Last week I purchased stock in a new long-term investment within my client’s Growth allocation that I’m pretty excited about. The company is called OPKO Health (OPK) and is run by Dr Phillip Frost who is often referred to as the Warren Buffett of healthcare. Studying a company’s management team and Board of Directors is often an overlooked step in the investment process but I would contend it’s as important if not more important than studying the business model, fundamentals or industry dynamics. Just think about some of the long-term success stories that have a visionary CEO at the center:
- Berkshire Hathaway & Warren Buffett
- Apple & Steve Jobs
- Microsoft & Bill Gates
- Nike & Phil Knight
- Starbucks & Howard Schultz
- Amazon & Jeff Bezos
I’ve followed OPKO for a couple of years now. The stock got hammered at the end of December after they announced that a recent Phase 3 hGH-CTP (human Growth Hormone) drug study fell short of expected results against a placebo, offering us a great long-term buying opportunity. Quite frankly, I think the market is wrong on this one and I’m hoping the stock remains under pressure so I can add to the position at lower prices. The Phase 3 study was testing their hGH drug for adults with growth hormone deficiency but was found to have no added benefit over a placebo. However, an outlier was identified so they’re reevaluating the study (one guy in the placebo group decided to go on a diet and 30 day marathon training spree instead of maintaining his normal lifestyle. His weight loss results skewed the average for the placebo group.). This drug is being developed in collaboration with Pfizer and OPKO is confident they’ll see the positive results they expected the first time around. Additionally, adults only represent 20% of the potential market for growth hormone deficiency with young children making up the remaining 80%. The Phase 3 study for children was initiated at the end of 2016.
Here’s the stock chart over the last 5 years. There are two instances when the stock has been knocked down following announcements. The first was June 2015 when OPKO announced that they were acquiring Bio-Reference Labs, one of the largest diagnostic testing facilities in the US. They utilized an expensive stock price as currency to finance the purchase, which is smart but it pretty much cut the stock in half. A company should issue stock for business opportunities when the market allows them to at a rich price, and buy back stock when it’s cheap. The second announcement was the drug study mentioned above just a few weeks ago.
So why do I think the market is wrong? Two reasons – 1) It’s a mistake to bet against Dr Phillip Frost, and 2) you need to take a step back and look at the whole picture to see the long-term value in the stock. OPKO is not just a one-trick pony and I think we’ll be seeing the company hit full stride over the next year or two as various revenue sources come online. If so, the recent drop in the stock price is a wonderful opportunity.
Dr. Phillip Frost
Dr Frost is a self-made billionaire with a very impressive track record. Here’s the rundown:
- Full scholarship to the Albert Einstein medical college in NYC
- Joined University of Miami’s dermatology department in 1966
- Invented a disposable tool for taking skin biopsies that he sold to Miles Laboratories in 1969
- Began building and acquiring new medical innovations within his practice
- Became chairman of dermatology at Miami’s Mount Sinai Medical Center in 1972
- Merged his company with Key Pharmaceuticals in 1972
- Sold Key to Schering-Plough in 1986 for $836 million (became Schering’s largest shareholder)
- Started a generic drug company in the early 1990’s called Ivax and started buying up smaller generic drug companies at bargain prices
- Expanded internationally and bought a large Czech pharmaceutical company called Glaena from the Czech government (they were privatizing) in 1994 for a mere $50 million
- Sold Ivax to Teva Pharmaceuticals in 2005 for $7.6 billion (Frost owns 1.5% of Teva’s stock and serves as Chairman of the Board)
- Became CEO and Chairman of the Board for OPKO Health as the result of the merger of 3 biotech companies in March 2007. Rounding out the management team includes Dr Jane Hsiao and Steven Rubin. Both were with Frost at Ivax (Dr Hsiao’s late husband co-founded Ivax with Frost).
OPKO Health
Frost is best known for his ability to recognize opportunities and make strategic investments. He’s a dealmaker that prefers to meet in person and will make decisions on the spot if he gets the right feeling from the person (he does his research ahead of time to know the market opportunity so it all comes down to the right people). Here’s the overview of the OPKO umbrella:
Last quarter, they brought their recently approved drug Rayaldee to the market. Rayaldee helps vitamin D insufficiency for patients with secondary hyperparathyroidism (SHPT) from Chronic Kidney Disease (CKD). It’s the only FDA approved product for this need. Prior to Rayaldee, patients with this condition were treated with a high-dose vitamin D supplement, but this has not been FDA approved or determined to be safe and effective. Rayaldee corrected Vitamin D insufficiency in over 80% of patients compared to 7% for a placebo. OPKO increased their salesforce last quarter for the product and will look to double it later this year. This addresses an unmet need in a $12 billion market (~9 million patients). And that’s just in the US. OPKO also has subsidiaries in Chile, Mexico and Europe that offer new potential international markets for products that first prove successful in the US.
The real genius is how the company is sharing technologies and leveraging capabilities from the various pieces to benefit the whole. For example, OPKO has a blood test they developed called 4Kscore to accurately assess the risk of prostate cancer for men with elevated PSA readings. The current process for men with high PSA readings is to perform a biopsy which can be painful and cause bleeding and infection, while roughly 60% of the results turn out negative. To the joy of 7.5 million men in the US each year, the 4Kscore blood test virtually eliminates the need for the biopsy.
Now to piece it all together – the Bio-Reference Labs acquisition now gives OPKO a diagnostic testing facility for their two main blood test products – the 4Kscore test and their Claros 1 in-office immunoassay platform – and the ability to leverage Bio-Reference’s 420 person salesforce to expand their existing and developmental products nationwide. Frost is leveraging the synergies between the various units to accelerate time to market. He knows what he has in-house and he knows what he needs to grow or to compliment it. They now have 6 products (tests and drugs) which are estimated will be at least $1 billion in annual sales and all are either approved or very close to coming to market. Just when the company is ramping up, the market knocks down the stock. It’s a beautiful thing.
In addition to their clinical testing products, here are the key drugs in development:
Outlook & Expectations
I think OPKO represents perhaps the best long-term investment growth opportunity in the market today. I believe the stock is undervalued so I’ve started a position and will look to buy more if the stock continues to slide. However, the stock is heavily shorted by hedge funds and in a clear downtrend so I don’t expect it to just magically reverse and move higher without a positive catalyst (like positive results from a study or a drug approval). You’ll see big one-day jumps and they’ll all revolve around development news. It will be quiet… and then BAM! All of the gains at once. We should see multiple developments over the next 2 years.
The icing on the cake is that Frost himself owns about 35% of the stock and is in the market buying more shares almost daily. In a recent interview, he was quoted as saying that he believes OPKO will mean more to medicine than any of his previous endeavors. Here are the slides from a recent presentation they gave if you’d like more info on the business.
Thanks for following!
-Nick