3 Things To Know About Opko Health

Opko Health (NYSE: OPK  ) has had a bumpy but profitable ride over the past 12 months, rallying more than 40% on optimism regarding the blockbuster potential of Rayaldy, its treatment for thyroid disorder, chronic kidney disease, and vitamin D deficiency.

Opko is unprofitable, but it has already generated $75.8 million in revenue over the first three quarters of fiscal 2013, compared to $47 million in 2012 and $28 million in 2011.

OPK Chart

Source: Ycharts.

Opko's generates most of its revenue from medical products (point of care, nutritional goods, pharmaceutical ingredients, topical medication, and veterinary items), lab diagnostic services, and acquisitions. Most of its products and services are aimed at the European and Latin American markets.

Looking forward, however, Opko expects Rayaldy and several other pipeline products to boost its revenue from the millions to the billions.

Let's take a closer look at three things investors should understand about Opko, and how its past, present, and future are intertwined with Teva Pharmaceutical (NYSE: TEVA  ) , Amgen (NASDAQ: AMGN  ) , Roche (NASDAQOTH: RHHBY  ) , and Tesaro (NASDAQ: TSRO  ) .

1. A strong leader and inorganic growth are Opko's foundations
Much of Opko's appeal comes from its founder and CEO, Dr. Phillip Frost, who is also chairman of Teva's board of directors. Frost has a solid reputation among health care investors, since he previously founded Ivax, a maker of generic drugs that was acquired by Teva for $7.6 billion in 2006.

Opko was pieced together by merging three smaller companies,, then acquiring various companies in Latin America between 2009 and 2013. In 2012, Opko also acquired small companies in Spain, Canada, and Israel. Last August, Opko acquired Prolor Biotech, which is developing treatments for growth hormone deficiency, hemophilia, obesity, and diabetes.

These acquisitions now form the base of Opko's operations, providing it with stable revenue going forward.

Last quarter, Opko's revenue rose 57% year over year to $20.6 million. This keeps Opko's financials fairly steady -- over the past 12 months, the company reported a negative operating cash flow of $37.9 million, but it finished last quarter with $181 million in cash and $227 million in debt.

2. All eyes on Rayaldy
Rayaldy, the vitamin D supplement, is the single most important drug for Opko's future.

Vitamin D insufficiency can be caused by chronic kidney disease, or CKD, as well as secondary hyperparathyroidism, or SHPT, in which elevated levels of parathyroid hormones, or PTH, can trigger bones to release excess amounts of calcium into the blood. That excess calcium can cause severe cardiovascular problems.

SHPT has been traditionally treated with surgery, but new drugs known as calcimimetics "mimic" calcium to trick the body into believing that elevated levels of calcium have been reached. The best known calcimimetic is Amgen's Sensipar (known as Mimpara in Europe), which the FDA approved in 2004 for patients on dialysis.

Rayaldy is not a calcimimetic, but rather a supplement of vitamin D, which plays a vital role in lowering PTH levels.

Rayaldy focuses on the problem of vitamin D insufficiency caused by the abnormal upregulation of CYP24, an enzyme that destroys vitamin D and its metabolites in CKD patients. Opko says that currently available vitamin D supplements do not sufficiently raise vitamin D prohormone levels or effectively treat SHPT.

In other words, Opko believes Rayaldy will be a game-changing product that will widely be considered the safer alternative to existing vitamin D supplements, such as Roche's Rocaltrol and Abbott Labs' (NYSE: ABT  ) Calcijex.

The company expects Rayaldy to hit annual peak sales of $6 billion (roughly half the vitamin D supplement market) if approved.

Rayaldy is being tested in two phase 3 trials with approximately 210 patients. Top-line data from both trials are expected in mid-2014 -- which could be the next big catalyst for the stock.

3. Three other areas of growth
Besides Rayaldy, Opko has three other products worth mentioning -- hGH-CTP, 4Kscore, and rolapitant.

hGH-CTP, which Opko acquired from Prolor, is a human growth hormone treatment for hormone deficiency, kidney disease, Prader-Willi syndrome, and Turner syndrome. The treatment could substantially improve the lives of patients since it is only injected once weekly, compared to a daily injection from comparable products. hGH-CTP is in a phase 2 trial for children and a phase 3 trial for adults. If the drug is approved in 2014, hGH-CTP could claim a large share of the estimated $3 billion market for human growth hormones.

4Kscore is a prostate cancer test available in the U.S. and Europe. The company expects the test to reduce a number of the 750,000 unnecessary biopsies performed annually in the United States by 50%. Analysts believe that based on an estimate of 1 million tests performed annually at a cost of $300 per test, 4Kscore has peak sales potential of $300 million.

Rolapitant, a drug for chemotherapy-induced nausea and vomiting, is licensed to Tesaro. The current agreement states that Opko is entitled to up to $121 million in milestone payments and double-digit tiered royalties if it is approved. However, peak sales estimates for rolapitant are very broad, from $300 million to $1.5 billion, so it's still early to guess what Opko's cut of the profits could be.

The Foolish takeaway
Investors should remember these three key things about Opko:

  • Opko already has solid sources of revenue growth from its diversified portfolio of medical products and services.

  • Rayaldy could be the blockbuster drug that finally boosts Opko's bottom line to profitability.

  • hGH-CTP, 4Kscore, and rolapitant could eventually be worth more than $1 billion in additional annual revenue.

Opko's price-to-sales ratio of 39 doesn't indicate that the stock is cheap, but it's not terribly overvalued either, especially when you consider that its current market cap of $3.6 billion is merely 60% of Rayaldy's peak sales potential of $6 billion.

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