OPKO Health: Current Valuation Creates An Interesting Opportunity

Summary

• OPKO Health ran into SEC-related issues in 2018 and its stock price has plummeted since.
• OPKO has a long history of operating losses, but it has the potential to change the situation.
• OPKO's actions after the coronavirus outbreak may have shifted stakeholders' perceptions of the company.
• OPKO's diagnostics unit is making progress and the company's pharmaceuticals unit is growing nicely.
• Cheap valuation and current momentum create an interesting chance for both short-term and long-term investors.

Editor's note: Seeking Alpha is proud to welcome Henri Piiksi as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA PREMIUM. Click here to find out more »

Current situation

OPKO Health (NASDAQ: NASDAQ:OPK) has not been able to regain trust from its investors after its controversies with the SEC in 2018. Lost confidence and slower than expected revenue growth have shown in Opko's stock price, which has plummeted 80% between August 2018 and April 2020. Opko's stock is also highly shorted with around 25% of the stock's float sold short.

However, Opko's important role in coronavirus testing might be the catalyst it has needed to gain back the lost confidence and justify a higher stock price. BioReference Laboratories, Opko's subsidiary, has managed to tie partnerships with different entities and is currently running PCR and antibody tests for coronavirus around the United States. The company has shown remarkable efficiency by setting up a PCR testing capacity of 700 000 in just a few weeks and has received a lot of positive news coverage for that.

Opko's insiders are currently buying the company's stock heavily. Especially CEO Phillip Frost is known for putting his money where his mouth is, and recently he has been buying Opko's stock at an accelerating pace.

Source: Author's calculations from SEC -filings.

Source: Thomson Reuters

Financials

Opko's problem has been a long streak of operating losses. Breakdown of Opko's income statement reveals that its expenses are currently unsustainable. For the last three years company's COGS, SG&A and R&D have averaged around 115% of revenues.

Source: Data gathered from Thomson Reuters

To address this problem, management has started a cost-reduction project, which's results should show up in the future. However, some progress has already been made since in Q1-2020 Opko's operating loss was $40.7 million, which is noticeably less than the loss of $75.3 million in Q1-2019. Investors should still not be overly optimistic about these changes since they are just a start for a long and uncertain project.

The good news is that Opko's short-term financial position is solid. Per management, the company is currently in a stable liquidity position and can meet its anticipated cash requirements for operations and debt service beyond the next 12 months. Opko's quick ratio of 1.1 indicates the same thing.

Opko also recently received $30 million of additional short-term liquidity through the CARES Act, and the company has a $100 million credit facility which it can use if needed. This means that the company can handle some unexpected expenses as well. The company's financial structure is also healthy and its debt-to-capital ratio of 15,11% is notably lower than the industry average of 31,1%.

Analysts are currently very positive on Opko's future outlook and they expect its EPS to grow at a strong pace and to reach positive territory in 2023. Equity research company Zacks also recently upgraded Opko Health to a strong buy -category. These analyst expectations might also sign that something is changing in Opko's outlook.

Source: Data gathered from Thomson Reuters

However, there are risks that Opko's management has to solve. Management has stated that the biggest risks regarding the company's profitability are troubles in the commercialization process of Rayaldee, troubles in 4Kscore tests' sales, and troubles in the ability of the company to generate profits and cash flow from BioReference Laboratories. Per management, success on those factors is essential to improving the company's profitability, and therefore I will cover those factors throughout this thesis.

Opko's pharmaceuticals unit has great potential - Case Rayaldee

Opko's pharmaceuticals unit is currently producing only 20% of the company's revenues, but by looking at its products we can see great potential there. A good example of this potential is Rayaldee.

Rayaldee treats secondary hyperparathyroidism in patients with stage 3-4 chronic kidney disease (CKD) and vitamin D insufficiency. Opko Health is also currently running phase 2 open-label trials for Rayaldee for patients with stage 5 chronic kidney disease and vitamin D insufficiency. Phase 2 trials for this higher strength Rayaldee are expected to be completed in 2020.

Rayaldee is the only medicine approved by the FDA to treat secondary hyperparathyroidism in stage 3-4 CKD, and its high potential comes from this monopolistic position in a big market. According to the National Kidney Foundation, 10% of the population worldwide is affected by chronic kidney disease and millions die each year because they do not have access to affordable treatment. The prevalence of chronic kidney disease is also expected to increase due to obesity, diabetes, hypertension and aging population. These factors create a natural demand for Rayaldee, and none of the alternative medicines are even close to reaching FDA acceptance.

Rayaldee has already had an amazing 92% YoY CAGR in prescriptions between 2017-2019 and its sales in Q1-2020 were also up 79% from Q1-2019. Per management, Rayaldee is also expected to be approved and launched in Europe during the second half of 2020. Current studies of Rayaldee's effectiveness on stage 5 chronic kidney disease patients have shown very promising results, which are expected to be released fully in the second half of 2020.

FDA has also recently authorized a clinical trial to evaluate Rayaldee in COVID-19 patients.

Source: Company presentation; RAYALDEE total prescriptions

The company's clinical development program also looks promising with a great pipeline of candidates in development. Especially the rare disease pipeline seems interesting. The strategic global partnership with Pfizer to commercialize Opko's growth hormone replacement medicine Somatrogon is also finally paying off, and Somatrogon is expected to receive BLA submission in the second half of 2020.

Source: Company presentation

Diagnostics unit is making progress

Opko's diagnostics unit is currently producing around 80% of the company's revenues. Most of the diagnostics unit's revenues come from BioReference Laboratories, which Opko acquired in 2015.

A report conducted by MarketsAndMarkets stated that the global infectious disease diagnostics market is estimated to reach a worth of $19.35 billion in 2022, witnessing a CAGR of 5.6% from 2017. The single biggest market for diagnostics is North America, and Opko Health currently holds a strong position there. Diagnostics unit indeed has potentially a very big market to its products but to this day it has not been able to fully utilize that. This is mostly because Opko's management team has had a hard time turning BioReference Laboratories into its full potential.

However, now Opko's management has stated that a lot of changes have been made and that the diagnostics unit is scaled to support profitable growth and efficiency. Efficiency growth is also probably the reason why Opko was able to set up a huge testing capacity for coronavirus so quickly. Opko's accomplishment with BioReference Laboratories is in part thanks to its CEO Phillip Frost, who has made his fortune by his ability to pick and price acquisitions.

Diagnostics unit has also gotten its prostate cancer test (4Kscore) in uplift and during Q1-2020 the company performed nearly 16 000 4Kscore tests. Opko has received Medicare reimbursement for customers going for 4Kscore tests, which should help the test to reach even more people and show up in sales growth in the future.

Source: Company presentation

Risks seem to be slowly decreasing

Opko has a devastatingly long history of declining revenues and rising expenses, which is probably the top reason why many investors are avoiding the company.

However, Opko's current outlook seems better than in a long time. Many of the expected synergies from the acquisition of BioReference are finally coming together and the partnerships BioReference has formed during COVID-19 will be valuable assets in the future. BioReference will also continue to have a key role in PCR and antibodies testing in the future.

Opko's pharmaceuticals unit has been able to develop its first FDA accepted medicine, Rayaldee, and this is starting to show in sales. Rayaldee already had sales of $66 million in 2019, and its demand is expected to grow at a fast pace. Pharmaceuticals unit also has many great partnerships that help in bearing the costs and risks associated with its business. Acquiring Pfizer as a partner shows how much potential the pharmaceuticals unit truly has. Opko is also currently expanding its business to Europe and Japan, which could drive up its financials greatly.

Opko's stock has become more volatile over the past two years. By looking at its beta coefficient we can see that the volatility increased a lot after the SEC-controversies in 2018, so it is reasonable to assume that this increased volatility probably reflects mostly investors' lost trust. However, because of recent changes, one may expect this volatility to decrease in the future, which should stabilize the stock performance. Opko also has strategic entities' ownership of around 40%, which reduces volatility and shields stock price performance.

Source: Data gathered from Thomson Reuters

Stock is conservatively priced

Conservative pricing is revealed, when Opko's enterprise value to sales -multiple is compared to its peers' multiples. This comparison suggests that Opko Health's stock is undervalued by 61%.

Source: Data gathered from companies' financial statements

Comparing Opko's EV/IC -ratio (enterprise value to invested capital -ratio) to its peers' ratios reveals the same conservative pricing as before. This comparison suggests that Opko Health's stock is undervalued approximately 94%.

Source: Data gathered from companies' financial statements

Together these two methods reveal an average underpricing of 77,31%, which would suggest a real share price of $3.83. Analysts' current mean target price is $4.20, which is 94,44% above the current share price. For these reasons, I think a conservative target price range to Opko's stock would be $3.20-$4.00.

Another interesting method to analyze Opko's stock price is to compare its market cap to its 12M forward EPS. This method also suggests that the stock is currently undervalued.

Source: Data gathered from Thomson Reuters

Investor outlook and conclusion

There are at least two bullish indicators for short-term investors. Firstly, 25% of Opko's float is sold short and therefore there is an increased possibility for a short squeeze after the recent 90% surge in Opko's stock price. Secondly, Opko Health has been all around the news lately and this positive attention drives new investors to the company. Google Trends shows how recent search volumes for keyword "Opko health stock" have surged, indicating the growing interest in Opko's stock.

Source: Google Trends; Keyword "Opko health stock"

Long-term investors should be cautiously hopeful, too. The current situation has helped Opko's stakeholders regain some of their lost trust in the company. Opko's stock has been very volatile after the company's controversies with the SEC, and by regaining its investors' trust the company can stabilize its stock price performance.

The current situation has also shown that BioReference Laboratories has achieved the level of efficiency expected from it. Opko's pharmaceuticals business is thriving with Rayaldee's sales constantly growing around 80% per year and a strong pipeline of new products in development. Pharmaceuticals unit has also signed great contracts with Vifor Fresenius and Japan Tobacco, and these partners bear most of the costs for obtaining product approvals to different markets. These partners will also pay milestone payments and shares of revenue from sales which are expected to start in late 2020.

I think it is reasonable to assume that this current situation is the catalyst Opko has needed for a long time. I see the stock's conservative valuation together with its long-term upside potential as an interesting opportunity for investors with a high risk appetite.

Analyst’s 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.

Comments

[amannheim_100]

@henri Piiksi

Do you think OPK will give Q3 guidance in the upcoming Q2 ER?

[Henri Piiksi]

@amannheim_100I'm sorry for the delayed answer. But I believe they will give some guidance. However, giving detailed guidance in the current situation is hard since everything is very unpredictable at the moment.

[bargains]

@Henri Piiksi

Thank you for a very informative article. Have you thought of possibly updating your report on OPK in the near future? The stock action since you wrote your report may be telegraphing some substantial developments at OPK. Alternatively, it could be due to a short squeeze.

In any case, even a short updated report from you on OPK would be most welcome.

[Henri Piiksi]

@bargainsHi, I'm sorry for the delayed answer. I will update my report in the near future. However, in short, I think that majority of this current rise is due to the new contracts that BioReference has made. Currently, the stock is in a great position because of these contracts and the upcoming success with Rayaldee. Somatrogon is also likely to receive FDA approvement. I don't see much downside in the stock with the current information that we have.

[downlimit]

great analysis. charts, and comps: ev/ic, ev/rev, and liquidity. shorts at 26 % getting squeezed by the insider. 1.5 billion market cap. better than average volume day. 8% off a 52 week high. could print new high list this week. like it

[stormydoctor]

OPK going to pop Monday guys, get in while you can.

[Doctor's husband]

Presenting data at meetings has never been a market mover for this company. If news does move the stock there's always a nice pullback to reward the careful. Just my opinion.

[Ethan Roberts]

If you look at the history of insider buying on OPK, you will see that Philip Frost has been a buyer of his company stock on a regular basis and at all different prices. Much of his shares at this point are probably down 60%-70%, but he's also been a buyer when OPK was scraping bottom, like it is now. It's one of those stocks you can buy a few hundred shares at two bucks and just forget it. One day you'll wake up to find the FDA has finally approved one of their many pipe lines, and the stock will be at $12. But that could be a long time from now.

[valtr]

What is a long tome horizon for u? 3?5?10? years ?

[Ethan Roberts]

Well, let's look at the long term history going back 14 years. In 2006, this was a penny stock. It rose to $6 a year later, only to fall back to less than a buck in the 2007-09 recession. Over the next six years it does a slow climb up as high as $17, but mostly on speculation. Meanwhile, Frost is buying up shares at almost every level. But 2015 was the peak, and it fell from there to almost a buck again this year. So now it's at $4. I guess it's a great trading stock if you get in low, but the buy and hold crowd at $16 might not be so happy. My only point was that nobody should get excited that Dr. Frost is buying shares, because he routinely does that no matter what the price.

[Rgarga]

did anyone else but Dr frost buy? anyone know anything about his health

[NuGy]

AlieGee: Thanks for your response. I won't lose the benefit of the capital loss if I harvest it as I won't violate the wash sale rules if I buy it back. I will probably harvest the loss to offset gains made when I took money off the table earlier in the year. Whether I buy it back or not should be a more informed decision by year's end, or next year. It looks like something may break on the search for a vaccine. Let's hope so. Back to normal would be great. Makes one appreciate what was normal.

[Thrasymychos]

How does ASND have the market cap it does and OPK so much less? ASND's TransCon, contrary to what this "sugars" poster says nelow here is excreted water compared to CTP-hGH. But I guess you have to know scientists from PFE to know that.

[easyxpress]

OPK has a chronic problem of bad management team. Worse, there's nothing they can do about that because the CEO owns half of the company. Over the years, the shorts are making tons of $. And it's still one of the most shorted stock in the market. Unless there's major change of the management team, the stock will remain where it is now, unfortunately.

[hcarlpast]

I have followed OPKO for years, noting Dr. Frost's insider buying. Of course much of this was at much higher levels than now. I am convinced that although Dr. Frost is much smarter than I will ever be, this company is highly speculative and not for the vast majority of investors. Too many other quality drug companies to consider, this one is a dog.

[AlieGee]

Good luck to you Henri. I read your bio and not much is mentioned about you.....Student, full time investor with years behind you, CPA, ?? etc.

Will you be writing about bio only?

[Henri Piiksi]

Thank you! I will write about a broad range of stocks. I'm always trying to find new ideas and perspectives. I did a quick update on my bio.

[coolcatnip]

percentages of CAGR, sound nice but bottom line is very little revenue has been generated and barely increased revs expected...with a management team that moves @ Tortoise speed there is so much opportunity elsewhere that unless you want to put a little in a trust for your grand kids there not much going on, there's always potential but so far investors have gotten nothing but older...

[Thrasymychos]

Article does not address the blow out potential from CTP-Hgh. ASND has a market cap 5 times OPK's, and its TransCon (competitor of CTP-hGH) is quite iffy given its narrow patient testing base (1/3 of PFE/OPK) and only 2yr safety record. I look at ASND as the corner drug store in comparison to PFE's size, let's call is a big Norteast mall. The numbers on Covid-19 testing I think are not suffiently appreciated, either. Back to CTP-hGH: if PFE can generate $1.7 billion in revenues by 2022, OPK gets half of the profits-- no longer just legacy payments. That completely shifts OPK's forward p/e in a different light.

[Henri Piiksi]

Thank you for your feedback. I was aware that the numbers on COVID-19 testing probably were not sufficiently appreciated, but I didn't want to be overly optimistic. I think the revenues from COVID-19 PCR and antibody testing should at least fully compensate for revenue losses resulting from possible declines in non-urgent testing. There is some uncertainty on how much revenue COVID-19 testing could produce, but in the best case, it might be a lot. I agree with you on CTP-Hgh's great potential!

[sugars]

Super blowout CPT-hgh , I doubt it ! Not 5 yrs ago . Not now. Rayaldee, 4kscore, Varubi, and now CPT-HGH. Built up as Potential blockbusters. So far ---- Piddling !!!!
Has anyone heard about this big demand a new Hgh drug?
Be veeeery careful with this company.

[mrmeman]

Well Pfizer (HgH drug partner) sold $475M worth of their current HgH drug last year and PFE is in charge of commercialization of the new/improved drug. 1/2B dollars annually seems like decent demand, but you haven't heard of it, so I'm sure its not real.

[NuGy]

AlieGee:Where be you? Hopefully you are still aboard. I can't stomach a $20,000 loss at this point in "harvesting" capital losses except it will offset capital gains I have harvested this year. I am up to my limit in single security investments, so don't want to buy more to decrease my average cost basis. I have decided to hang on , at least towards year end. If I need the loss, I will harvest it. Perhaps buying back avoiding applicable 30 day rules. Things appear to be turning on the good side for a change, but they have a long way to go to bail me out.. Hell, I would be happy to get back 50%. What are your thoughts? Be safe out there.

[AlieGee]

Howdy @NuGy - - I'm here...Thanks for your kind words to be safe...Same to you. I'm hanging in. I don't have the large loss you do so that's why I
will hold. I do see potential but shorts seem to be having a party.....Kind of
like looting we've been seeing.
As far as selling at a loss and then buying back within 31 days, what you
lose is the tax loss benefit. Nothing more, nothing less.

Good luck....

[Doctor's husband]

Henri welcome. Please expand your bio info. I appreciate your contribution. My family and I highly respect Dr Frost as a scientist and businessman and know him to be a true humanitarian. That being said, I hope he has another good 3 to 5 years to realize his dreams with OPKO. We can't ignore his advanced age. The fast money amateurs who often don't understand what they are buying, drawn into the stock Covid will likely get beaten by the shorts. That being said, I am increasingly confident the company and will eventually thrive and reward investors .

[Henri Piiksi]

Thank you for your words!

[AndreP]

I second that Doctor's husband. I lived in Miami and yearly met the Doctor. Made good money on Ivax, teva and Key. This is a difficult one I admit but hanging in.

[DB2012]

invest in quality companies not garbage like OPK. There is a reason a stock is a dollar or two.

[Swich Research]

Good article but I would have liked to see ratings from large institutions instead of Zacks (no offense) and I would have liked a little more clarity on the share price estimation. I'm still trying to make sense of it.

[Henri Piiksi]

Hi, thank you for your feedback. Zacks' rating is based on large institutions' revisions of Opko's earnings estimates, so it implicitly takes into consideration those large institutions. Analysts' mean target price of $4.20 also includes large institutions (e.g. Barrington Research with a price target of $4). As for the clarity of share price estimation, I understand your point. I take that on note for the future.

[Swich Research]

Thank you Henri.

[AlieGee]

If you're looking for the larger brokerage firms to rate, they don't on low priced stocks. I believe the minimum is 10.00

[vinniy0]

Should have thanks to Dr. Cohen for getting BRL the contracts, PR etc regarding Covid. Other than that great article.

[ATinvestor]

I think it’s all up from here for OPK.

Covid-19 testing will carry them until Rayaldee and 4K Score testing pick up and that will carry them until their new drugs are approved.

[AlieGee]

4K will be a revenue generator..

[samuel332]

very impressive analysis. company still has to overcome its checkered reputation

[Henri Piiksi]

Thank you for your words! I agree with you. Opko's bad reputation is clearly causing harm to its stock price performance.