We came across a bullish OPKO Health Inc. (OPK) thesis on ValueInvestorsClub by VIC_Member2015. VIC is one of our favorite sites to follow because the ideas are usually posted by aspiring analysts who are trying to find holes in their own thinking. We find the ideas presented on the site well thought out and definitely worth checking. Click here for the full article. Below we summarized the OPK bullish thesis.
OPK is a diversified healthcare company focused on diagnostic and pharmaceutical solutions for patients, healthcare professionals and researchers. OPK is dually listed on the NASDAQ and the Tel Aviv Stock Exchange.
OPK primarily has three business segments:
Diagnostics: The segment accounted for about 88% of the company’s 2019 gross profit. OPK’s BioReference Labs (BRL) is America’s 3rd largest diagnostics lab network comprehensively covering detection to treatment of disease. BRL is benefitting from the pandemic-related rise in lab test demand. The highly fragmented diagnostics industry consolidation coupled with favorable regulatory environment is a plus for the segment.
Pharmaceuticals: The segment added 12% to the company’s 2019 gross profit. OPK’s primary revenue generator is Rayaldee that is used to treat secondary hyperparathyroidism (SHPT) in patients with stage 3-4 CKD and vitamin D deficiency. The drug is also under trial for treatment of the SHPT patients with stage 5, and mild-to-moderate cases of COVID19.
Somatrogon: Under a Royalty Agreement with Pfizer, the once-weekly growth hormone replacement therapy, Somatrogon is poised to see collection of royalties in 2021.
A combination of factors underpinned OPK stock to all-time low in early 2020 before a recovery set in. The analyst believes Wall Street has failed to recognize the disconnect between OPK’s misread fundamentals and its true intrinsic value.
Street does not have confidence in BRL’s profitability, but the analyst believes its capacity and PCR testing demand is only expected to grow. A huge drop in the R&D expenses for Rayaldee and Somatrogon, and a rising stream of revenues for the former from the US, Japan and Europe are accretive to OPK. A
The notion that COVID testing will decline mass availability of vaccinations also seems to be misplaced as it will take a while before a safe vaccination is found and delivered to the masses. Besides, if only half of the world’s population vaccinated (as planned), the positive impact of the vaccine could be muted. In his earlier positions as the head of Teva Pharmaceuticals, Key Pharmaceuticals, and Ivax, OPK’s current Chairman & CEO Phillip Frost has had successful history of creating shareholder value. But, the SEC’s case against him for false price inflation did not help the stock. With the sell–side analyst coverage almost disappearing, institutional investors have largely shunned OPK.
However, with long term positive fundamentals, misunderstood asset valuation by the Street, and industry tailwinds, OPK is sitting on multiple inflection points. With insiders holding 42% and 33% of the remaining floating stock shorted, OPK offers an attractive investment opportunity.
On a Sum of the Parts basis, stock is trading at 1/3 of its intrinsic value, a should command of a low-double digit price.
