Who knows better than anyone else if a company is headed in the right direction? Its executives -- particularly its CEO. That's why when a CEO decides to buy more shares of his or her company's stock, it's worth noting.
Opko Health (NYSE: OPK) CEO Dr. Phillip Frost has purchased over $2 million worth of Opko stock in September so far. In August, he scooped up more than $20 million in Opko shares. Other officers and directors of the biotech have also been buying the stock in recent months. Why are insiders so positive about Opko Health's prospects? Here are three key reasons.
1. Bio-Reference Laboratories acquisition
Opko executives have high hopes for the company's recent acquisition of Bio-Reference Laboratories. They think this buyout will help in two key ways. First, Bio-Reference brings with it a history of growing revenue and earnings that can help Opko's bottom line. Second, Bio-Reference gives Opko a major increase in its sales and marketing reach.
The latter reason behind this acquisition could pay off in big ways for Opko. For example, the biotech has focused only on urologists thus far in marketing its 4Kscore prostate screening test. With the sales resources of Bio-Reference, Opko can now target primary care physicians and internists, who order 93% of PSA tests.
There should be another important benefit for Opko resulting from the Bio-Reference buyout on the reimbursement front. Getting payers to recognize the value of diagnostic tests and agree to pay for them is critical to the success of companies like Opko. Bio-Reference claims a large team that is skilled at making the case to payers.
2. Promising drugs
Dr. Frost and others within Opko are no doubt also eyeing the promising potential of several drugs in addition to the opportunities for its diagnostic tests. Rolapitant and Rayaldee stand out as two likely winners.
Rolapitant treats nausea and vomiting resulting from cancer chemotherapy. Opko licensed the drug to Tesaro in 2010 for up to $121 million plus double-digit tiered royalties. Tesaro won FDA approval for rolapitant, which will be marketed under the name Varubi, in early September. The drug could eventually generate annual sales of around $400 million, according to industry analysts.
Rayaldee helps prevent and treat secondary hyperparathyroidism in patients with stage 3 or 4 chronic kidney disease (CKD) and vitamin D insufficiency. The FDA accepted Opko's New Drug Application for Rayaldee in July. Over 20 million Americans have stage 3 or higher CKD -- and there's no approved treatment. Analysts think Rayaldee could hit peak annual sales of more than $500 million, assuming it wins regulatory approval.
3. The price is right (to insiders, at least)
All of that insider buying in August and September came as Opko's stock took a beating. Shares fell more than 40% from June highs after the biotech reported disappointing second-quarter results in early August.
Short-term traders looked at Opko's revenue and earnings misses in the second quarter and bolted for the door. CEO Phillip Frost and others within the company, though, apparently saw the lower share prices resulting from the sell-off as a great buying opportunity. Wall Street analysts would probably agree, with a consensus one-year target price nearly twice that of Opko's current share price.
Judging from transactions made earlier this year, Frost thought Opko was a smart buy even when the stock traded over 30% higher than it does now. With the stock now at its lowest levels since February, insiders seem to think the price is right for backing up the truck and loading up on Opko shares.
The outside view
Is the fact that insiders are buying lots of Opko shares reason for "outside" investors to do the same? No -- not on its own. Those insiders could be wrong. However, it does make sense to examine the reasons why insiders might be buying.
In Opko's case, the biotech's prospects do appear to be bright over the long run with its Bio-Reference acquisition and pipeline. As for the short term, with 80% of the stock's float now sold short, good news for Opko could create a "short squeeze" that drives the stock higher. Count me as one outsider who thinks the insiders at Opko might be on to something.
Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.