Opko Health Growing Regardless Of Drug Approval

| About: OPKO Health, (OPK)

Summary

Opko has a strong growing underlying business.

The company is on track for profitability without a major drug approval.

The growing revenue provides funding for continued development of the pipeline.

Opko Health, Inc. (NYSEMKT:OPK) came out with first quarter earnings on May 9th. As an investor in the company I was looking forward to the earnings report. The company has a lot happening and I wanted to hear an update on the development of the different areas. I was very pleased with the report and with what management had to say during the conference call. It seems that the market did not agree with me as much. The stock traded choppy post report as it was at $10.26 and rose to reach $10.65 and has since fallen to close at $9.05.

There has been a lot of focus on Rayaldee and the complete response letter that the company received concerning the drug. The company also announced some big news concerning the exploitation of the drug in Europe. It licensed the rights in the region to Vifor Fresenius Medical Care Renal and Pharma. That development can be a discussion for another time. What I wanted to highlight from the earnings report and conference call that does not seem to be getting the attention it deserves is the underlying business that was acquired with the acquisition of BioReference Labs (NASDAQ:BRLI) and the growth of the 4KScore Test. I don't want to call this the core business, since I believe that the core business of Opko is the development of drugs, but this business line, the revenue falls under "services" in the financial reports, is core to the success of Opko. This services line provides strong growing revenues for the company and I believe they could push the company towards profitability in the coming quarters regardless of Rayaldee.

4KScore Test

I previously covered the 4KScore Test (a prostate cancer diagnostic) and the progress that it is making towards becoming reimbursed and therefore in the process becoming much more widely used in the healthcare industry. Please refer to my previous article that discusses this more in depth. I want to focus more on the sales and potential going forward.

The ramp up in sales people, coming in from BioReference, for the Test seems to have been successful. During the conference call Steven Rubin said that they performed 4,600 tests in the month of April alone. Also they said that the Test continues to grow double digits from month to month. It seems that the Test is starting to gain some traction. It has been a slow roll out for the Test, but without reimbursement that can be expected. I assumed that this would be a make or break year for the Test and it appears to be paying off. I think this Test can provide solid revenues for the company moving forward.

I wanted to forecast out the amount of revenues that Opko may receive from the Test in the coming years. Concerning the growth rate they stated that it was experiencing double digit volume growth each month, while they did not specify how high of double digits we know from the 4th quarter conference call Dr. Frost mentioned that with the increased sales people coming over from BioReference that the Test doubled the number being ordered daily and that it was increasing rapidly.

Also they said that they expect the strong growth to continue going forward. The company said the number of tests performed is growing at a double digit rate, so to be conservative, I estimated growth of 12 percent each month for the rest of the year. During conference calls and other presentations the company has stated the pricing for the test will be at $1,900 per test. As Opko works with insurers, this price may be negotiated down some, so for my projections I will use an estimate of $1,200 per test. Using these assumptions, the projected revenues for FY2016 are below.

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I back dated the 12 percent growth from the 4,600 tests that the company performed in April. I know the growth was much higher than that in March but as the overall amount of tests performed in the first three months of the year is rather small so the difference due to the growth rates would be an insignificant sum. I used the consistent growth rate of 12 percent for each month leaving us with a total number of 78,713 tests performed during FY2016. With an estimate of $1,200 per test that brings the revenue from the tests to $94,455,636. I do not think this estimate is unreasonable for the company. I have also included a sensitivity analysis table that demonstrates how revenue may look depending on the price of the test and growth rate for the year.

10%

12%

14%

16%

18%

$1,000

$73,684,994

$78,713,030

$84,276,612

$90,421,335

$97,196,265

$1,100

$81,053,493

$86,584,333

$92,704,273

$99,463,469

$106,915,891

$1,300

$95,790,492

$102,326,939

$109,559,595

$117,547,736

$126,355,144

$1,500

$110,527,491

$118,069,545

$126,414,918

$135,632,003

$145,794,397

$1,700

$125,264,489

$133,812,151

$143,270,240

$153,716,270

$165,233,650

$1,900

$140,001,488

$149,554,757

$160,125,563

$171,800,537

$184,672,903

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As can be seen in the above table the range of revenue could be as high as $184 million if the company can grow the number of tests by closer to 18 percent each month and hit their price target of $1,900. If Opko can receive the price target of $1,900 and maintain the 12 percent growth that I forecasted the company will earn close to $150 million from the tests during FY2016.

The FY2016 estimates have a strong impact on the future forecasts. If the Test performs much better than forecasted in FY2016 then the revenues for following years will increase significantly based upon growth from the previous year results. The opposite of this is true as well. This is why I attempted to be conservative with my estimates and included the sensitivity analysis showing various potential outcomes.

Looking further forward I would expect the strong growth to continue in 2017 and 2018 as the company receives reimbursement. The Test will take some time to be accepted and used by many doctors. Since the overall number is still rather small I would expect growth of 100 percent for FY2017 and close to that for 2018. Below shows the potential growth and revenue for 2017 and 2018:

FY2017

FY2018

Number

157,426

283,367

Growth

100%

80%

Price

$1,200

$1,200

Revenue

$188,911,273

$340,040,291

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I do not think any of my estimates are overreaching as to the potential of the 4KScore Test. The market size for the Test is very large. The company stated that the intended use and population of the 4KScore Test is "any man being considered for initial or repeat prostate biopsy because of an abnormal PSA [prostate-specific antigen] (PSA levels or PSA velocity) and/or abnormal DRE to predict the individual's risk of aggressive prostate cancer on prostate biopsy".

To give you a bigger picture of the potential for the Test the company gave some numbers out during its most recent Analyst and Investor Day presentation. There are 30 million PSA tests ordered each year in the US. Abnormal PSA leads to over 1 million prostate biopsies each year. That is just the number of biopsies performed each year, that does not include those with elevated PSA levels that are not given biopsies, which I assume there are quite a few due to the nature of a biopsy. There are lots of negative effects of a biopsy, and only 25 percent of the biopsies performed show any cancer. This shows that there is a large market potential of at least over a million tests a year. I see doctors much more willing to have a patient submit to the 4KScore Test rather than directly to a biopsy. The 4KScore Test may also grow much higher than this over time as many doctors are hesitant to have a biopsy performed due to the expense and higher risk. The 4KScore Test is so simple that if a doctor is slightly concerned about the PSA level he would be much more likely to request a 4KScore Test to be performed. I think this will expand the market potential even more for the Test.

The table below is a summary of my forecast for the potential revenue for 2016, 2017, and 2018 for the 4KScore Test.

4KScore Test

(In Thousands USD)

FY2016

FY2017

FY2018

Revenue

$94,456

$188,911

$340,040

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BioReference Labs

I have written about the acquisition of BioReference Labs before and how I think it is a positive for the company. The acquisition was made for multiple reasons, one being it helped to provide the infrastructure to launch Rayaldee in the US. Opko would have had to do some serious hiring and overhaul to hire salespeople and build the adequate infrastructure for the launch. This is not the strength of Opko as they have yet to launch a drug to the market. So rather than take on this endeavor, which carries heavy risk and expenses, the company chose to grow this part of the business by acquisition. This is one of the reasons that Opko paid a solid premium for the company. This benefit has not yet been realized, at least not in a monetary sense, as the Rayaldee launch will not occur until the second half of the year.

The infrastructure was also for the growth of the 4KScore Test. BioReference brought the experience to help the Test be approved for reimbursement, an area that once again Opko did not have as much experience in. So far this seems to have been successful as the company has received a CPT code for the test and reimbursement for Medicare should begin starting next year. Even though we heard from the previous conference call that this expense can be back dated to this year. I have already talked more about the 4KScore Test above.

The part that really caught my attention during the conference call is the continued growth in revenue for BioReference. During the conference call it was said that revenues for the quarter for BioReference were around $250 million. We can look in the quarterly report as well for this number. Opko breaks its revenue down into three categories: services, pharmaceuticals, and intellectual property. The services revenue is in essence the revenue of BioReference. There is some other small revenue here but you can see from the previous year, before the acquisition of BioReference, the revenue for the service line was $2 million. This means that revenues for BioReference grew by 20 percent year over year. This is continued strong growth for the company post acquisition.

When doing some due diligence on Opko I found a nice piece of information in one of the 8-K filings. It showed the projections by BioReference management related to the acquisition. Below is a screen shot of the projections from the 8-K filing.

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These are internal company estimates and were used in valuation for the acquisition of BioReference. So I would expect the estimates to be relatively accurate. It is hard to nail down the exact amount of revenue that BioRefernce made in 2015 as the acquisition occurred during the third quarter of the year and Opko only released revenues earned post acquisition for BioReference. From my calculations it appears that for FY2015 BioReference had revenue of closer to $880-$900 million. This may also have been slightly skewed downward as there was a lot of focus on the acquisition and changes occurring in the business. The first quarter report shows that BioReference is on track to meet its goals set forward for FY2016. It had revenues of over $250 million for the quarter. Revenues in the business have not traditionally been stronger in any particular quarter and tend to grow quarter over quarter, implying that BioReference will easily beat the revenue estimate of $1,010,309 for FY2016. The projections above show that BioReference expects continued revenue growth of double digits over the next three years.

Conclusion

The BioReference forecast shows revenues and earnings continuing to grow into the future. The projections were better validated in the first quarter report. This gives more insight into the future revenue potential of Opko. The 4KScore Test is also picking up steam and has potential to continue to add and grow revenues for the company. These service revenues build cash flow for Opko to continue research and development and develop their pipeline. The below combines my estimates for the 4KScore Test and the projections provided by BioReference management.

Sum of 4KScore Test and BRLI

(In Thousands USD)

FY2016

FY2017

FY2018

Revenue

$1,104,765

$1,318,023

$1,587,988

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Opko has a strong potential pipeline and many different potential revenue streams. I have written articles and have seen many other articles written concerning the different drugs and earnings potential that Opko has, but I feel that the underlying business is being overlooked by many. The BioReference acquisition provided revenues and cash flow for the company. It has continued to grow and is still growing revenues at a double digit rate. The 4KScore Test has benefited from the acquisition as well and seems to be picking up steam. I expect it to grow revenues for the company. I see the company on pace to profitability due to its underlying services business. The revenue and cash earned from these services provides Opko with sufficient cash to continue its development of the pipeline without dilution or taking on debt. They can fund themselves and that is without a major drug being approved into the market.

Opko is on the right track. The conference call was encouraging to me. I was excited about the success I heard in the underlying business. I am also excited about the earnings potential from the other many developments that the company currently has. I continue to be long Opko Health. My original draft recommended buying before Rayaldee was approved but during the review process Rayaldee received approval. This only fortifies my position in the company and the future success of the business, while it does increase your entry point. It now has a drug approved in the market. The point of the article remains the same, being regardless of the drug approval the company is experiencing strong growth.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OPK over 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.