OPKO Health’s Healthy Buyout Binge

by James Brumley | January 23, 2013 11:37 am

OPKO Health’s Healthy Buyout Binge

When investors digest any single piece of recent news from OPKO Health (NYSE:OPK[1]), it might be easily dismissed as inconsequential. When you really take a step back, though, and look at the bigger-picture, OPKO takes on a much more meaningful shape.

Take the latest insider purchase. It’s no big secret that CEO Dr. Phillip Frost is a major shareholder in the global pharmaceutical and diagnostics company, so the 35,000 shares he picked up a few days ago — about $200,000 worth — wasn’t heralded by the media. However, all those many, many incremental stock purchases he’s made over the years have given Frost more than a 40% stake in the company.

It’s not unusual for top management to hold sizable stakes in the company they lead, but all too often it’s nothing more than token levels of ownership. If the stock tanks, then so be it. Frost, though, is putting a proverbial ton’s worth of his financial future into the stock’s growth. If nothing else, other shareholders can rest assured the CEO is on the same side of the table they are.

Still, that’s not the only reason investors may want to take a closer look at OPKO now.

Growth by Acquisition

OPKO’s acquisition of Canadian drug company Cytochroma earlier this month might be one of those news items that ends up being reviewed and then discarded. But it’s not just Cytochroma.

That deal follows a similar announcement in late December that OPKO was acquiring a Brazilian pharmaceutical company called Silcon Comércio, Importacao E Exportacao de Produtos Farmaceuticos e Cosmeticos. And in October, OPKO acquired diagnostics and testing name Prost-Data and its related OURLab affiliate. In August, OPKO bought Spanish drug company Farmadiet. Even earlier in 2012 OPKO announced the purchase of Chilean pharmaceutical company Pharma Genexx.

And more names than just those have been added to the roster over the past 12 months.

If it needs to be said, OPKO is in a growth mood, and isn’t taking no for an answer. Its strategy is working, too, even if it’s costing money in the near term. Although the third-quarter year-over-year loss expanded, all those acquisitions from 2012 at least led to a 74% improvement in revenue.

Yet, it’s not as if all those purchases have been acquisitions just for the sake of making acquisitions. If you dig deeper, there’s actually a focused method to the madness.

The Cytochroma deal? That brings two Phase 3 drugs into the fold, both of which are being tested as kidney disease treatments. The big gun is the drug called Replidea, which will treat secondary hyperparathyroidism — one of the debilitating symptoms of renal disease.

With Brazil’s Silcon Comércio, OPKO gains a better foothold in South America and further paves the way for its 4KScore biomarker, a prostate cancer test. With Farmadiet, OPKO gains access to a portfolio of broad-use pharmaceuticals and neutraceuticals that Frost specifically said would be introduced in Latin America, where OPKO already had a presence through Pharma Genexx, and now, through Silcon Comércio.

With Prost-Data and OURLab, OPKO dives a little deeper into the clinical diagnostics business. Prost-Data primarily does blood work for urologists, but these same labs are well-positioned to begin servicing the company’s new 4KScore. They may also serve as the launch pad for the company’s new Alzheimer’s test, which it’s been working on with Bristol Myers Squibb (NYSE:BMY[2]) since 2010. Bristol Myers and OPKO have agreed to develop more diagnostic tests.

The Bigger Picture

What does it all point to? OPKO is aiming to become a soup-to-nuts operation, offering diagnostics as well as a treatment option for several diseases. At the same time, it’s adding new drugs to its portfolio, treating ailments for which new tests will almost certainly be developed. And the company plans to focus on the underserved (yet still lucrative) Latin American and South American markets.

By having a hand in the whole pie rather than just part of it, OPKO Health puts itself in a position to feed itself. All of these recent acquisitions in various ways fuel other OPKO divisions.

In other words, though there’s a little pain now, even more reward will be coming later.

Predictions of company acquisitions are a dangerous game to play. In the same sense that economists have predicted seven of the last four recessions, stock analysts have predicted eight of the last five corporate buyouts. Translation: If the only reason you’re interested in OPKO Health is that it may be a buyout target, that’s probably a poor reason to own it.

On the other hand…

…If there were ever a person who could get OPKO Health sold at a nice price, it’s CEO Frost. Why’s that? Two reasons: Key Pharmaceuticals and Ivax.

Frost worked the former into a company that was ultimately acquired by Schering-Plough, and then he did the same for Ivax, which was acquired by Teva Pharmaceuticals (NASDAQ:TEVA[3]) in 1986. While Frost has never said an acquisition is the ultimate goal here, he’s certainly guiding OPKO through a path parallel to the ones he pushed Key and Ivax through.

Bottom line? There was little doubt that OPKO was a compelling investment. But over the past year — and so far into this year — Frost has turned the heat up on increasing its value. This may quietly be one of the market’s better longer-term ideas.

As of this writing, James Brumley didn’t own any securities mentioned here.

Endnotes:
  1. OPK: http://studio-5.financialcontent.com/investplace/quote?Symbol=OPK
  2. BMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMY
  3. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA

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