Can This Diversified Health Care Company Justify Its Lofty Valuation?http://www.fool.com/investing/general/2013/10/22/can-this-diversified-health-care-company-justify-i.aspx Leo Sun
October 22, 2013
Opko Health (NYSE: OPK) is a polarizing stock. Bulls believe the company's growing portfolio of smaller companies will eventually put it on the map as a serious drugmaker. Bears point out that Opko generates very little revenue and that its losses are ever widening.
However, Opko stock has risen more than 140% over the past 12 months, indicating that the bulls are firmly in control. Let's take a closer look at this company to see where it might be headed.
Frost founded Opko by merging together three smaller companies. In 2009, Opko started acquiring a series of smaller companies, including a Latin American distribution business that would account for the majority of its revenue until 2013. It also acquired the maker of a compact blood analyzer and gained the rights to an Alzheimer's diagnostic test. In 2012, Opko purchased more companies in Latin America, and expanded its reach to Spain, Canada, and Israel, where it acquired a maker of hepatitis B vaccine.
In August, Opko acquired Prolor Biotech, which has drug candidates for growth hormone deficiency, hemophilia, obesity, and diabetes.
Analyzing Opko's revenue streams
Opko's revenue comes three main sources -- products (point-of-care products, nutritional products, pharmaceutical products, pharmaceutical ingredients, topical medication, and veterinary products), services (lab diagnostics), and acquisitions. Many of its products are sold in Latin America and the EU.
Although Opko's year-over-year revenue growth is impressive, remember that Opko currently has a market cap of $4.3 billion -- and it is trading at a whopping price-to-sales ratio of 47. This means that it needs to generate a lot more revenue to justify its current lofty valuation.
Unfortunately, the company's losses are widening, and its expenses are climbing. Last quarter, Opko's total expenses surged 114% year over year to $41.8 million, causing its net loss to nearly double to $18 million.
Measuring the growth potential of Opko's new projects
To hint at citicoline's growth potential, Opko noted that sales of another citicoline product in Spain, Somazina, generated over $80 million in sales in 2012. The company also points out the citicoline enjoys strong sales across Latin America. However, Citicoline is an off-patent drug that is currently manufactured by 30 different companies, and hardly a breakthrough product that can produce guaranteed revenue.
Rolapitant is another product that should be scrutinized. Opko originally purchased the drug from Schering-Plough (now part of Merck (NYSE: MRK)) in 2009 for $2 million in cash upfront.
Opko could have been required to pay up to $27 million more to Schering if various milestones were achieved. However, Opko held onto the drug for a year without doing any clinical research on it, then flipped the drug to Tesaro (NASDAQ: TSRO) for an upfront payment of $6 million and up to $115 million in royalty payments.
That series of deals has raised some concerns, since Tesaro is now valuing the drug at $121 million -- more than four times Opko's original deal with Schering. Moreover, rolapitant isn't addressing an unmet need -- there are already plenty of medications for chemotherapy-related nausea, such as Kytril, Zofran, Anzemet, and Aloxi. There are currently generic versions of Kytril and Zofran available, whereas Anzemet and Aloxi are manufactured by Sanofi and Helsinn Healthcare, respectively.
Rayaldy is Opko's brightest hope, since current methods of treating vitamin D deficiency in patients