Each year, there are around 200,000 distinct insider transactions reported to SEC via Form 4 filings. While the term “insider trading” sounds nefarious, there are just a handful of cases deemed illegal by federal prosecutors each year, though anomalous, above-average returns remain.
On average, a host of empirical studies and our own research have found that individuals who mimic insider trades can beat the market by 7 percentage points a year, and buying activity is typically a stronger indicator than selling activity. In other words, there are many reasons for an insider to sell shares of his or her company, but only one, very bullish reason to buy. Let’s take a look at one stock in particular that looks like a good candidate to be “monkeyed,” so to speak.
Opko Health Inc. (NYSE:OPK) is a drug and medical device company that most investors associate with ophthalmology exclusively, though it has been making significant headway in the point-of-care diagnostics arena of late. While POC tests for Alzheimer’s, testosterone (multiplex urology panel-based), and a blood test for Vitamin D are still in development, Opko has a prostate-specific antigen (PSA) test on the cusp of a European launch, and a four-step prostate cancer test that was launched in Europe this October.
Called 4Kscore, Opko’s newest prostate cancer test reduces the need for full biopsies, which are costlier and more time-consuming than the typical POC test. On its corporate website, Opko predicts that 4Kscore “could lead to a 50% decrease” in the near “750,000 unnecessary prostate biopsies [that] are performed annually in the US” alone. A domestic launch is expected to occur in the coming months, as European launch partner International Health Technology is in the process of “expanding” into the U.S., according to an Oct 1st press release from Opko (via BusinessWire).
Supporting expectations of a U.S. launch is Opko’s Dec 18th acquisition of OURLab, a moderately sized CLIA laboratory that gives the company “a commercial platform to support the near-term U.S. commercial launch of its novel panel of kallikrein biomarkers and associated algorithm (4Kscore™),” according to an official PR statement. In short, it looks as though Opko will now employ the usage of two commercial partners to bolster the domestic release of 4Kscore.
There are three reasons why investors must pay attention to these developments (continued on the next page):
1) CEO & Chairman Dr. Phillip Frost has been buying in bulk. Opko and Frost go together like Bert and Ernie, as the pharma magnate has been with the company since its inception and IPO, the latter of which occurred in early 2011. Frost has since accumulated 119.5 million shares, good for a whopping 40.1% share of his company’s float.
In 2012 alone, Frost has amassed close to 11 million shares of Opko, worth an approximate $51.4 million. Over this same time, there have been zero insider sales in Opko. This is about as bullish as insider trading sentiment can get in a particular company, but don’t take our word for it, check out the mammoth transactions for yourself.
2) The markets have responded well. Over the past six months, shares of Opko are up close to 9%, likely on the back of Frost’s continued confidence in the stock and the company’s accelerated development of 4Kscore. Regarding the latter, in fact, OPK closed at $4.16 on Oct 1st, the launch date of 4Kscore in Europe. In a little over 12 weeks since, investors have pushed shares up to the $4.80 range – an appreciation of more than 15%.
3) Revenues can increase tenfold. For bullish investors who are peeved they didn’t follow Frost’s lead sooner, Opko still has intriguing growth prospects. The company has failed to turn a profit in each of the last three quarters, exhibiting its last positive EPS in its fiscal fourth quarter last year, but 4Kscore can have a meaningful effect on the company’s top line.
According to Bloomberg, Michael King of Nomura Code Securities estimates that the average price of the ConfirmMDx test from competitor MDXHealth SA (PINK:MXDHF) is “about $146 per tissue sample.” Assuming that Opko’s 4Kscore test maintains this cost structure, the company can see a revenue increase of over tenfold from current levels. We’ll explain.
Consider the following logic: estimates vary, but on average, Forbes estimates that though 2009, “about 30 million men received a PSA Test each year – at a cost of about $3 billion annually.” Now, there are other PSA products on the marketplace, but many empirical studies, including that of Rinaa Punglia of Harvard Medical School (via the New England Journal of Medicine) indicate that the current testing format missed more than 65% of tumors in men over 60, and 82% of tumors in younger men.
In clinical tests of over 10,000 patients, Opko’s 4Kscore sports far superior accuracy. Results vary, and were conducted by seven different screening studies in Europe and the U.S. (found on Opko’s website), but on average, the percentage miss was three to four times lower. Particularly accurate results were found in high-risk patients.
With this in mind, it’s not out a stretch to consider the possibility that Opko’s test could capture a modest 10-15% of the PSA test market in its first year, which equates to roughly 3 million-4.5 million unit sales in the U.S. alone. With a simple back-of-the-envelope calculation of $146 per test, we can obtain our $440 million-$650 million revenue forecast.
Considering the fact that Opko made just $9.6 million in revenue last quarter, a successful 4Kscore launch could boost revenues significantly, giving much more insight into why the markets are valuing the stock at a lofty 38.2 times sales. With our expected revenue boost mentioned above, this sales multiple drops to 3.8, below peers like Waters Corporation (NYSE:WAT) at 4.3x, and Edwards Lifesciences (NYSE:EW) at 6.0X.
As most trading veterans are likely aware, the markets tend to appreciate rosy forward-looking growth prospects, which is a psychological factor that a successful 4Kscore launch will undoubtedly give Opko. This time next year, we could be looking back at Opko as one of the best investments of 2013, calling it “the company that boosted revenue tenfold.” That’d be one of the best monikers any stock could have, and is something Dr. Phillip Frost would certainly take a liking to.
Here’s a full look at the stock’s profile page on Insider Monkey; billionaires Israel Englander and Cliff Asness also hold positions in Opko (check out Cliff Asness’ other key picks here), so there’s some support from the smart money as well.
