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Aug 1

Opko: Contrarian Play On Positive Update – Seeking Alpha

By S. Mitra, MBA (ISB)

Opko Healthcare (NASDAQ:OPK) stock offers a good buying opportunity at its current beaten down price due to a number of reasons. The company recently provided an encouraging update about its hGH-CTP Phase 3 setback that happened in December last year. Opko also initiated a Phase 3 study for hGH-CTP in the pediatric segment. This positive news is expected to get the stock out of its rut. Further, the stock is also expected to benefit from positive revenue growth for the company's newly launched Rayaldee product.

The company recently reported positive topline data analysis of the Phase 3 study of its investigational long-acting human growth hormone product (hGH-CTP) in adults with growth hormone deficiency ('GHD). This is the same drug whose December 2016 results led to the steep decline in Opko share prices. The results at that time failed to show a statistically significant difference over placebo. However, later the anomaly was attributed to the existence of outliers. The company now carried out a sensitivity analysis to quantify the impact of outliers on the results. Consequently, the results excluding outliers showed statistically significant differences to placebo. The data is encouraging as the company recently started a global Phase 3 trial for the drug in pediatric GHD patients. The pediatric trials are important as Opko stands to share profits upon the commercial launch of the drug for the pediatric market.

However, the bigger impact of the announcement is that it goes to prove that stock markets overreacted to the results of December 2016. The stock slumped nearly 20 percent in a single day. However, the stock's beaten down price now provides a good opportunity to create a position in the company as it still retains its strong fundamentals as is evident from its latest data announcement.

Opko partners with Pfizer (PFE) for hGH-CTP. The company received $295 million in upfront payments from Pfizer while the regulatory milestone entailed an additional $275 million. Opko is also entitled to royalties from adult hGH-CTP sales. The recent finding reassures us that the company may go ahead with its hGH-CTP testing in adults. This is a step forward for Opko to capture the highly lucrative growth hormone market, which is expected to touch $4.7 billion by 2018.

Opko has taken another innovative approach to capturing the growth hormone market as it is also testing more efficient methods of delivering the drug. While pharma companies are keen on developing newer growth hormone therapies, there is also increased focus on developing more efficient methods of delivering them. Its latest Phase 3 trial in pediatric market involves a multi-dose pre-filled pen for delivering the drug. The company also plans to use this pen for patients who continue in the open label extension phase of the adult Phase 3 and the pediatric Phase 2 GHD studies. This approach is expected to help the company in multiple ways. First off, better methods of drug delivery will help Opko in gaining a higher market share as these new methods are expected to be easier to use. Additionally, this approach may also make the therapy more attractive vis-a-vis upcoming biosimilars, which may negatively impact the growth hormone market by offering lower priced alternatives.

While the company has a well diversified drug portfolio and robust pipeline, it is also performing well financially. The company reported its consolidated revenue for the quarter ended March 31, 2017 at $296.1 million, up from $291 million it had reported for the corresponding quarter of the previous year. It ended the quarter with $131.1 million in cash, cash equivalents and marketable securities. Along with its steadily improving revenue stream, the cash balance offers a nice cushion for the company as it progresses with its trials and studies.

Another important catalyst coming up for Opko is the results related to its Rayaldee product. Rayaldee was commercially launched in the US by the end of last year. The company recently reported that Rayaldee is now accessible by 68 percent of all insured Americans. The company is counting on reaching 75 percent by the end of this year. Opko is expected to announce the revenue figures in its upcoming earnings announcement and the expected positive improvement in the outreach of the drug will likely provide yet another push to the lagging stock. The company plans to expand its sales force to promote the drug in the market.

Despite encouraging updates coming from the company, the stock's current performance is a cause of concern. At the same time, it is clear that the company has strong operational standing and thus good potential ahead. At the current price point, which is approximately 50 percent lower than its 52 weeks high of $12.15, the stock is cheaply priced, offering a good contrarian investment opportunity.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OPK over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long PFE.

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Opko: Contrarian Play On Positive Update - Seeking Alpha

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