NONOF - OPKO Health's Future After Merck Deal: Bright Or Uncertain

2023-05-11 12:29:00 ET

Summary

• In the first three months of 2023, the company posted $237.6 million in revenue, up 28.2% from the previous quarter.
• In addition to the Merck deal, OPKO received a $7 million payment from Vifor in Q1 2023, thanks to the German price approval for Rayaldee.
• Overall, Rayaldee sales in the United States remain flat, at $6.6 million in Q1 2023, slightly less than the sales average over the past nine quarters.
• With a $50 million payment received from Merck's Epstein-Barr vaccine partnership and based on current cash and cash equivalents, we believe there is no need for a dilutive secondary public offering.
• However, due to the need to redeem approximately $211 million of senior convertible notes maturing in 2025 and the lack of significant progress in increasing the margins of the company's diagnostic segment, we are lowering our previous target price from $8 per share to $4.50.

OPKO Health ( OPK ) is a multinational company comprised of the pharmaceutical division and BioReference Health, one of the largest players in the US diagnostics industry. Between 2020 and 2022, the company's services and products have been used by millions of Americans and, under the leadership of Jon Cohen, have actively partnered with major professional sports leagues to diagnose COVID-19. In addition, OPKO Health has an extensive portfolio of experimental drugs, some of which are being developed in partnership with Pfizer ( PFE ) and Merck ( MRK ) and which have the potential to restore investment interest in the company, observed in 2014-2015. This article will provide an analysis of the progress made in the development of OPKO's business in recent years and its prospects in the long term.

OPKO Health's progress in recent years

Since the approval of the COVID-19 vaccines and the end of the acute phase of the pandemic, OPKO's revenue continued to decline until the third quarter of 2022 due to the diagnostics segment, the demand for services of which was falling and the sale of GeneDx ( WGS ), which is one of the US leaders in genetic testing. However, over the past two months, the situation has improved slightly due to the ongoing geographical expansion of Rayaldee and Ngenla. As an OPKO Health partner, Pfizer continues actively commercializing Ngenla (somatrogon) in seventeen countries, including Japan, Australia, Canada, and Germany. Ngenla is a long-acting human growth hormone ((HGH)) analog that promotes growth in children with growth hormone deficiency and offers patients less frequent injections while maintaining similar efficacy as daily injections of growth hormones such as Genotropin, Humatrope, and Norditropin.

Moreover, in the second quarter, Ngenla was included on the list of medicines that are reimbursed by the French National Health Insurance , and thus we believe in the ability of Pfizer to strengthen its position in the European market while the main competitors, Ascendis Pharma's Skytrofa ( ASND ) and Novo Nordisk's Sogroya ( NVO ), only expected to enter this market.

In general, Pfizer expects to enter all key international markets by the end of the year, which will affect the growth in royalties to OPKO Health. In the first three months of 2023, the company posted $237.6 million in revenue, up 28.2% from the previous quarter.

At the same time, revenue from the sale of products and the transfer of intellectual property amounted to $105.2 million in the three months of 2023, an increase of 147% compared to the first quarter of 2022. The increase in revenue is primarily due to the receipt of a $50 million upfront payment as part of a signed agreement with Merck to develop MDX-220, an Epstein-Barr virus vaccine candidate, for a total of $872.5 million. ModeX Therapeutics developed this nanoparticle-based vaccine candidate, whose business was bought out by OPKO on May 9, 2022, for $300 million in common stock .

We believe that Phillip Frost, as the CEO of OPKO Health, made a brilliant move by acquiring promising experimental drugs for treating cancer, HIV, and COVID-19, but also got Sanofi employees responsible for product development of French company candidates. For example, before joining OPKO as its president and vice chairman of the board of directors, Dr. Elias Zerhouni served as the 15th director of NIH and president of global research and development at Sanofi from 2011 to 2018.

In addition to the Merck deal, OPKO received a $7 million payment from Vifor in Q1 2023, thanks to the German price approval for Rayaldee. A payment of $2.5 million was also received from Nicoya by an agreement signed in 2021 to develop and commercialize this drug in Greater China.

Overall, Rayaldee sales in the United States remain flat, at $6.6 million in Q1 2023, slightly less than the sales average over the past nine quarters. We continue to believe that Rayaldee, approved for treating secondary hyperparathyroidism in adults with stage 3 or 4 chronic kidney disease (CKD) and vitamin D deficiency in 2016, will not be a cash cow for the company. This is due to the generic versions of AbbVie's Zemplar and Amgen's Sensipar, which have a significantly lower cost and relatively high efficiency, making them preferable to OPKO's product for insurers.

However, cash burn rates are slightly declining, and operating losses were $30.5 million in Q1 2023, down $53 million from two quarters ago. We believe that OPKO Health will remain unprofitable in 2023 due to rising R&D costs in the pharmaceutical segment and increased competition among organizations providing laboratory testing services.

While BioReference continues implementing various cost-cutting initiatives to avoid hitting the iceberg, the pace still needs to catch up. Thus, the losses from the operating activities of the diagnostic segment of OPKO continue to be relatively high. After the sale of GeneDx, which is still a loss-making business, and Jon Cohen's departure, the efficiency of the current business model remains low.

In our estimation, Phillip Frost's only opportunity to regain Wall Street's credibility and add value to investors is to sell the diagnostics business and then focus the business on developing the broad portfolio of product candidates generated from numerous company acquisitions between 2012 and 2022.

So, on the Q1 2023 earnings call, Elias Zerhouni stated the following :

“We believe MSTAR is a plug-and-play platform that provides a competitive advantage over all the other multispecific technologies with 28 patents filed to date. As we progress our therapeutic candidates, we will evaluate which targets we keep in-house and which we seek to partner in order to maximize the value of our pipeline.”

The above announcement is an essential confirmation of management's commitment to maximizing investor value and entering into at least one more partnership to develop the company's pipeline, which Elias Zerhouni also hinted at in the Q4 2022 earnings call .

“So, it depends on each product. And in terms of the portfolio. We've had a lot of incoming interest, both for the multispecific antibodies as well as the vaccine. So we're in active conversations. I hope to see one or maybe two transactions complete this year, hopefully, in the first half.“

ModeX Therapeutics' extensive portfolio of product candidates has been developed using multispecific antibody technology, which has many advantages over traditional approaches. For example, based on the ModeX MSTAR platform, drugs are being developed that target up to six different biological pathways in a single molecule and thus have greater versatility and effectiveness in the fight against solid tumors, leukemia, and hematologic malignancies relative to competitors.

Moreover, thanks to the STEALTH platform, the power of multispecific immunomodulation is targeted to specific targets, which can dramatically reduce life-threatening side effects for the patient compared to already approved antibodies.

Based on the results of preclinical studies and ModeX Therapeutics' innovative platform technologies, it may be of interest to Big Pharma, which is actively looking for assets to acquire to reduce the risks of inevitable loss as generic versions of their multibillion-dollar blockbusters appear on the market.

Conclusion

OPKO Health is a pharmaceutical-like healthcare company developing next-generation product candidates with the potential to fight deadly diseases like cancer, HIV, type 2 diabetes, and more. In addition, the company's structure includes BioReference Health, one of the largest players in the US diagnostic industry. Thanks to the COVID-19 pandemic, between 2020 and 2022, millions of Americans used the services of this company to diagnose COVID-19, which affected the growth of the company's investment attractiveness headed by Dr. Phillip Frost.

With a $50 million payment received from Merck's Epstein-Barr vaccine partnership and based on current cash and cash equivalents, we believe there is no need for a dilutive secondary public offering.

In addition, Pfizer, a partner of OPKO, is actively working with the FDA to get Ngenla approved in the United States. We believe that with the approval of this long-acting growth hormone in 41 countries, the likelihood of a favorable decision by the regulatory agency is high. If Ngenla is approved in the US, it will bring OPKO $90 million in milestone payments and a significant increase in royalties from its sales.

However, due to the need to redeem approximately $211 million of senior convertible notes maturing in 2025 and the lack of significant progress in increasing the margins of the company's diagnostic segment, we are lowering our previous target price from $8 per share to $4.50.

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