Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing Opko and have received five hundred dollars for independent research. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate.
The world of emerging biotechnology may carry substantial risk when it comes to track records and approval, but there are two points that matter at the end of the day. First, risk can be good. One of the central principles of financial theory is that riskier assets generate higher returns as a result of fundamentals dissipating initial reservations.
This leads me to my second point, namely that there are ways emerging biotech investors can reduce risk. If a major experienced investor is endorsing the company, if the insiders are increasing ownership, if management or the board comes equipped with a track record of success, or if the pipeline has connections to leading companies, it's a good sign that the fundamentals are pointing in the right direction.
Opko Health (OPK), a billion-dollar-plus pharmaceutical and diagnostic company, has all four positive signs going for it. It is backed by healthcare legend Phillip Frost, who is worth $2.3B, according to Forbes. Frost is the Chairman & CEO of Opko and has delivered past innovation time and time again. He has proven to be a winner with the $826M sale of Key Pharmaceutical to Schering-Plough and the $7.6B sale of Ivax to Teva (TEVA). I also believe he is a winner, because he has done an impressive job of "interlinking" his holdings (ie. getting one holding to provide business to another and vice versa).
It is unfortunate then that an article published earlier today on Seeking Alpha attempted to discredit both Frost's investment record and his bullish position on Opko. Perhaps most upsetting of all, the piece made a point of looking at the flaws in the painting and just missing the overall painting.
It ran us through a series of disappointing Frost investments and went so far as to highlight "Dr. Frost's excursion into Chinese fraud". Saying this is kind of like saying "Mister Rogers goes hunting in the Amazon" - it just doesn't work. Aside from the fact that Frost is not a prolific investor in China (he principally backs Israeli bio-pharma), to say nothing of fraud (his business dealings and philanthropy are highly respected), it really just strains the imagination to argue that a billionaire is somehow a failure and that "investors should apply a discount to Opko's shares" as that same billionaire acquires more and more shares.
Having netted billions in value creation over the course of his career, Frost ranked #2 by InsiderScore.com as an insider whose shares have appreciated the most. His investment in PROLOR Biotech (PBTH), which I have covered several times, has been an incredible home run. And I anticipate likewise for his investment in Opko.
Why Opko Looks Undervalued
As the Chairman & CEO, Frost owns a near majority stake in Opko and has been aggressively increasing ownership. His purchases have been made on the open market and most of them have been above the current $4.57 price per share. The purchases have been consistent, substantial, and reinforced by purchases from the Director, Vice Chairman & CTO, and Executive Vice President. In fact, in the last six months, more than 3.8M shares have been purchased in over 91 transactions by insiders. The amount that has been sold? Zero.
Click to enlarge.
Source: FINVIZ.com. Description: Insider transactions since May 1st. Insiders have continued to buy increasing amounts of Opko, and this reality has been consistent dating back to the IPO.
Insiders of OPKO actually love the stock, and are putting their money where there mouths are: They own 52.7% of the outstanding shares. Respected hedge funds appear to be taking a similar view on the stock. Aletheia Research & Management owns 3.3% of the firm; Jana Partners owns another 0.9%; and institutional investors collectively own 20%, which is a figure that is very high for a rising biotech given the insider ownership.
But it's not just about the abundance of support from institutions and leading healthcare investors that make Opko undervalued. It is ultimately the firm's diversification and catalysts that will drive value creation. Opko's proprietary Claros Point-of-Care Diagnostics Platform can produce quality lab results for testing blood in just 10 minutes. The product is potentially revolutionary, since it is attempting to transition in-vitro medical diagnostics from the laboratory to the bedside. With healthcare costs rising, suppliers are looking for an efficient clinical workflow and improved customer experience. Claros accomplishes both with minimal provider training.
Claros is just one potentially billion dollar product that Opko owns. It is noted for "technologies… and vaccines to diagnose, treat, and prevent neurological disorders, as well as infectious diseases". The Israeli firm is also developing a software product that helps doctors quickly obtain test results. Rolapitant, which is currently in its Phase III trial, has already demonstrated solid efficacy for treating chemotherapy-induced nausea and vomiting (ie. "CINV"). Phase II results demonstrated that patients treated with just one dose had impressive five-day activity in CINV prevention. Emerging market focus through the acquisition of a Latin American pharmaceutical company adds yet another layer to the upside story. And diagnostic tests for Alzheimer's have been so productive that Bristol-Myers (BMY) signed a deal with Opko for continued development.
Based on the above pipeline momentum, I believe the $1.4B market value understates the firm's potential. Frost is not just good for market confidence; he is also good for networking. Since Opko's products target multi-billion dollar markets, it follows that its multi-billion dollar Chairman & CEO can connect the firm to partners that will provide access to large patient populations. What partner? Frost chairs Israel's largets biotechnology firm, Teva, so it makes sense that he would link a local firm (ie. Opko) with his flagship holding.
In light of the catalysts and positive continual reinforcement by both leading healthcare investors and major institutional shareholders, it should not be surprising that the company has a 1 year price target of $8.25, which is at a more than 80.5% premium to today's value.
Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing Opko and have received five hundred dollars for independent research. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.