The last 12 months haven’t been pretty for Opko Health Inc. (OPK). Its stock has tanked by more than 31% during this period. Just when investors were supposed to be seeing light at the end of the tunnel, the FDA decided to halt the approval of one of its biggest drugs, Rayaldee. This sent OPK stock down by at least 8% during the morning trading session. But, what was the real issue?
Opko Health said in a press release that the decision to halt the approval of Rayaldee has nothing to do with the drug in itself. OPK claims the FDA hasn’t requested additional clinical studies before the drug can get approval.
Additionally, management said the issue is tied to deficiencies that the FDA found at Catalent Inc‘s (CTLT) facility, the manufacturer that Opko Health has contracted to produce Rayaldee.
Opko Health CEO, Phillip Frost, said during a conference call this morning that his company believes Rayaldee would have been approved if the issues at Catalent weren’t present.
In short, Opko Health isn’t running into trouble here, at least not in the near term. But, does this initial market reaction prove material to the company’s investment thesis? Let’s take a look.
OPK Expects Rayaldee to be a Billion-Dollar Drug
Without a doubt, Opko Health expects Rayaldee to be blockbuster, with the company saying the drug will address an unmet market for stage 3 and stage 4 chronic kidney disease (CKD). OPK estimates that there are 20 million patients in this market in the U.S. alone, making the market worth a mouth-watering $12 billion.
Moreover, OPK expects that it will be a leader in this market. Execs said during the conference call that there are currently no available products that can raise serum total 25-hydroxyvitamin D (25D) to recommended levels, something that Opko Health claims Rayaldee can do. In essence, expectations are that Rayaldee will be a billion-dollar drug.
However, going by what a Motley Fool analyst said, the delay here would have meant that the potential market-leading position of Rayaldee is at risk. The analyst explained that Amgen, Inc.’s (AMGN) etelcalcetide, which is due an FDA approval decision by August 24, competes with Rayaldee. By that logic, the delay here could mean that etelcalcetide reaches the market before Rayaldee. With the first-mover advantage in the healthcare space, etelcalcetide could take the leading position.
However, investors should note that etelcalcetide is being considered as a “potential new treatment option for the management of secondary hyperparathyroidism (SHPT) in patients with chronic kidney disease receiving hemodialysis.”
On the other hand, Rayaldee is being considered as treatment for SHPT in patients with stage 3 and stage 4 CKD and Vitamin D insufficiency.
To make things clearer, etelcalcetide is targeted for treatment at the end-stage of the disease, while Rayaldee is meant for mid-stage of the disease.
Even though there’s always a chance of an off-label of etelcalcetide, it’s unlikely that would significantly affect the market performance of Rayaldee.
Taking It Home
Having ascertained that this delay doesn’t increase competition risk for Rayaldee, there is no reason for Rayaldee not to be a leader in its market. However, we’ll have to wait to see if Opko Health is right with its billion-dollar tag on the drug.
Overall, though, I believe Opko Health presents a high-risk/high-reward asymmetry. It’s not for the faint-hearted.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
