OPKO: Buy The Dip

| About: OPKO Health, (OPK)

Summary

Rayaldee will be approved and should be launched in the second half of 2016.

Rayaldee is one of its kind treatment, and has no competition at the moment.

Insider buying continues strong at OPKO, helping the investors to remain positive.

The most awaited catalyst for OPKO Health Inc. (NYSE:OPK) in 2016 was the FDA decision on Rayaldee's NDA on March 29, 2016. Rayaldee has been developed for the treatment of secondary hyperparathyroidism (SHPT) in patients suffering from stage 3 or 4 chronic Kidney Disease (CKD) and vitamin D insufficiency. Rayaldee is important for OPKO as it will be launched in a $12 billion market, and as I previously wrote, a 10% share means $1.2 billion in sales. However, the much awaited decision date, which most of us expected to be the approval date, turned out to be a CRL date for OPKO. OPKO was served a Complete Response Letter (CRL) on March 30, 2016, by the FDA, on observations regarding its third-party manufacturing facility for Rayaldee. Following the news the stock price declined almost 10% and closed at $9.90 on March 30, 2016. However, the price did recover 5% the next day, and continued to stay positive on April 1, 2016 as well.

OPKO has a contract with Catalent Inc. (NYSE:CTLT) for the manufacturing of Rayaldee. The FDA inspected Catalent's St. Petersburg, FL facility from March 14, 2016 and issued the observations by March 25, 2016. OPKO does not have a backup manufacturer for obvious reasons. Catalent is a global provider of manufacturing services to 83 of the top 100 branded drug marketers. Not only this, 40% of the recently approved drugs also have Catalent as their manufacturer. Previous issues raised by FDA regarding Catalent's manufacturing facilities were promptly resolved. Thus, the company not only has strong foothold in the manufacturing services, but is also prompt in resolving issues.

Fate of Rayaldee Hanging in the Balance?

The CRL issued by the FDA, only has observations regarding the third-party manufacturing facility for Rayaldee. And there are no concerns regarding the safety, efficacy or other labeling issues for Rayaldee. In addition, the FDA also did not request additional study or data and also approved the name Rayaldee for the drug. Thus, it is certainly clear that the issues were solely regarding the Catalent's manufacturing facility, and Rayaldee should be approved and launched by the third quarter of this year. As Dr. Frost himself stated during the conference call, following the CRL that if the deficiencies at the facility were not present, Rayaldee would have been approved.

Thus, it is safe to say that the fate of Rayaldee is not hanging in the balance, and it will be approved soon. As for the CRL, OPKO is expected to submit an action plan to FDA, with Catalent by April 15, 2016, listing out the ways in which the deficiencies will be removed. Catalent has ensured that they will promptly correct the observations pointed out by FDA. As Dr. Frost mentioned in the conference call that the issues are not unusual and can be fixed.

Once the deficiencies in the manufacturing facility are corrected, OPKO will resubmit the NDA and based on the category of submission, a decision should be reached within either 2 months or 6 months. In the meantime, OPKO will continue its efforts for the launch of Rayaldee and build the sales force. The commercialization for Rayaldee will take place as planned, however, the timeline will be pushed a little further.

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Source: Investor Presentation

Even though Catalent has ensured fast resolution of the problem, but a possible worst-case scenario would be the delay in the approval of Rayaldee. This may come about if the corrections made by Catalent are not at par with the FDA's requirement, which would require further inspection. It's imperative to understand that a Form 483 isn't issued until or unless FDA believes the action was warranted. Thus, any discrepancy could push the approval and launch timeline of Rayaldee even further. This is the worse-case scenario, which in my opinion is highly unlikely, since both OPKO and Catalent are expeditiously engaged in correcting the deficiencies. And they will definitely take utmost precaution while addressing the CRL concerns.

Does Rayaldee Have a Competitor?

The delay in the launch of Rayaldee has been touted as detrimental for the drug's market capturing ability and first mover advantage. The approval of Rayaldee on March 30, 2016 would have meant that the drug be launched before Amgen Inc.'s (NASDAQ:AMGN) etelcalcetide. Etelcalcetide is awaiting FDA decision, which is expected on August 24, 2016. With the delay in the approval of Rayaldee, it is expected that it will be approved after August 24, meaning that Etelcalcetide would reach the market before Rayaldee. Now this makes a pretty logical argument, but it's imperative to understand the differences between the two drugs. These differences not only put this argument to rest but also show how Rayaldee and Etelcalcetide are not currently competing against each other.

Rayaldee, as explained, treats stage 3 and 4 CKD patients suffering from SHPT and Vitamin D insufficiency (VDI). The drug works by reducing the level of parathyroid hormone (PTH) and increasing the 25-hydroxyvitamin D (25-D). On the contrary, Etelcalcetide has been developed for the treatment of SHPT in stage 5 CKD patients, and works by lowering the PTH levels in the patients. The major difference among these two drugs, among others, lies in the stages of Chronic Kidney Disease, the former is for stage 3-4 pre-dialysis patients, while the latter is for CKD stage 5 hemodialysis patients.

Drug Name

Treating

CKD Stage

Method

Outcome

Adverse Events

Rayaldee

SHPT & VDI

3 and 4 (Pre-Dialysis)

Oral

Lower PTH levels and raise 25-D

No

Etelcalcetide

SHPT

5 (Hemodialysis)

Intravenous

Lower PTH levels

Yes

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This comparison entails that at the moment Rayaldee and Etelcalcetide do not compare with each other, and thus, the delay in the launch of Rayaldee will in no way impact its ability to capture market share. However, it must be noted here that OPKO has already planned a clinical trial for patients with stage 5 CKD. This does not mean that Rayaldee will be in trouble, rather Etelcalcetide will have competition in the form of Rayaldee and vice versa. On the contrary, it is also highly likely that Amgen will test the efficacy of Etelcalcetide in stage 3-4 CKD patients with SHPT. However, it will only pose as a threat to Rayaldee if it produces better results. Even if the results are close to Rayaldee, grabbing Rayaldee's market share may not happen that easy. Since Rayaldee treats the underlying cause of the disease and effectively addresses the vitamin D insufficiency.

Insider Trades

One thing that I, and I'm sure other investors, appreciate about OPKO is the consistent insider buying that the management undertakes. Recently, after the CRL issue Dr. Frost acquired a significant number of shares. This helps keep the investor sentiment positive; as management investing in the company they are working in means a lot.

Source: NASDAQ

Conclusion

This glitch in the approval of Rayaldee is not a substantial setback for OPKO, since the drug will be approved. Not only this, the company has a deep pipeline which is producing positive trial results, and once approved will be operating in multi-billion markets. OPKO will be presenting various poster presentations at the Endocrine Society's 98th Annual Meeting, which will be held from April 1-4, 2016. In addition, various other important catalysts will take place through the year.

Despite the CRL, the analysts remained optimistic, with Ladenburg Thalmann reiterating their Buy rating. And analysts at Barrington Research, albeit lowering the price target, maintained the Outperform rating on the stock. This shows that the initial price fall was merely a market reaction to the negative news, since an approval was highly expected. Despite this the long term sentiment for the stock remains positive.

All in all, the fall in share price is a good opportunity to go long on the stock or acquire additional shares. OPKO already has products in the market, which are faring well. And with the approval and subsequent launch of Rayaldee, the company is on track to turn profitable in the near future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.