February 16, 2012 - 3:07pm EST by
2012 2013
Price: 5.13 EPS NM NM
Shares Out. (in M): 323 P/E NM NM
Market Cap (in $M): 1,652 P/FCF NM NM
Net Debt (in $M): -75 EBIT -20 -20
TEV (in $M): 1,577 TEV/EBIT NM NM
Borrow Cost: NA

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On the heels of the unfolding success of our short call in Hyperdynamics (which appears almost certainly destined for $0 at this point), we thought we would share another terminal short opportunity in a company called Opko Health.  Despite Opko’s current market capitalization of $1.6 billion, we strongly believe the assets of the company have no value and the stock is likely to prove worthless. 

DISCLAIMER:  We currently hold a short position in this security.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Please do your own research.

Opko was created through a merger of three small companies in 2007 by Dr. Phillip Frost, Chairman of Teva Pharmaceutical.  Dr. Frost has quite a significant, dedicated shareholder following, and as a result, the company immediately garnered a market capitalization of over $500 million. Opko’s original focus was on developing treatments for various eye diseases (macular degeneration, dry eye, allergy, etc.).  Two years later, these efforts failed and the company’s market cap fell to around $200 million.  In 2009, OPKO attempted to reinvent itself by embarking on a series of small acquisitions.  After several equity raises, warrant exercises and a surge in investor enthusiasm (helped by Dr. Frost’s appearances on CNBC and his regular purchases of nominal amounts of shares on the open market), Opko’s market capitalization has remarkably swelled to $1.6 billion. 

The company has no net tangible assets other than cash and burns around $20 million annually.  The assets backing the company’s lofty valuation include (1) two fairly unexciting and tiny South American pharmaceutical distribution businesses that they acquired in 2009 and 2010 for a total of $20 million , (2) Claros Diagnostics, acquired in late 2011 for $30 million, which is developing a small desktop blood analyzer, (3) a series of small investments in start-up healthcare companies with a book value at September 30, 2011 of $5.9 million and (4) a potential Alzheimer’s diagnostic test, for which it acquired the rights in 2009 for minimal (if any) upfront payment.

I think it will be fairly obvious to even the most casual investor that the distribution businesses have virtually no value.  They generate reasonable sales but appear to generate little or no profits.  Claros was just recently acquired in a competitive auction process so the fair value is probably not much more than the $30 million they paid (we think even that is generous).  We don’t think even a bullish appraisal of this business can put a dent in the market cap.  Upon acquisition, the company had book value of negative $1.8 million, total assets of $557 thousand and cumulative R&D spend of $5 million.  The basic concept is selling a mini blood test kit that the doctor can use during an office visit to run blood tests in-house.  Many companies have tried this before, but doctors generally don’t want to be bothered spending their time on the tests or risk the liability of getting it wrong.  The investments Opko made in start-up healthcare companies are too small to matter as well.  So bulls mainly point to the Alzheimer’s diagnostic test as evidence of the company’s opportunity. 

While in its very early stages, the basic idea of the test would be to develop a blood test that could diagnose Alzheimer’s disease in its early stages.  Currently there are certain diagnostic tests performed that can suggest the presence of the disease but the only definitive diagnosis is through an autopsy.  Dr. Thomas Kodadek (who now devotes 20% of his time to OPKO as a consultant) developed the idea from a study he conducted of six patients with advanced Alzheimer’s and six healthy patients while he was at theUniversityofTexas-Southwestern.  His study indicated the presence of specific antibodies (proteins that the body creates to fight disease) in the Alzheimer’s group only, which Opko believes could be used as markers to diagnose the disease early.  Opko claims they can launch the test in the first half of 2013 and position the test like the PSA screen test for prostate cancer – basically everyone over the age of 50 should get the test.

The two analysts that cover the company are extremely bullish on the company’s prospects.  Ladenburg Thalmann (which is also a screaming short and where Dr. Frost serves as Chairman of the Board) believes Opko has a “best-in-class business model” – an odd term for a company that has never made a dime of profit.  The analyst at Jefferies thinks the Alzheimer’s franchise could be worth $1 billion and told us “even if [it] fails, Dr. Frost will find something else”. 

We strongly doubt that the Alzheimer’s test will ever have significant commercial value, and consequently, we believe Opko’s stock will likely prove worthless.  First, this study is clearly very preliminary with only six Alzheimer’s subjects studied.  Second, the only subjects examined already had severe Alzheimer’s – the antibodies discovered in those patients may very well not even exist during earlier stages of the disease when this test would be useful.  Furthermore, a sufficient study could take a decade or more as patients would have to be measured from pre-onset of the disease all the way to autopsy to confirm the diagnosis.  However, even if the science does eventually prove valid, significant uncertainty remains regarding intellectual property as similar studies are being conducted (a very similar study has been conducted at the University of Medicine and Dentistry of New Jersey), and there are likely other antibodies associated with Alzheimer’s that could be used as the basis of competing tests.  As stated by a spokesman for the Alzheimer’s Association in August 2011, “many labs are looking at this... they are all in the very preliminary, very early stages.” 

Finally, and perhaps most importantly, one must ask, who would even want this test?  Alzheimer’s is a terrible disease for which there is no cure, and we would imagine very few people would want to know that in several years they may not be able to recognize their kids or find their way home.  But, you need not take our word for it: by Dr. Kodadek’s own admission in a January 2011 interview, “it’s unclear whether people would want to know a couple of years ahead of time they are going to get Alzheimer’s if they can’t do anything about it.” 


Reality sets in, equity raises, cash burn, more failures
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