Brian L. Wilson
OPKO Health (NASDAQ: [[OPK]])
has been seeing a steady rise in short interest throughout the last
few months - with the last measurement by NASDAQ coming in at 30.16
M shares on May 15th 2013 as speculators begin to question the
premium that the market is placing on the company due to the
involvement of 37.5% individual shareholder and famous biotech
investor Dr. Phillip Frost.
Also interesting in recent trading was the neutral/bearish
reaction that the market had to OPKO's acquisition of PROLOR
Biotech as announced on April 24th, which allowed OPKO to acquire
what I consider an especially lucrative asset - hGH-CTP, in
addition to the other development programs ,with a $480 M all-stock
transaction (which has technically become cheaper with recent
declines in OPKO share price). Phillip Frost's control of 12.7M
shares of PBTH (nearly 20% of shares outstanding) seemed to ease
the process, and allowed OPKO to gain a pipeline (pictured below,
click to enlarge image) for a very fair price.
As you can see, the next-generation human growth hormone product
hGH-CTP is the most matured development program, has orphan drug
status in the US/EU, and remains vital to the valuation of PROLOR
(and now OPKO) due to the sheer size of the therapeutic market and
the competitive advantages that are introduced with PROLOR's
technology. The company's CTP (carboxyl terminal peptide) platform
allows for the development of controlled release injections of
therapeutic proteins, which offers patients an equivalent dosing in
a weekly injection as opposed a daily injection. Human growth
hormone, which is injected daily into patients with stunted growth,
can now be injected in a far more convenient weekly version.
We saw a similar improvement made with sleeper-hit company
Regeneron's (NASDAQ: [[REGN]])
wet AMD drug EYLEA, which offered a more convenient dosing regimen
relative to another VEGF inhibitor LUCENTIS which had comparable
efficacy and pricing. Since Wall Street did not anticipate the huge
implications of EYLEA's competitive advantage against LUCENTIS, it
wouldn't be surprising if we saw a similar situation play out
between hGH-CTP and hGH. As they say, history tends to repeat
It's hard to determine at this point what kind of market
penetration we'd see once hGH-CTP is launched and fully saturated
into the hGH market, although the general consensus amongst
analysts is that the product should come to represent about one
third of the hGH-related revenues - if not more. Based on PROLOR's
estimates, this implies that the product can generate close to $1 B
in annual revenues in a few years.
Applying a generous 15% discount rate over what could be three
years until introduction to the market, and another 25% devaluation
due to the risk of FDA rejection (arriving at $230 M in "current"
revenues), we can infer that the hGH-CTP program should be worth
something closer to $1 B. Based on this, I find it surprising that
OPKO's overall valuation suffered as a result of the PROLOR
acquisition, and that bears are willing to short the company up to
20% of float despite the $2 B market capitalization.
Worth noting about hGH-CTP is that PROLOR announced the
initiation of a pivotal Phase III study for hGH-CTP, which may
bring more market attention to the undervaluation of this
development program after the publication of top-line results that
can establish the relative efficacy of hGH-CTP and standard hGH
On top of this, OPKO's recent acquisition streak could prove
very beneficial to the company's valuation over the next few years.
The strategic buyout of the Brazilian pharmaceutical company Silcon
Comércio, for instance, aids in the market penetration of OPKO's
4Kscore diagnostic test for prostate cancer where significant unmet
need still exists.
Another deal worth mentioning was the "pooling" of OPKO's and
RXi Pharmaceuticals' (
RNAi pipelines, which resulted in a significant (50 M share) stake
in RXi for OPKO. More recently, we also saw a deal made with
Tesaro (NASDAQ: [[TSRO]])
for shared development of rolapitant, under which OPKO can receive
$121 M in milestone payments plus full rights to market in Latin
Looking at OPKO's balance sheet, we can also see some notable
improvements after the company's 3% convertible debt auction
earlier in the year. As of March 31st 2013, the company held $182 M
in cash, and $238 M in current assets. The biggest liability on the
balance sheet at this point is the big pool of convertible notes
(valued at $196.4 M), although the interest rate is quite favorable
and it must be noted that the debt doesn't expire until 2033.
OPKO is a heavily shorted biopharmaceutical holding company that
is often misunderstood and underestimated, as was the case for
previous companies that had been acquired and controlled by the
multibillionaire healthcare investor Dr. Phillip Frost. Recent and
promising acquisitions by OPKO have been on very favorable terms,
and the company's financials were drastically improved after the
company's convertible debt auction. Of particular interest on the
acquisition front is hGH-CTP from the PROLOR pipeline, which
justifies half the $2B valuation of OPKO single-handedly.
I am long [[OPK]] indirectly through the sale of OOTM put options.
I wrote this article myself, and it expresses my own opinions. I am
not receiving compensation for it. I have no business relationship
with any company whose stock is mentioned in this article.
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