Focus Article: Opko Health, Inc. (OPK)

Hardly a day goes by before I see an alert for yet another insider purchase at Opko Health (OPK) by its Chairman and CEO Dr. Phillip Frost. After months of reporting on these purchases, we decided to do a deep dive to understand the company and Dr. Frost’s motivations for buying the stock as best as possible. With less than a week to work on this article and the fact that Opko is a holding company for various pharma, diagnostics and biotech companies, this could be considered a preliminary report instead of a comprehensive research piece.

It is often said that insiders sell their company stock for a variety of reasons (to diversify, pay for a large expense, etc.) but they buy only because they are bullish about the prospects of their company. This is not entirely true. We have noticed insider buying that appears to be little more than window dressing to “paint the tape” and at times insiders fail to see the big picture that other investors are more in tune with. These insider purchases at Opko certainly feel more like the “paint the tape” variety.

The number of red flags that were raised as we dug into the company were numerous and we have attempted to highlight some of them. While Dr. Frost has been purchasing shares almost continuously and has spent $85.59 million on acquiring Opko shares just in the last six months, the company has also been diluting shareholders through stock-based acquisitions and a secondary offering last March. In fact the number of common shares outstanding have increased nearly 50% from 187.71 million to 280.67 million over the last three years.

The secondary offering by the company last year was handled by Jefferies & Co. (JEF) along with J.P. Morgan (JPM). Ladenburg Thalmann (LTS) acted as co-manager for the offering. Opko is covered by two investment firms and has two buy ratings. One of them is from Jefferies with a price target of $8 and the second buy rating is by Ladenburg Thalmann with a price target of $8.50. Dr. Frost also happens to be the Chairman of Ladenburg Thalmann.

In addition, bullish articles we have read about the company on Seeking Alpha have either been one sided such as this “interview” with Dr. Frost or have disclaimers that a third party related to Opko paid them for their “research”.

What follows is a look at the company in the format we have been publishing our weekly focus articles.

Opko Health, Inc. (OPK) $4.57

The Company:

Opko Health is a research and development-based healthcare company headquartered in Miami, Florida. It was formed in 2007 by Dr. Phillip Frost M.D., as a result of a merger of three small companies, Acuity Pharmaceuticals Inc., Froptix Corporation and eXegenics. The company is involved in the discovery, development, and commercialization of pharmaceutical products, vaccines and diagnostic products. Opko Health has an international presence in Chile, Mexico and Israel and derives almost all of its current revenue from these international operations.

Opko Health was originally formed to be an Ophthalmology Company based on a study being done at the University of Florida to develop a new drug for the treatment of AMD (Age-related macular degeneration). AMD is a disease that attacks the macula of the eye, where the sharpest central vision occurs. Wet AMD is the more advanced and dangerous stage of the disease, where new blood vessels grow beneath the retina and leak blood and fluid. This leakage causes permanent damage to light-sensitive retinal cells, which die off and create blind spots in central vision. The drug being developed by Opko Health for the treatment of the wet form of AMD was called Bevasiranib. This drug was unable to meet its end point and was terminated during Phase III of its clinical trial.

After terminating Bevasiranib, the company changed its focus and is now more of a holding company for a diverse group of healthcare businesses. The company moved into a new platform to discover new diagnostic tests in humans with the help of a scientist named Tom Kodadek who was working at the University of Texas. Opko Health is currently working on diagnostic tests for Alzheimer’s disease, Pancreatic Cancer, Parkinson’s disease, and for Lung Cancer.

Opko Health acquired a company called Claros in October 2011 for $32.5 million. This company has developed a microfluidics-based Point-of-Care diagnostics system. The system consists of a disposable, credit-card-sized test cassette and a desktop analyzer. Using a finger stick drop of blood on the cassette, the analyzer can run up to 20 separate tests, producing laboratory-quality results in about 10 minutes. The initial tests being developed is the PSA Test (Prostate-Specific Antigen Test). Prostate-specific antigen (PSA) is a protein produced by cells of the prostate gland. The PSA test measures the level of PSA in the blood to detect Prostate Cancer. Market investors expect these businesses of  Opko Health to generate significant future revenues for the company.

In 2011, Opko Health partnered with Bristol-Myers (BMY) to investigate the utility of its technology for the diagnosis of Alzheimer’s disease and for identifying individuals with early-stage cognitive impairment that are likely to progress to Alzheimer’s disease. In April 2012, the company signed an agreement with Laboratory Corporation of America Holdings (LH) under which LabCorp licensed exclusive rights in North America and the United Arab Emirates to OPKO’s intellectual property to develop and commercialize laboratory testing services for Alzheimer’s disease.

The company brokered a product called Rolapitant because the CEO of Schering-Plough had to divest himself of this product in order to complete their merger with Merck. Rolapitant is a cancer-supportive care product used for chemotherapy-induced nausea and vomiting. Having worked on it for a year, Opko Health out-licensed this product to another company, Tesaro with the possibility of getting $120 million in payments, and up to 20 percent royalty with almost no investment.

Dr. Phillip Gamma Frost

Dr. Phillip Frost received an M.D. from the Albert Einstein College of Medicine in 1961. He was Chairman of the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami, Florida from 1972 to 1990.

Dr. Frost began his career in 1972, when he bought Key Pharmaceuticals along with Michael Jaharis and turned the company around. He was Chairman of the Board of Directors of Key Pharmaceuticals until 1986 when it was acquired by Schering-Plough for $587 million.

After the acquisition of Key Pharmaceuticals, Dr. Frost founded the IVAX Corporation in 1986 along with Dr. Jane H. Hsiao, the current CTO of Opko Health. Ivax specialized in generic drugs and played a significant international role in Latin America, Central and Eastern Europe. IVAX was acquired by Teva Pharmaceuticals (TEVA) in 2006. Dr. Frost became Vice Chairman of Teva after the acquisition of IVAX in 2006. In 2010, he was named Chairman of the Board of Teva and was reelected to the position in May 2012. Voluntary Disclosure: I hold a long position in Teva.

Dr. Frost was also one of the first and largest investors in Protalix Biotherapeutics (PLX). He invested $24 million in the company. In 2007, shares of Protalix fell as much as 84 percent to a lifetime low, a day after the biopharmaceutical company offered to sell 10 million shares at a huge discount. Dr. Frost resigned from the company’s Board of Directors the same year.

Opko Health was formed by Dr. Phillip Frost in 2007. The company has a Market Cap. of $1.35 billion and currently trades at $4.59 per share. Phillip Frost, who is worth $2.3B, according to Forbes, has been actively buying shares of Opko Health along with OPKO’s Director, Vice Chairman & CTO, and Executive Vice President.

Dr. Frost has previously served as a director for Continucare Corporation, Northrop Grumman Corp., Ideation Acquisition Corp., Protalix Bio Therapeutics, Inc., and SafeStitch Medical Inc. (a Chinese reverse merger company), and as Governor and Co-Vice-Chairman of the American Stock Exchange (now NYSE Amex).

Dr. Jane H. Hsiao, current CTO at Opko Health has been a partner with Dr. Frost from the time he founded the IVAX Corporation in 1986. She controls the ‘Gamma Trust’ and is also the Chairman and Interim Chief Executive Officer at Non-Invasive Monitoring Systems (NIMU). It should be noted that the only other multi-million dollar insider purchase of Opko was by Dr. Hsiao.

Business Statistics & Financials:

The company generated $28 million in revenue in 2011 and a loss of $1.28 million. Operating cash flow was negative $18.5 million. For the first quarter of 2012, the company reported revenue of $8.78 million. More than two-thirds of the Q1 revenue was derived from an acquisition of an Israeli company in December 2011 and the rest came from sales in Chile and Mexico. Operating cash flow was negative to the tune of $11.5 million in Q1 2012.

The company has $48 million in net cash on its balance sheet. Based on their burn rate in the first quarter of 2012, they will go through this cash in about 4 to 5 quarters. Two of the risk factors they state in their 10-Q filing are,

“We expect to finance future cash needs primarily through public or private offerings, debt financings or strategic collaborations, which may dilute your stockholdings in the Company.”

and

“Future issuances of common stock and hedging activities may depress the trading price of our common stock.”

Does Opko deserve the 80% increase in its stock price over the last two years and a valuation of $1.35 billion given the company is rapidly burning through cash and its products are still in the early stage of development? A couple of well-reasoned articles we discovered while working on Opko make the case that Opko is worth a fraction of its current market cap. You can read these articles here and here.

Our review of their investor presentations and recent SEC filings show that the company only talks about its potential products and there is no discussion of what kind of revenue investors can expect the company to generate and when it expects to achieve profitability.

Competitors:

Insider Buying:

Three insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Opko Health, Inc. here.

Conclusion:

Based on the work we have done on this company, I would avoid the stock unless you have the required industry experience to determine the value of their product pipeline. Further dilution of current shareholders is probably the only probable event I am willing to bet on. That said, I would not recommend going short the stock primarily because short interest in the stock is very high with a short ratio of 31.4 and because insiders control more than 50% of the company.