O is for optimism
OPKO Health, Inc. (NASDAQ:OPK) is present in the field of diagnostics and the pharmaceutical industry on an international scale. The stock has disappointed us for a long time. The stock price has stumbled and tumbled every year since 2015. Then it almost hit $18. Over the past 12 months, the stock price has fluctuated between $2.79 and $5.25. It fell by almost 16% during this period.
Nevertheless, there is a lingering sense of optimism about OPK. We have been buying and selling and tracking stock for years. Managing Director and Chairman, Dr. Phillip Frost, ponies his own money by buying shares in big lots. He sets the tone, talking enthusiastically about the string of aspirational projects. The result is meteoric revenue growth. OPKO has healthy free cash flow and manageable debt. Yet the company remains unprofitable.
The consensus among Wall Street analysts is that the stock deserves a bullish rating. Four out of five Seeking Alpha authors concluded it was either worth buying or buying heavily over the past 18 months. An analyst predicts earnings will jump +55%.
Hold for headwinds
We believe revenues will decline in 2022 compared to the record year of 2021. The number of COVID-19 tests is down. Governments and insurers want lower prices for pharmaceuticals. Earnings per share will be -$0.04 in Q1 22, compared to +$0.05 EPS for the same quarter last year. The next financial report is expected on May 9, 2022.
SA’s quantitative rating is a sure take and SA concludes that the current price is a fair assessment. Although we tend to be bullish, we are more comfortable with the hold for several reasons. The stock has been and we believe will continue to be a high risk investment.
Stocks are down 57% over the past five years. They sometimes jack up more than $5 on snippets of good news. Any sizzle is usually related to Dr. Frost’s frantic stock buying. The price jumped in March from $3.12 to $3.74 on news that Dr. Frost bought another 350,000 shares. He owns a valued 228M, giving him approximately 29% ownership.
Earlier, on January 22, the shares exceeded $5 on several news: OPKO announced the sale of its subsidiary GeneDx. Countries have approved their medicine for pediatric hormone deficiency. The FDA, however, issued a full response letter rejecting the company’s approval to market the drug in the United States at this time. The shares fell almost 21%.
Shares rose 5% soon after. That day, OPKO’s RAYALDEE kicked off sales in Germany, and the company announced that Dr. Frost had purchased another 150,000 shares.
In the pharmaceutical sector, OPK is in Phase 2 studying the efficiency of RAYALDEE to “mitigate the severity of upper respiratory tract infections and accelerate recovery from COVID-19”. But RAYALDEE’s entry into the American market is still a long way off. Some European countries have approved it for the treatment of certain chronic kidney disease conditions.
The company’s bioreference laboratories offer a full range of tests and related services. They served 11 million patients last year in specialty markets including oncology, urology, women’s health, maternal-fetal medicine, genetics and COVID-19 testing.
We do not expect OPKO to maintain the pace in 2020 and 2021. COVID-19 testing revenue in 2022 will be less. The federal government’s budget for free test kits did not pass. Don’t expect uninsured and underinsured people to pay $125 to $400 for COVID-19 testing. Cruise lines increasingly require passengers to get pre-cruise tests at their own expense. Correctional facility budgets are stretched and a target for state budget cuts.
OPK faces other headwinds. There is not much media coverage about the OPK. Articles average about three per week. Half is now bullish and the other half is bearish on the title. As Dr. Frost continues to accumulate stocks, hedge funds sell. The funds reduced their holdings by about 624,000 shares last quarter. OPK does not pay a dividend. Short interest now stands at +10.5%.
The stock has a leveraged beta of just under 1, so it’s a bit less volatile than the market. Shares fell to $1.69 before COVID-19 testing gave them a big boost.
2021 was a banner year for revenue. It grossed over $1.7 billion. Japan and the EU have approved the sale of OPKO’s pediatric hormone therapy. Canada and Australia have also approved it for sale. BioReference closed the year with record sales of $1.6 billion. The news should have sent the shares higher, but their price fell from $4.74 to $3.
Pharmaceuticals revenue increased approximately 15% in Q4 21. The increase was offset by a decrease in diagnostics from $457.9M to $362.8M for the same quarter year-over-year. OPK is currently net unprofitable. We see a drop in revenue in 2022 of around 4%. Earnings are unlikely to be positive for the next three years either. Other biotech companies on average expect 13% revenue growth in 2022.
Assets total 2xs liabilities at the end of 2021. Debt is not an immediate concern, but worth noting. Debt at the end of 2021 was $204.85 million. Equity totaled $1.685 billion. Debt during the cheap money years increased, but equity decreased. The debt ratio rose from 4.5% to 12.2% in five years. In the future, we are going to see higher interest rates on borrowed money and currency restrictions. This could be problematic for all unprofitable businesses.
money is life
The sale of the subsidiary would generate $150 million in cash plus other income. The company holds $134.7 million in cash and cash equivalents. OPKO has $265.6 million in receivables and $97 million in inventory. Its current liabilities of $283 million and its long-term liabilities of $370 million are hedged. Free cash flow leaves OPKO with a cash trail for the next three years. The market capitalization was $3.13 billion in January 2022, but now stands at $2.4 billion.
Bullish analysts have set the average target price at $6 over the next 12 months. This represents a 67% increase from the current price. An analyst pegs it at nearly $7. Another has a fair value of $10.46 per share. Optimism. OPK’s price-to-book ratio is 1.4x while the biotech industry average is 2x.
Dr. Frost and his management team have managed to build an impressive company. Its products benefit mankind. At the same time, products and marketing have built a stellar revenue base. At some point, we hope it will bring in strong bottom lines and wealth for investors.
Dr. Frost, 86, is the founder, engine and agitator of OPKO, he should live and be well. He owns nearly 30% of the shares; the vice-president holds 4.8%. Both are in their 15and year with OPKO. The management has been in place for a long time and knows the industry very well. But we don’t see any organic growth, in particular, to drive the stock price. There is a possibility that other biotech companies may be interested in parts of OPKO or the whole shebang.
Dr. Frost needs to see him. The billionaire has been a rock star in health since the days of Viagra. It will take more than his smile and enthusiasm to follow the optimistic price targets, however. It may be time to consider another way to resolve investor frustration and fatigue.