeyance for the right moment. There are very few projects that we've actually dropped.
Steven Rubin: We do go after what has high, high potential. Should any product fail, we will survive and we have other products behind us.
5. Where does the Alzheimer's product stand? Is it likely to be commercialized?
Dr. Philip Frost: It turned out to be a more complicated project than we had hoped for. But the technology itself is being used to develop other tests. There are libraries of chemicals that will be more sensitive than the ones that were used for the Alzheimer's initially.
On the other hand, other types of tests using the technology, that can be very important commercially, are moving along well. And they don't require quite the sensitivity that the Alzheimer's test did. And we hope to be able to talk about them in the near future.
Steven Rubin: Alzheimer's is complicated. We try to have an impact on people's lives and it's not easy. We still believe very strongly in the technology. We're not abandoning it.
6. So there are, what, three, four or five more types of tests applicable to this same type of technology?
Dr. Phillip Frost: There's many, many more. We have a couple that are moving along nicely. One is for a type of neurologic problem that affects the eye. Another one is for MS. Another one is for type 1 diabetes. We are trying to make good use of all the assets we have.
7. What about the 4Kscore prostate cancer screening test. It is living up to your expectations?
Dr. Phillip Frost: So far, so good. We expect to release it in the first quarter. We're performing tests and they're looking good. We're hiring the head of the diagnostics division, a very well-known person, very successful director. We're interviewing for a new head of marketing for that division. The main responsibility will be to introduce the 4Kscore test. So these projects are very much alive.
Steven Rubin: We've got two decades of work on this. We will prove what we say. We will be able to reduce unnecessary biopsies.
8. Is the Latin American drug distributor making a profit?
Dr. Phillip Frost: We have several companies, one in Chile that's profitable and growing, one in Mexico that ... at the moment it's either break-even or profitable. We have a company in Spain that's been profitable and profits are growing - it's introducing a new product that we expect will even accelerate the earnings growth. So they're all growing as planned and very much on target. Doing very nicely.
Steven Rubin: We have a foothold in those areas and we're going to buy more. The purpose in buying these companies is to give us a commercial discipline while they are in the development stage … Look at our IVAX (Dr. Frost's generic products company that he sold in 2005 for $7.6 billion) footprint. We were one of the innovators.
9. Claros Diagnostics - Does it make just one product that is not working?
Dr. Phillip Frost: All the products are working. The first was the PSA, but we have two other products with much bigger potential … So the first one to come to market will probably be the testosterone test.
That's turning out to be an extremely good acquisition. Very valuable technology. We're still extremely enthusiastic about it. I know physicians we have talked to - we have done some marketing studies - and almost 100 percent of the physicians say they will use it. It's another way for them to turn money in addition to doing what's good for the patient. They can give patients the results on the spot rather than having to wait several days.
10. Is L.G. LifeSciences going to beat you to market with the human growth hormone?
Dr. Phillip Frost: I don't know about that but we are in phase 3 trials. I know our tests look very, very good. From what I've heard we have some reason to believe ours is a superior product.
Steven Rubin: Their product is not as good as ours. It cannot reach high concentrations and therefore multiple site injections are required for heavy kids. Their product also requires a thick needle for injections and it is painful. They presented findings a few years ago at the International Congress of the Growth Hormone Research Society that the product generated antibodies in about 33 percent of children. So the body is actually rejecting the drug. But ours is a great platform.
11. Mr. Bozza made some insinuations about Ideation. What was your role with Ideation, which merged with a Chinese company and became SearchMedia?
Dr. Phillip Frost: I can tell you right now like other businesses that people invest in, you don't always have a straight road up, so far as results are concerned. The initial team that was put together in China was dismissed. And we have a new CEO in place, Peter Tan, who is a terrific guy. I just came back from Shanghai a few days ago and met with the people in their offices. It's functioning beautifully now. We expect the company to be profitable early next year. The installation of their advertising screens are amazing. They're very classy and very elegant. It's a terrific business model now with good management.
The new name for that is Tiger Media. That is a company that as often happens, struggled initially, but we think we have a good formula now. We expect it to grow rapidly.
I'm an investor there. I'm not managing that business but since I have a significant position I try to keep abreast of what's happening.
Steven Rubin: Dr. Frost and I acquired this Chinese media company. We identified fraud at the company. We approached the auditors about it and we got rid of the bad actors. We have changed the business model and ultimately it's going to be fine. I think what we've learned is not to do business in China unless we have people on the ground that we trust.
12. You're wealthy. Why bother with all this now?
Dr. Phillip Frost: First of all, I enjoy surmounting challenges. Secondly, there's a lot of technology involved with what we do. So I'm constantly learning, which I feel is very important.
Steven Rubin: We're going after things that are innovative and will make a difference in people's lives. Not everything will work but we will have a lot of success. That's why I go to work every day. Regarding the nearly $5 billion market cap - any of these products will get you over the market cap. We've done this so many times before. It's the same basic core entity that has been together over two decades. You don't give up. You find solutions. We are going to be successful.
* Important Disclosure: The owners of TheStreetSweeper hold a long position in OPK and stand to profit on any future increases in the price of those shares.
•Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.
Disclosure: I am long OPK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: * Important Disclosure: The owners of TheStreetSweeper hold a long position in OPK and stand to profit on any future increases in the price of those shares.•Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to email@example.com.