Inside Opko Health

Mar.26.12 | About: OPKO Health, (OPK)

OPKO Health Inc. (NYSE:OPK) is pharmaceutical and diagnostics company headquartered in Miami, FL that develops and commercializes novel and proprietary technologies that include molecular diagnostics tests, vaccines to diagnose, treat, and prevent neurological disorders, infectious diseases, oncology, and ophthalmologic diseases. The company works in the United States, Chile, and Mexico and is headed by Phillip Frost, M.D., Chairman and chief executive officer.

John Eastman interviewed Dr. Frost for this article.

JE: Dr. Frost, OPKO was formed in 2007 by the merging of two companies, Acuity Pharmaceuticals and Froptix, the company you founded?

DRF: Right. What we did was we originally thought we were going to be an ophthalmology company because of a development that we had become aware of at the University of Florida and we formed the company which was going to be a new drug to treat the dry form of AMD, for which there's no treatment. But while we were at that point, we came across a little company called Acuity that had an siRNA (Small interfering RNA) product that had completed Phase II clinical trials for the wet form of AMD, and that was a little company called Acuity that was owned by venture capitalists. So we decided to put the little company that we had formed together with Acuity into a shell to make it a public company and we put cash into the company to finance it. When I say "we," it's a group of my colleagues and myself. And as it turned out after spending about $30 million on the Phase three clinical trial, it was found it wasn't going to meet out endpoint, so we stopped the study, and by that time we had come across other technologies that were, in fact, more important to us. One of them was a new platform for discovering new diagnostic tests in humans. We developed the diagnostic test, based on the ability to identify disease-specific antibodies in the blood of patients. This technology was discovered by a scientist named Tom Kodadek while he was working at the University of Texas, and he was on his way to relocate to the Scripps Research Institute in Jupiter, Florida.

I'm on the Board of Scripps, and the then president of Scripps is on the Board of OPKO, and it was through his good officers that I discovered this work, and after some negotiating we got a license of technology from the University of Texas. Now, Dr. Kodadek is at Scripps, and we're continuing to work together. He is a consultant to OPKO and we have laboratories up in Jupiter, next to Scripps, but we also support Dr. Kodadek's work in his laboratories in Scripps. So that work is coming along nicely and we have now antibodies that we think are useful for diagnostic tests for Alzheimer's, for Pancreatic Cancer, for Parkinson's disease, and for Lung Cancer. For the Alzheimer's, we have a preliminary working agreement with Bristol Myers, and it's a non-exclusive type of agreement, so we're free to exploit it in other ways on our own.

JE: And before that you were instrumental with a company called IVAX? It too was a public corporation and was acquired by Teva in January of 2006?

DRF: Right.

JE: Can you tell me about this company and its products?

DRF: IVAX was a company that we started in 1987, shortly after we sold our first company, which was Key Pharmaceuticals to Schering-Plough.

JE: You were one of the founders of IVAX then?

DRF: I was the founder yes, and I had two partners to begin with, but they were more passive.

JE: And what did IVAX work on?

DRF: The company initially started out to develop new products based on new delivery systems, much as we had done in Key Pharmaceuticals. But before long we discovered the advantages of the generic drug business, which was just beginning to blossom at that time. And so it wasn't long before in addition in our efforts to develop new drugs, we became an important generic company, but we always specialized in generic products for which the brand product had special challenges. For example, we were the first company to have a generic product that had a $100 million of sales, Verapamil.

What has always been my strategy was to internationalize the business. IVAX became a branded generic company in Latin America, Central and Eastern Europe, and at one point we were the largest generic company in the U.K. So internationally, we played a significant role and I think this was one of the attractions to Teva when we finally sold to them in 2006.

JE: So IVAX was founded in 1987 and sold in 2006. is that correct?

DRF: Right.

JE: Would you consider that company a success?

DRF: A huge success and I think it's played a very important role in Teva's (NYSE:TEVA) business activities, also. It's been totally integrated into Teva, but the original IVAX products are still very important products for Teva. For example the heart respiratory line of products is a billion dollar business for them. Our companies in Latin America and Central and Eastern Europe are over a billion dollars sales type businesses. So it was a wonderful acquisition for Teva, it was a very nice sale for IVAX.

JE: For analysis purposes, from a stock purchased in 1987 when the company was founded, to after the split when it was sold represented something like a 6000 % gain. Does that sound correct?

DRF: It could be, I never calculated it myself, but it worked out well for everybody. The actual sale by the time of closing was a $10 billion price. The actual sales price was $7.4 billion, but it was half stock and by the time we closed the stock had gone up to make it much more interesting.

JE: So I wanted to go back to OPKO. Today OPKO is a five-year-old company, correct?

DRF: Right.

JE: Its current capitalization is about 1.44 billion? It seems to have about $9 million worth of debt.

DRF: That sounds about right.

JE: I noticed in the closing of 4Q of 2011 the company reported a loss of about $20 some million and it also had about $71 million in cash. Does that sound correct?

DRF: Yes. The losses were in part right down of good will but it sounds right.

JE: Do you believe OPKO now has the sufficient cash on hand to operate, to carry out its stated directives for the company?

DRF: Yes.

JE: So as OPKO is a research and development-based pharmaceutical company, they make R&D investments which are risky. However on the benefit side, if one of your products reaches commercialization captures a large market, it could be significant for shareholders, correct?

DRF: Without a doubt. For example, the tests that I mentioned, if they work out, the Alzheimer's test, any one of these tests could be commercially important beyond anyone's present expectation. But talking about diagnostics, we not only have the new test, but we recently acquired a company called Claros that had a unique technology, which I consider the hardware part of the game. The new test I would look at as software and this represents a platform to actually perform the test. These are point-of-care type tests. This it looks like credit card and utilizes a technology referred to as Microfluidics and it was developed up in Boston by scientists at MIT and Harvard. You put a drop of blood at one end, put it in the little box that applies mild negative pressure which sucks the blood through the pipes which are aligned with chemicals, and within ten minutes you get a print out of the test results that are similar to what you get in a large laboratory.

So a patient coming comes to have their finger pricked by the nurse and by the time they sit down to see the doctor, the doctor can have the results in front of them. The first test that they're developing is the PSA. As you know, the PSA has some controversy about it, but what we've done is analyze it's three new markers, which when used in conjunction with conditional PSA gives you much more precise data, and which can then prevent you to avoid 60 percent of the biopsies that are now performed. That's the big controversy, which is too many biopsies get done. So we have not only a great test, but we think we have a solution to the present controversy. Now, from an economic point of view, it could be very interesting. There are 30 million PSAs done a year in the United States, the average reimbursement $30, so it's presently a high dollar market. But the reimbursement's paid per test. So with our four tests you'd expect it to be four times as much, a $3.6 billion market. But if we're lucky enough to get an increase reimbursement because we're going to provide information that's novel and important, maybe we can even get more. We also have a lot of other things going on, new drugs that we've developed that are interesting.

JE: In addition to the obvious benefit of a faster turnaround, do you believe the device represents a cost savings in order to produce those tests?

DRF: So overall we're going to show that with our PSA for example, it will save the payers millions of dollars if used extensively. But more important it's going to get more precision to the process of existing prostate cancer tests. In so far as the other products are concerned, like in Alzheimer's tests, with the neurodegenerative diseases, the critical point is to start treatment early, because in Parkinson's and Alzheimer's by the time you make the diagnosis, a lot of the tissue of the brain is already gone and it's too late to do much. So with the new drugs coming along, it's absolutely critical to start treatment early. And our Alzheimer's test, for example, fills every promise of turning positive before the full-blown Alzheimer's is present. That's an example of the types of things we're going after. All of our projects represent break-through type of projects, so that any one of them is enough to make the company quite successful.

JE: These all seem to be rather compelling reasons for why someone in the industry would be interested in OPKO. According to the public SEC Insider trading reports, you have in the past and continue to invest heavily in the company?.

DRF: Absolutely.

JE: That represents a commitment, but furthermore it's an investment of stock in the open market. Do you believe this company has compelling reasons for why this is a good investment?

DRF: Well, there are compelling reasons for me to invest. A week ago Friday I bought 620,000 shares. I'm very pleased with my investment and of course I can't speak for others, but let me just give you another aspect of my approach.

Basically we're extremely opportunistic. You've heard what I've described already, but another example is a product that we brokered called Rolapitant, which came about because the CEO of Schering-Plough, whom I had known, had to divest himself of this product in order to complete their merger with Merck. Knowing that we move quickly he gave me a call and very quickly we had the product in our hands. We paid very little money for it; we got the ownership of the product, plus raw material to continue with it, it was worth more than we paid for it. We worked on it for a year, we invested very little money and turned around and out-licensed to another company, got the money that we put in plus we have the possibility of getting $120 million in payments in it, and as well as up to 20 percent royalty with almost no investment. That product can be a million dollar product. We also got some ownership in their company -- the licensee's company. So if that works out, I know the people in the company think it's going to be a billion dollar product, we can wind up with a serious income stream just from that one product, and we don't have to do anything further--they're paying for all the Phase III studies. They have finished Phase II studies by the way. So that's an example of the type of opportunism that we got to exploit.

JE: Very good. Can you tell me about the involvement of the Bill and Melinda Gates Foundation with OPKO?

DRF: That consists of a $3 million grant to Tom Kodadek, the scientist that I mentioned earlier at Scripps and he in turn got to work on our project, and now Scripps subcontracts with OPKO for part of the work that gets done within OPKO.

JE: Thank you Doctor Frost.

OPKO is currently trading at $4.87 has a 52wk range: of 3.15 - 5.85, a market cap of 1.44B.

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