OPKO Health (OPK) has come to my attention because I noticed that the chairman and CEO, Dr. Phillip Frost, has been consistently showing up on the list of CEO buys at GuruFocus. As I look back at the history, he has been doing so for years. According to the Form 4 filed with the SEC, his is the beneficial owner of shares in his own name, his trust, and an LLC. Together he is the beneficial owner of 158.71 million out of the 412.91 million shares outstanding, representing about 38 percent of the shares. As of 6/19/14, his position is valued at $1.457 billion. Phillip Frost has had many successful investments in the past, could this be the next one?
Dr. Frost has an excellent track record. He has successfully founded several pharmaceutical companies and overseen the development and commercialization of a multitude of others. He was chairman of the board of Key Pharmaceuticals from 1972 until it was acquired by Schering Plough in 1986. Frost was then chairman of the board of IVAX since 1987 until it was acquired by Teva (TEVA) in 2006. He then took over as chairman of the board of Teva Pharmaceutical. He also served as chairman of the board of directors of PROLOR, a development stage biopharmaceutical company that was purchased by OPKO in 2013. To name a few more, he previously served as a director for Continucare Corp, Northrop Grumman (NOC), Ideation Acquisition Corp, and as Governor and Co-Vice-Chairman of the American Stock Exchange.
Dr. Frost has a history of developing pharmaceutical companies. In the early 1970s he took over Key Pharmaceuticals with billionaire partner Michael Jaharis to develop generics and veterinary products. They sold the company to Schering-Plough in 1986. In 1987 Frost founded generic drug maker Ivax and sold it to Teva Pharmaceutical for $7.6 billion in 2005. OPKO Health is his next project.
OPKO Health was originally Cytoclonal Pharmaceutics and later changed to eXegenics. eXegenics was engaged in the research, creation, and development of new drugs for the treatment and prevention of cancer and infectious diseases. In late 2002 the company began winding down its drug discovery operations and had no revenue from 2003-2006. The company in its current form started in 2007 with the merger of eXegenics, Froptix, and Acuity Pharmaceuticals. Dr. Phillip Frost became the Chairman and CEO of the newly formed company.
Today OPKO is a multi-national pharmaceutical and diagnostics company built up through acquisitions over the years. It focuses on less crowded parts of the industry and purchases late stage development products with large market potential. Strategic investments are also made in companies for capital appreciation and product rights.
The first major revenue generating product, 4Kscore Test, recently hit the market in the United States and will launch in Europe in September. It is a point-of-care diagnostic system for prostate cancer testing, as well as for use in laboratory systems. The panel of markers included in the OPKO 4Kscore is the result of a decade of research by scientists in Europe and the U.S. Extensive studies have shown that it may reduce the number of unnecessary prostate biopsies by 50 percent or more, avoiding the frequent complications of pain, bleeding, and infection, which sometimes require hospitalization. In a recent investor presentation, OPKO said that the PSA (Prostate-Specific Antigen) market is 60 million tests globally. Currently in the U.S., sales equate to $395 per test.
The 4Kscore test is part of the point-of-care hardware system that will be able to produce laboratory-quality test results from a single finger-stick of blood in about 10 minutes, all at the doctor’s office. The other tests under development are for the detection of low vitamin D, low testosterone, and Alzheimer’s disease. The vision for this product is that it can be used as a fast diagnostic tool in every doctor’s office.
The low vitamin D test is on track support the launch of the drug Rayaldy in the first quarter of 2016. It is currently in phase III and has U.S. patents protecting it through 2028. The drug is for patients with chronic kidney disease (CKD) in stage 3-4. There are currently 8 million CKD stage 3-4 patients in the United States. Rayaldy is expected to take a significant market share in the patients suffering from SHPT making it a potential $12 billion revenue opportunity. There are also three other drugs in phase III with a revenue potential of about an additional $6 billion. There also additional drugs in phase II and preclinical trials.
Through Frost’s business savvy and medical industry connections, he has been slowly building a pharmaceutical powerhouse for what is likely his last project. Opkco is in control of the entire supply chain through diagnostics, research and development, manufacturing, and distribution. OPKO has been strategically buying medical businesses in Europe and Latin America to help build out its marketing and distribution channels.
Many of the assets that he has been buying were a bargain prices. Shareholders of PROLOR Biotech filed a lawsuit to because they thought the purchase price for the company was too low. PROLOR Biotech was purchased for $480 million last year. The main drug obtain in the deal was a more efficient hGH drug that is currently in phase III with a potential market size of $3.5 billion. The suit was recently dismissed. Another example of OPKO’s successful bargain hunting is their purchase of the drug Rolapitant. Schering-Plough had to unload the drug during its merger with Merck in 2009. OPKO was able to purchase it for $2 million up front and potentially pay another $27 million if certain milestones were reached. A year later OPKO sold the rights to the drug to Tesaro (TSRO) for up to $121 million, including up-front payment and additional payments based on achievement of milestones. OPKO will also receive double digit royalties on sales and received a 10 percent equity position in Tesaro. Tesaro now has a $1.1 billion market cap and Rolapitant is now in phase III with a $1.5 billion market potential.
Dr. Frost also an avid investor of small companies and has taken many public. Many of his investments are in medical start-up companies that bring him back to his passion of medical research. OPKCO has a strategic investments portfolio controlled by Dr. Frost. It is said that he is a long-term investor that uses his influences to organize and manage. Some of the investments are listed on the company’s website in the “Strategic Investments” section. They include: ARNO Therapeutics (ARNI), ChromaDex Corp (CDXC), Cocrystal Pharma (COCP), Neovasc (NVCN), Pharmsynthez (MIC:LIFE), RXi Pharmaceuticals (RXII), Senesco (private), and Zebra Biologics (private).
Dr. Frost is going to step down as Chairman of Teva Pharmaceuticals at the end of the year freeing up more time for him to work on OPKO. The Miami multi-billionaire has an excellent track record. He founded, developed, and sold two major drug companies, Key Pharmaceuticals and Ivax. Ivax was sold for $26 a share to Teva in 2005. Split adjusted, its IPO price was $0.38, providing a compounded annualized return of 26.5 percent. OPKO is his next venture. The stock closed at $4.50 in May of 2007 when the company was changed from eXegenics to Opkco and traded under the new symbol. It closed today at $9.23, an annualized return of about 11 percent compared to only about a 3.7 percent annualized gain for the S&P 500. Many of the large biopharmaceutical companies sell at a price-to-sales multiple between 4.5 and 10. At this time Ralaydy with its $12 billion potential, is projected to start selling in the beginning of 2016. If the drug only sells a quarter of its potential and the company trades at the bottom of the price-to-sales range, the stock would be worth $32.62 per share by then end of 2016. Those numbers are also ignoring the of the revenue potential from diagnostic equipment and other drugs in the pipeline, including three others in phase III and two in phase II. The stock has plenty of risk associated with it. Looking at the financial statements, the company is all promises with little revenue to show for it. Like other biotech stocks, one bad FDA announcement involving the trials could send the stock down by 20 percent, especially if it involves Rayaldy. This company is not a one-drug wonder. It has plenty of other revenue opportunities in the pipeline and continues to add to its arsenal with new acquisitions. I think this company could follow in the footsteps of Ivax and provide extraordinary gains.
The legendary investor, George Soros, has been accumulating OPKO shares. He is the largest shareholder of the gurus we follow. He initiated his position in the third quarter of 2013 and just bought 76.98 percent more in the first quarter of 2014. He now has 1,494,800 shares. You can follow him at GuruFocus to see how he manages his position.
