Wednesday, April 19, 2017

Investment Thesis on Opko Healthcare Incorporated


Opko Health, Inc. (NYSE:OPK)

Max Morrow – President and Chief Investment Strategist & Lead Analyst, Healthcare
Current Price
Target Price
Appreciation Potential

Company Overview
Opko Healthcare, Inc., a healthcare company, engages in the diagnostics and pharmaceuticals business in the United States, Ireland, Chile, Spain, Israel and Mexico. The company’s diagnostics segment operates Bio-Reference Laboratories, which offers a myriad of services in the area of diagnosis, evaluation and treatment of diseases. The company was incorporated in 1991. Opko started in Miami, Florida, but has proven itself capable of expanding its geographic and therapeutic bounds. In addition to research and development of ophthalmic drugs, the company also engages in the research of other biopharmaceuticals tailored toward infectious diseases, neurology and oncology.  It has development programs for vaccines and molecular diagnostic tests. Opko Health also offers a variety of over-the-counter drugs throughout Latin America.

Source: Hoovers Research

Industry Indicators
  • ·         US consumer prices for medical care commodities, which have the potential to impact the profitability of pharmaceutical firms, increased 4.1% in February 2017 compared to the same period in 2016.

  •       US nondurable goods manufacturers' shipments of pharmaceuticals and medicines, which serves as an indicator of pharmaceuticals production, rose 5.2% in January 2017 as compared to the same period in 2016; a major improvement.

  •       US retail sales for health and personal care stores, which could be an indication of consumer sales of pharmaceuticals, increased 6.1% in the first several months of 2017, as opposed to the same period in the preceding year.

  •       The Pharmaceuticals industry has not been so prosperous in the last several months. On average, major pharmaceutical manufacturers have seen a stock price decline of around -2.91 percent.

  •       Several points of interest that will help to drive the pharmaceuticals industry come from an increase in U.S. spending on pharmaceuticals, as well as the strong surge in new medicines.

  •       The industry is expecting to see compounded annual growth of around 5.60 percent, from $400 billion in 2015 to $548.4 billion by 2020.

  •       The industry will be adding over 300,000 jobs within bio-pharmaceutical organizations and vendor companies within the overall supply chain by 2021.

  •         Due to a diverse and outstanding healthcare system, easily accessible healthcare and trends of self-medication, U.S. pharmaceutical consumption is relatively high.

  •       Cancers of the respiratory and digestive systems, lymph nodes, prostate and breast are the leading cancers among Americans and cancer vaccines accounted for more than 58 percent of pharmaceutical market share in 2014.

  •          Approximately 105 vaccines were in development in 2016, with many of those in the phase of clinical testing and FDA approval.

  •       Global market for new innovations expected to grow to $7.5 billion by 2022, from $2.5 billion in 2015.

Source: Hoovers Research

$75.27 billion
$35.94 billion

News and Events
  • ·         Guggenheim sees 200%+ potential upside for Opko Health, Inc., with a buy recommendation at $25.

o   CEO and Chairman, Dr. Phillip Frost has displayed his capability of successfully building the company up.
o   Rayaldee sales could reach ~$700 million in 2021. Rayaldee has been approved for the treatment of Secondary Hyperparathyroidism (SHPT) in adults. The product has been granted a patent that could protect it up until 2034.
o   Opko’s pipeline could have the potential to generate several billion dollars in sales. Sales in the pipeline drugs target a potential ~$1.78B market.
  • ·         Opko Health CEO and Chairman also purchased 21,600 shares of Opko stock on Monday, April 3rd. The purchase agreement was for $7.82 per share, totaling $168,912.00. With this purchase, Frost now owns 3,068,951 shares of the company, valued at approximately $23,999,196.82.

Source: Sleek Money

Investment Risks
  • ·         Opko has had some major setbacks which has caused the company to lose approximately a third of its value since late December.

  •       Poor performance of the diagnostics business and Rayaldee’s slow launch have weighed in on the share price after the Q4 report.

  •       Opko Health maintains an Altman Z-Score of 3.62, placing it in the safe zone for general manufacturing companies.

  •       Opko has a current cash to debt ratio of 1.61, which essentially means that the company has the ability to pay of any debt with cash on hand.

Source: NASDAQ

Executive Compensation
Executive compensation for all key executives totals to $12,851,400, with a strong 5 year growth trends in compensation across all of the key executives. Dr. Frost’s salary trend has increased from $469,800 in 2011, remained the same at year end 2012, then grew to 2,472,508 in 2013, to 2,614,400 in 2014 and finally, to 3,835,600 in 2015.

Source: Morningstar

Investment Thesis
I believe that Opko Healthcare, Incorporated has demonstrated the ability to grow significantly, through strong initiatives to push life-saving pharmaceuticals through the healthcare industry. With strong fundamentals, I am able to conclude a buy recommendation for this company.

One of the things that stood out to me throughout my research on the quantitative side was through looking at an analysis of earnings growth for the next several years. Although the company exhibited weak earnings in 2016 at -0.05 and had projected estimates to be even lower throughout 2017 to end at -0.10, there is positive growth to be achieved, with 2018 earnings estimates of 0.08. The estimates for year end 2019 are projected to rise to 0.27.

Several of the risks associated with the company’s operations include some setbacks that declined their stock price by a third, as well as poor performance within the company and a slow launch of Rayaldee, which contributed to the stock price toward the end of the 4th quarter.
Despite the setbacks that the company has experienced, revenues maintained 5-year growth of 112.83 percent. The negative earnings can be associated with the stagnant growth in operating income, which took a major hit following the year end of 2013. However, operating income has managed to begin rebalancing itself and head toward the positive direction with a 2014-2015 YoY improvement of 32.46%. The same trend can be noticed from 2015 to 2016, with a positive improvement of 25.59%.

CEO and Chairman, Dr. Phillip Frost has proven his ability to lead and improve the business state of Opko Health through the company’s upgrade in financials, turning Opko toward the positive direction. Because of a weak set of valuation models due to the high growth potential, the intrinsic value of the company was derived heavily from qualitative information acquired through careful research through several of the resources offered by Penn State University’s Libraries. These resources include Thomson Reuters as well as Hoovers Research. The Bloomberg terminal was also used in the analysis.

The methodology for valuing the company consists of the evaluation of two models within the industry comparable component of the research protocol. Industry ratio averages (including P/E ttm, P/B and P/CF ttm) as well as the industry peg ratio was used in the determination of the price for the stock, which I concluded to be ~$11.52, with a current stock price of $7.14. Along with consideration by several other sources, as well as a model I created to estimate an intrinsic value based on ordinary least squares regression, I conclude a conservative intrinsic value for Opko Healthcare, Incorporated of ~$12.83.