In previous columns, I was very bearish on Co-Diagnostics (NASDAQ:CODX) and XpressSpa (NASDAQ:XSPA). Both stocks are plays on testing for the novel coronavirus. However, Opko Health (NASDAQ:OPK) stock is very different from those two names.
Co-Diagnostics had little revenue before developing its test for the coronavirus in “less than two hours.” And its coronavirus test has generated some controversy. XpresSpa has no previous experience with lab testing, has not announced any paying customers for its tests, and seems to be trying to compete with entities that are providing the test for free. The valuations of both stocks are very high.
In contrast Opko’s BioReference Laboratories subsidiary has a tremendous amount of experience in obtaining and testing blood samples. Further, BioReference has announced that it has made deals to provide its coronavirus tests to large government entities. These contracts are generating a significant amount of revenue.
Finally, Opko has generated meaningful sales in past years, and it has developed a drug that looks poised to bring in significant revenue, while the valuation of OPK stock is reasonable.
BioReference Labs Is the Real Deal
Acquired by Opko in 2015 for $1.47 billion, BioReference generated $832 million of revenue in its fiscal 2014, making it America’s “third-largest publicly traded lab company” at that time, according to TheDarkIntelligenceGroup.
BioReference has been testing lab specimens since 1986 and has acquired many other experienced diagnostic entities over the years. Since at least 2000, it’s carried out genetic screening.
On the coronavirus front, BioReference signed a $150 million contract with at least four coronavirus hotspots: New York State, New Jersey, Detroit, and Florida. It’s also processing tests for many hospitals.
As of July 1, it had processed almost 250,000 Covid-19 tests from nursing homes and live-in facility employees. Given all of this information, it’s obvious that BioReference got a lot of money to process coronavirus tests.
Opko’s HGH Drug Looks Poised to Generate Significant Revenue
Opko, in partnership with Pfizer (NYSE:PFE), developed a human growth hormone drug, somatrogon. Based on data generated by a Phase 3 trial of somatrogon, the drug appears to be significantly more effective than a drug called somatropin, which is used to treat growth hormone deficiency or GHD.
According to Opko, 1 in 3,800 children in the U.S. requires human growth hormones. In 2017, there were 74 million children in the U.S. That means about 19,500 children in the U.S. have GHD and require HGH treatments. HGH treatments cost $1,000 to $5,000 per month.
Since a number of other companies’ HGH treatments are undergoing Phase 3 trials, but Opko has a big-time partner in Pfizer, let’s assume that Opko gets 30% of the market at a price of $3,000 per month or $36,000 per year. That works out to annual revenue of $210.5 million. If Pfizer gets 30% of the revenue, Opko would still get $147 million. In 2019, Opko’s revenue was $902 million.
Some parents are starting to give HGH to children who don’t clinically require the hormone, and 1 in 10,000 adults have GHD. Moreover, some adults who don’t have GHD are using HGH to try to combat the aging process. Some doctors could legally prescribe Opko’s HGH treatment to adults. And finally, Opko’s treatment could be approved in the EU. All told, I think the drug could easily generate $300 million of annual revenue for the company.
A Possible Bonus
On June 1, the FDA agreed to allow Opko to conduct a Phase 2 trial of its Rayaldee drug as a treatment for patients with mild-to-moderate COVID-19. Rayaldee is a prohormone of calcitriol, which is the active form of vitamin D.
In a statement, Charles W. Bishop, the CEO of Opko’s renal division said, “Raising serum 25D (a derivative of Vitamin D) enables macrophages, a type of white blood cell of the immune system, to secrete potent antiviral proteins that can destroy SARS-CoV-2, the virus that causes COVID-19. It also can suppress the cytokine storm triggered by viral infection.”
There’s some controversy over the link between Vitamin D and the coronavirus. Yale doctors say there’s “slim … evidence” of a link, while the University of Chicago contends that “Vitamin D deficiency may raise risk of getting COVID-19.”
On the other hand, there seems to be a widespread belief among medical professionals that the cytokine storm triggered by Covid-19 is a major problem, and Opko appears to be somewhat optimistic about the ability of its drug to combat that issue.
Regardless, with a vaccine potentially arriving in the fall or early next year and the FDA only authorizing a Phase 2 trial last month, the company may not have enough time to generate a large amount of sales from the indication. If it does turn out that Rayldee meaningfully helps coronavirus patients, however, the company could get a meaningful revenue bump from off-label prescribing and stockpiling by hospitals and governments.
The Bottom Line on OPK Stock
Opko, which reported sales of $990 million in 2018, looks poised to generate strong revenue growth this year, driven by its coronavirus tests and its HGH treatment. Meanwhile, its shares are trading at a reasonable 2.4 times its trailing sales. Given these points, OPK stock is worth buying for longer-term investors.
As of this writing, Larry Ramer did not own any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.
