OPK - OPKO Health: Improving Profitability Should Drive Shares Forward Post Q2 Earnings

2023-07-31 14:19:19 ET

Summary

• OPKO Health stock has bounced back since February but remains down over 11% since last year.
• OPK stock's rally in recent months has been supported by strong buying volume and positive earnings revisions.
• The company's collaboration with Merck and potential milestone payments contribute to its growth potential.

OPKO Health Overview

We wrote about OPKO Health, Inc. ( OPK ) in September of last year when we assessed whether the company's strong potential could be realized. Although the stock has bounced back very strongly since early February of this year, shares still remain down over 11% since we penned our last commentary over 10 months ago. Suffice it to say, given that OPKO does not pay a dividend and the fact that the S&P 500 (SP500) gained 18%+ over the same timeframe, a long investment in OPKO initiated last year represents a sizable opportunity cost not just from a nominal return standpoint but also with respect to what has been lost in purchasing power (real returns).

In fact, as we see from OPKO's intermediate chart below, shares actually tested their 2020 lows in February of this year before rebounding significantly to the upside (resulting in a bullish crossover of the stock's intermediate 10 & 40-week moving averages). Investors who remain long this stock will now be hoping OPKO's bull run can continue, where higher highs and higher lows will eventually become the norm.

In the short term, we believe that shares most likely will keep drifting higher. Our premise stems from the fact that the rally in recent months has taken place on strong buying volume as forward earnings revisions have continued to impress in recent months. In fact, as we see below, EPS revisions for the third and fourth quarters of this year have been very strong. Suffice it to say, as long as this momentum continues on the earnings side, we believe there is every chance that shares make their way back toward the $4 level, all things remaining equal. Remember, given how this stock is set up, the trajectory of the share price is largely predicated on how those bottom-line estimates play themselves out in upcoming quarters . We state this because OPKO remains unprofitable from an operating income or operating cash-flow standpoint, and the stated trailing book multiple of 0.93 includes almost $1.6 billion of "goodwill" and "intangible assets."

Suffice it to say, OPKO is not cheap from a valuation standpoint, which is why momentum with respect to the company's bottom-line earnings needs to continue higher in order for shares to keep on gaining traction.

From one standpoint, we got that momentum in Q1 earlier this year, as GAAP earnings of -$0.02 per share beat estimates by a considerable distance. Whereas the Diagnostics segment decreased by approximately $154 million due primarily to the winding down of the pandemic, sales in the Pharmaceutical segment increased by $62+ million to hit $105.2 million for the quarter. From an EBIT standpoint, it was encouraging to see healthy gains in the Pharmaceutical segment (operating profit of $19 million in Q1) and reducing losses in the Diagnostics segment (operating loss of $40 million in Q1).

Strong Potential In Pharmaceutical

Profitability gains in Q1 however only scratch the surface with respect to OPKO's growth potential, no more so with the recent collaboration with Merck earlier this year concerning the MDX-2201 vaccine. Due to the absence of any real competitor in the EBV space, OPKO has the potential to receive up to $870+ million of milestone payments plus ongoing royalties ($50 million has been received already) if indeed certain targets can be met going forward.

One area where royalties being paid to OPKO is clearly evident (thus mimicking what could potentially happen with Merck (MRK) down the line) is the NGENLA agreement with Pfizer (PFE). Strong sales growth is expected here as the product has yet to be launched in multiple jurisdictions where NGENLA has already been improved.

The diagnostics side of the business continues to downsize, but it is refreshing to see here that declining sales are not resulting in declining profitability. This is due to robust cost-cutting where BioReference's testing services have become far more focused on adding value across multiple areas (oncology, urology, etc.). The key here, as we have stated before, is that the Diagnostics segment undergoes a controlled downsizing of its business. This will ensure that the Pharmaceutical segment can continue to gain traction, where more products such as RAYALDEE & NGENLA can continue to grow their sales over time.

Risks

As stated above, investors in OPKO are very much keyed into how the company's drugs will fare out with respect to their ongoing approvals and then potential multi-year remuneration. Given that the technical chart includes all known information and is constantly trying to predict growth rates, OPKO's forward EPS revisions as well as how the stock trades technically are sound bellwethers concerning the fundamentals of this stock. From an intermediate standpoint, if the 10-week moving average were to cross below the stock's-week average, this again would be a cause for concern.

Conclusion

OPKO Health has been trading very well since February this year where the stock's technicals and fundamentals both point to further rising prices. We would recommend though (given the steep valuation and lack of core profitability at present) that investors monitor EPS revisions and the technical chart accordingly. Let's see if the company can report another earnings beat for Q2 due later this week, we look forward to continued coverage.

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