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Opko Health: Betting On Proven Leadership

|Includes: BAX, CECO, OPKO Health, Inc. (OPK), TEVA

Opko Health (NYSEMKT:OPK) is a multi-national pharmaceutical and diagnostics company headquartered in Miami, Florida. It aims to establish industry-leading positions in large and rapidly growing medical markets by leveraging discovery, development, commercialization expertise, and technologies. The company formed in 2007 upon the merger of three smaller companies; Acuity Pharmaceuticals Inc., Froptix Corporation and eXegenics, Inc. on March 27, 2007. Upon this merger, Dr. Phillip Frost became CEO and Chairman.

Opko's chairman, Dr. Phillip Frost, has achieved great returns on his investments through various companies, many of which ended in eventual acquisitions:

- Key Pharmaceuticals: $5 million invested, grew to $180 million, acquired by Schering-Plough in 1986 for $600 million.

- North American Vaccine: $10 million invested, grew to $140 million, acquired by Baxter International (NYSE:BAX)in 1999.

- Whitman Education: $6 million invested, grew to $175 million, acquired by Career Education Corporation (NASDAQ:CECO) in 2003 in a merger agreement.

- IVAX: $100 million invested (including open market purchases), grew to $1.5 billion, acquired by Teva Pharmaceuticals (NYSE:TEVA) in 2006 for $7.4 billion. Funds that were invested from the 1987 IPO and held all the way until the 2006 acquisition achieved a return of 6,742%.

-Continucare: $16.8 million invested, grew to $170 million, acquired by Metropolitan Health Networks in 2011 for $416 million.

- Dreams Inc.: $2 million invested, grew to $15 million, acquired by Fanatics Inc. in 2012 for $183 million.

Today, Dr. Frost has an estimated net worth of $3.3 billion. His investment trust has $1.5 billion invested in Opko Health. Dr. Frost has been purchasing additional shares of Opko Health in heavy volumes on a regular basis for the past two years. While he has a position in Opko Health that is equal to roughly half of his net worth, it shouldn't be interpreted as putting all of his eggs in one basket; he has been diversifying within Opko, as the company has acquired many subsidiaries that have generated a great number of products developing in its pipeline.

Opko's late-stage Products and Pipeline:

Rayaldy: A Vitamin D compound for phase 3 and 4 chronic kidney disease. Current drugs on the market have not proven to be very effective at raising vitamin D levels in kidney patients without causing hypercalcemia. Phase 3 trial results expected to be announced around mid-2014. The market size is estimated to be $12 billion.

4K Score Test: Launched in Europe in October 2012, Recently launched in the United States. In the U.S., to detect prostate cancer, one million biopsies are performed annually, with 80% resulting in either no cancer or a low-grade cancer. The 4K Score Test is a blood-test algorithm to improve risk stratification of candidates for prostate biopsy presenting with an elevated PSA and/or abnormal digital rectal exam. This reduces unnecessary biopsies. This was developed by an international team of scientists at Memorial Sloan-Kettering Cancer and the University of Turku, and testing was conducted in a special laboratory in Nashville, Tennessee. This was tested in 9 clinical studies over 10,000 patients. A 2013 health economic study estimates U.S. cost savings from reduced unnecessary biopsies and associated hospitalization could be $1 billion/year.

Rolapitant: A drug to reduce nausea and vomiting for cancer patients receiving highly emetogenic chemo-therapy. Opko outlicensed Rolapitant to Tesaro Inc. a company that Opko has a 10% equity in. Opko will still be eligible for payment of up to $121 million, including an up-front payment and additional payments based upon achievement of specified regulatory and commercialisation milestones; and will receive double digit tiered-royalties on sales. Phase 3 trial results were published in December 2013, where it was reported that Rolapitant had achieved primary goals of reducing nausea and vomiting, but failed to meet secondary goals.

hGH-CTP Technology: Increases protein circulation time. Once-a-week injection, big improvement from current products that require daily injections. Small needle size, due to low viscosity. Superb clinical safety and immugenicity profile. Proper hGH treatment achieves increase in bone density, decrease in fat mass, increase in body lean mass, improved cardiac function, lower risk of cardiac disease, and improved overall physical performance. $3.5 billion market, growing at 5% annually. Currently in phase 3 trials with 189 patients. The primary efficacy point is to reduce truncal fat mass after 6 months.

Alpharen Tablets: A calcium-free non-absorbed phosphate binder, is in Phase 3 development in the U.S. and in Europe for the treatment of hyperphosphatemia in dialysis patients. The available Phase 3 data show that Alpharen controls elevated serum phosphorus at least as well as sevelamer and lanthanum, the market leaders in the U.S. and Europe, respectively, without unwanted heavy metal accumulation in the bone. The required dosage is nearly 40% lower than that of sevelamer, reducing the "pill burden" and increasing dosing compliance. Further Phase 3 development will start in H2'14. Alpharen is protected by issued composition of matter patents through 2018, by manufacturing patents through 2029, and by pending and planned use patent applications thereafter.

In addition to these late-stage developments, Opko Health has a lot of earlier-stage products that address multi-billion-dollar markets such as Oxyntomodulin (treats diabetes and obesity), AntagoNAt Platform (treats cancer), Factor VIIa-CTP (treats hemophilia), Sci-B-Vac (treats hepatitis B in stage five chronic kidney disease patients), Lunacalcipol (treats moderate to severe SHPT in stage five chronic kidney disease patients, and Psoriasis), and CTAP201 (treats mild to moderate SHPT in stage five chronic kidney disease patients).

Potential Acquisition?: If history repeats itself, Opko Health may be acquired some day. However, given that Dr. Frost is 78 years of age, such an acquisition may occur after his tenure, or perhaps around the end of his tenure. It took Key Pharmaceuticals 14 years to be acquired, it took IVAX 19 years to be acquired, and it took North American Vaccine 13 years to be acquired. By contrast, Opko Health is only seven years old. There is certainly potential for Opko to be acquired given its diverse pipeline, but history shows this is a long-term prospect and shouldn't be expected near-term. Long-term, perhaps Teva Pharmaceuticals could be considered a potential company that may be interested in acquiring Opko due to their connection with Dr. Frost (he sold IVAX to Teva in 2006, and he currently serves as chairman of Teva, though he is considering retirement from that role).

Risks:

1. Products and Pipeline may fall short of expectations: There is always significant risk when it comes to trial results and FDA decisions. The FDA can behave in a very unpredictable fashion. They may raise concerns that could delay or deny the approval of Rayaldy and Rolapitant. There is also the risk that there may be low demand for their products after they are granted approval.

2. Widening Losses: Opko Health reported a net loss of $98.0 million for the first nine months of 2013, compared to $30.2 million for the same period in 2012. While this may be cause for concern, it is not an uncommon situation for early-stage biotech companies to be going through a lot of cash while they have very few products on the market.

3. Age: Dr. Frost is now 78 years old. There is risk that when he departs from Opko Health, the stock holders of Opko may not react very kindly to the news and decide to sell. However, Dr. Frost's departure won't take away the products and pipeline that are already in place. There is also evidence that his tenure is likely to continue for some time; Dr. Frost is still active, not only in Opko, but in other companies where he serves as a director in various roles such as Castle Brands, TransEnterix, Inc., BioZone Pharmaceuticals, Inc., and Continucare Corporation. He also serves as chairman of Ladenburg Thalmann & Co. Inc, PROLOR Biotech (an Opko subsidiary), and Teva Pharmaceuticals. To paint a contrast, Dr. Frost is five years younger than Warren Buffett, who is still active as chairman of Berkshire Hathaway. While Dr. Frost is at an advanced age, it is still realistic that he could continue his work for another five to ten years. In an interview on Bloomberg TV in August 2013, Dr. Frost said, "After starvation, a man's worse enemy is boredom," explaining that it is healthy to stay active in business and overcome challenges.

Conclusion: While Opko may be classified as a high-risk biotech company, it provides a lot of diversification which comes with a margin of safety. Given the successful track record of Opko's chairman, the heavy insider confidence in the company, and the amazing pipeline of game-changing products, Opko Health is a solid bet for the future.

Disclosure: The author is long OPK, TSRO.