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Executive summary:

  • Shares of Opko have declined around 20% in the last 3 months due to Jefferies negative commentary
  • We believe Rayaldy and 4Kscore have a billion dollar market potential
  • The company will be able to recover lost value on major approaching catalysts

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In the last 3 months shares of Opko Health (OPK) have declined around 20%. The primary reason behind this decline was some negative commentary by Jefferies. However, in the last couple of months the valuations have stabilized around the $8 mark. We believe that Opko is one of the safer and more rewarding investments out there and is a buy at the current price levels. Our analysis also shows that 4Kscore and Rayaldy have a huge market potential and can turn out to be billion dollar products.

The Company

OPKO Is a multinational company involved in the discovery and development of next generation therapies and transformative diagnostics through its proprietary technologies. OPKO also identifies strategic investments that provide growth opportunities and geographical diversification in terms of sales and distribution. The company's main aim is to establish a strong industry position in growing medical markets via either organic or external growth.

Our discussion is based on OPKO's upcoming drug Rayaldy and the development of complex immunoassay blood tests (Point-of-Care System & 4K Test) which have the potential to enhance the company's valuations and profitability.

Rayaldy

Rayaldy is a modified-release formulation of 25-hydroxyvitamin D3 developed to treat secondary hyperparathyroidism (SHPT) which occurs due to Vitamin D insufficiency and stage 3 or 4 chronic kidney diseases (CKD). Vitamin D is not contained in any material quantity in the food consumed by the average human; it is a pro-hormone produced in the skin upon exposure to sunlight. There are certainly a lot of over the counter Vitamin D supplements available but they are ineffective in managing SHPT in chronic kidney diseases. Rayaldy is, however, the first and only modified release formulation of calcifediol and is protected by newly issued patents at least until 2028.

Secondary Hyperparathyroidism (SHPT)

Parathyroid hormones help to increase the concentration of calcium in the blood. Patients that suffer from SHPT produce an excessive secretion of these hormones by the parathyroid glands. SHPT is normally seen in patients with chronic kidney failure and can cause bone pains, joint pains and limb deformities. In minor cases it affects the blood, immune system and neurological system.

Phase 2 Results & Phase 3

PHASE 2: Randomized, double-blinded and placebo controlled Phase 2b trials were conducted and completed in Q4:11. The results showed a major improvement in the patient's vitamin deficiency and effectively reduced elevated plasma intact parathyroid hormone (iPTH) without any of the side effects normally suffered by patients that are taking OTC vitamin D supplements.

PHASE 3: Rayaldy is currently in Phase 3 trials for the treatment of SHPT in patients with stage 3 or 4 CKD and vitamin deficiency. The trials consist of 210 patients enrolled at about 40 sites in the US. 140 of the patients will be exposed to Rayaldy with the other 70 receiving placebo (2:1 randomized) for six months. After six months the trials will be followed by an open-label extension study in which patients are treated with Rayaldy for six months. It is expected that OPKO will announce the topline clinical results for Phase 3 trials in Q2:14. After this announcement the data will be collected, organized and analyzed in accordance with FDA regulations; followed by filing of the NDA (new drug application). It is up to the FDA to decide whether to review the case under priority (6 months) or under standard review (10 months). The FDA will also review the drug's professional labeling, in order to assure that proper and important information is communicated, and inspect the manufacturing site to ensure compliance to the standards. We expect the drug to be approved in the US at the start of 2016; however, we believe that it will be launched much earlier in other locations.

Market of CKD

The market of CKD was worth around $13.3 billion in 2009 and will grow to around $20 billion by 2016.

CKD

Cases (2012-2013)

Percentage of Total Population

Market in 2016 ($)

US market

20 million

28%

5.6 Billion

Rest of the world

50 million

72%

14.4 Billion

Worldwide

70 million

100%

20 Billion

Note: We have assumed that the percentage of total cases will remain the same in 2016.

Market of Rayaldy

Rayaldy (High)

Market of CKD in 2016 ($)

Penetration**

Peak Sales ($)

US market

5.6 billion

20%

1.12 billion

Rest of the world

14.4 billion

10%

1.44 billion

Total

20 billion

---

2.56 billion

Rayaldy (LOW)

Market of CKD in 2016 ($)

Penetration

Peak Sales ($)

US market

5.6 billion

12.5%

700 million

Rest of the world

14.4 billion

7%

1 billion

Total

20 billion

--

1.7 billion

*The table uses market estimates and our assumptions of the drugs penetration to reach potential peak sales figures.

** The penetration capability of Rayalday is given under two assumptions that is low and high success. We are assuming here that any new promising drug when entering a competitive market (existing treatments available) has the capability to take a market share between 10% and 20%. This number can vary depending on the marketing capability (big-pharma vs. small companies etc), competitive advantage of the drug etc. However, as numerous examples reveal the actual market performance of any drug is susceptible to a host of uncertainties which are nearly impossible to quantify.

We expect that Rayaldy's potential market will reach between $1.7 billion - $2.56 billion within a few years of its launch. This can lead to significant revenues from just one product for OPKO Health, which has many other strong candidates in the pipeline. We also believe that even though the market of CKD treatment is full of generic supplements and vitamin D hormone replacement products, the generic drugs are ineffective in treating SHPT and the hormone replacement products are too expensive for patients and not at par with the effectiveness and safety of Rayaldy.

Rayaldy and Competitors

Drug

25D* (vitamin D levels)

SHPT

Hypercalcemia (side effects)**

Rayaldy

Increases

Decreases

No side effects

Drisdol

Moderately increases

Moderately decreases

No side effects

Zemplar

Decreases

Decreases

Moderately Increases

Hectoral

Decreases

Decreases

Moderately Increases

*25D is a serum used to treat vitamin D insufficiency

**Hypercalcemia is an elevated calcium level in the blood

Other Products

  1. Lunacalcipol (CTAo18) Injection and Capsules are used for the treatment of moderate-to-severe SHPT in patients that are inflicted with CKD stage 3-5. This product is being developed to compliment Rayaldy (which treats stage 3-4 CKD patients). The Phase 1 trial was successfully concluded in 2007 and Phase 2a was completed in 2010. Phase 2b trials are expected to start in 2014. These trials will utilize the same population as Phase 2a in order to extract an in-depth analysis of the drug's effectiveness and safety. Lunacalcipol seems to be another breakthrough drug, like Rayaldy, which will be useful for SHPT patients that cannot be treated by Rayaldy.
  2. Alpharen Tablets (Fermagate Tablets) is in its Phase 3 in the US and Europe and is used for the treatment of hypophosphatemia, a disease that lowers the amount of phosphate in the blood. The patients normally suffer muscle dysfunction, white cell dysfunction and numerous other abnormal symptoms that can lead to death. Phase 3 data shows that the tablet controls phosphate levels at least to the same degree as the current market leaders. Further Phase 3 development will be carried out in Q2:14.

Diagnostic Overview

4Kscore Test (Prostate Cancer)

Before going into a discussion about 4K, one must have a complete understanding of the limitations of the PSA test. The PSA is a conventional test which measures the level of PSA in a male's blood. PSA, or Protein-Specific Antigen, is a protein produced by prostate gland cells in men that have elevated levels of PSA and are diagnosed with prostate cancer (according to the PSA test). The major concern isn't the technique itself but the optimal threshold for recommending a prostate biopsy. In the past, most doctors have considered PSA levels of 4.0 ng/mL and lower as normal. However, recent studies have shown that some men with PSA levels of below 4.0 ng/mL have prostate cancer and that many with higher levels do not have prostate cancer. PSA levels may also vary somewhat across testing laboratories. This leads to false-positive or false-negative results, leading to increased biopsies. Biopsies on the other hand can lead to serious infection, pain and bleeding.

4K uses four kallikrein markers, Total PSA; Free PSA; Intact PSA and Human Kallikrein 2 (HK2) to diagnose prostate cancer and has an accuracy level of 99.4%. The PSA test only uses Total PSA to diagnose prostate cancer. The goal of the 4K test is to eventually replace the PSA, which gives 75.9% false reports leading to biopsies. Costs of PSA tests amount to a total of $3 billion for 30 million tests per annum in the US alone. If 4K gets launched in the US (which it is expected to be in the first quarter of 2014) OPKO can capture a huge chunk of this $3 billion market. With a penetration of around 20%, OPKO Health can generate $600 million in the first few years. These estimates are conservative as the market seems to favor the 4K because of the limitations of the PSA test and the fact that even health authorities are not recommending the PSA. With these dynamics, the price of the 4K will certainly be higher than the PSA test because of its improved effectiveness in diagnosing prostate cancer; this means that it eventually outperform our revenue expectations. The test was launched in Europe about one year ago; however, OPKO has yet to strike agreements with medical reimbursement companies so that patients have insurance coverage instead of paying from their own pockets.

Point-Of-Care Diagnostics Platform

In October 2011, OPKO acquired Claros Diagnostics, Inc (now known as OPKO Diagnostics) which has developed a point-of-care system able to produce laboratory quality results in 10 minutes. The system includes a disposable, microfluidic test cassette and a robust, compact analyzer. Firstly the user collects a finger-stick of blood using OPKO's sample collection device and connects the said device to the microfluidic cassette. The cassette is then loaded in the analyzer which performs a complex analysis in about 10 minutes and provides the user with the required results. On the other hand, conventional immunoassays require large laboratories, expensive equipment and trained technicians to carry out these tests for most patients that are required to undergo biopsies. The limitation is that these tests could only be carried out in hospitals or laboratories and often led to days of waiting for lab test results.

OPKO's point-of-care system provides convenience to patients because the hardware can provide fast and accurate results simultaneously for multiple tests. Healthcare providers benefit from a lower total cost of operation, efficient clinical workflows and enhanced customer experience. The cost of producing the equipment is also quite low in comparison with diagnostic laboratories; at around $1 a chip/cassette and the equipment (analyzer) costs around $100. The main aim of developing a mobile diagnostic system was to enable some of the world's poorest regions to knock down the three barriers to effective health care - difficult access, high costs and long delays in results. However, it seems that the innovative handheld Lab-on-a-chip (LOC) could streamline blood testing worldwide and cause diagnostic laboratories to become redundant.

OPKO is trying to incorporate multiple diagnoses within its point-of-care system. It is currently working on PSA tests, 4K test, Vitamin D test, Testosterone test and Alzheimer test. This adds a new dimension to diagnostic testing as it will cut down costs and time by a huge degree. OPKO believes that it can capture a large portion of the market because doctors and patients will prefer instant results with much lower costs to the currently available diagnostic techniques. The company's system can create additional demand in physician offices, homes with patients, educational institutions and emergency settings.

Overall, OPKO is taking steps to bring about a revolutionary change in the diagnostic market in the coming years through its point-of-care system; which enables every test to be accurate, timely and cost effective.

Risks of investment

  1. OPKO's 4Kscore has already been launched in Europe as a prostate check for more than a year. There has been no disclosure of the revenues from that market in the 2013 results. This is a major concern for investors as it may point to a low demand for the test.
  2. Point-of-care system may prove to be a total failure. OPKO Health has been highly valued on this upcoming system which has the potential to revolutionize the diagnostic market; however, there has been a delay in its launch. It is possible that the system will never be launched due to manufacturing issues or that the market will not accept it as a replacement for lab testing.
  3. Rayaldy may never be a successful product in the market. Patients with early stage CKD are treated with over the counter Vitamin D supplements which are quite cheaper than other patent protected drugs. On the other hand, patients with late stage CKD (3-5) are treated with Hectoral and Zemplar. Both these drugs are going generic next year and this may cause their price to go down. Rayaldy has a tough competition to beat and it can only be successful if it shows a superior performance than its competitors.

Conclusion

OPKO Health has been hit with negative speculation in recent months, with media and analysts criticizing the point-of-care system and 4K Test. Questions have also been raised over Rayaldy's market and OPKO's expectations regarding its potential. The company is going through a critical phase, the 4K has not performed well in Europe and there are delays in the point-of-care system. However, we still believe that its candidates and products have the potential to be successful in the market especially the point-of-care system; which is being labeled as a failure but in the long term it will reshape the entire diagnostic market. We are also pretty bullish on the trail performance of Rayaldy and believe it can turn out to be a blockbuster product. Based on this analysis and keeping in mind the risks involved, we believe that Opko has a huge room for growth and is a very sound biotechnology investment.

Source: Opko: Ignore The Commentary And Focus On Numbers

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Healthcare analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.