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Key Points of Visionq

1. OPKO health Inc. recently signed collaboration and licensing agreement with a major Swiss drug company Vifor Fresenius Medical which enter new medical markets worldwide. This fact is the main fundamental reason for future stock-price increase.
2. As our valuations show, the company’s shares have significant mispricing in undervaluation side. The comparable and income approaches of fair value’s estimation complement each other and give an opportunity to make sure buy-side trade of OPK stocks.
3. Financials shows negative trend of financial results at the same time. But there is positive dynamic of revenue growth and investing features of cash flows and expenditures. With the realization of fundamental support the financial position of the company is going to have radical but positive changes.
4. Our technical analysis’ results confirm the vision of OPK future price increase with acceptable conditions (buying price, stop-loss and target) of trade commitment.

Main part of Investment research

Description of the company

OPKO Health, Inc. is a diversified healthcare company. The company “seeks to establish industry-leading positions in large, rapidly growing markets.”

· The diagnostics business includes Bio-Reference Laboratories, the nation’s third-largest clinical laboratory with a core genetic testing business and a 420-person salesforce to drive growth and leverage new products, including the 4Kscore® prostate cancer test and the Claros®1 in-office immunoassay platform.

· The pharmaceutical business features Rayaldee™, a treatment for secondary hyperparathyroidism in stage 3–4 chronic kidney disease patients with vitamin D deficiency (March 29, 2016 PDUFA date) and VARUBI™ for chemotherapy-induced nausea and vomiting (oral formulation approved by FDA and pending launch by partner Tesaro, IV formulation in Phase 3).

· The biologics business includes hGH-CTP, a once-weekly human growth hormone injection (in Phase 3 and partnered with Pfizer), and a long-acting Factor VIIa drug for hemophilia (entering Phase 2a). The company also has production and distribution assets worldwide, multiple strategic investments and an active business development strategy.

It’s good to notice that OPKO continues to explore year to year acquisition opportunities for complementary pharmaceuticals, compounds, technologies, and businesses. Last 5 years the company acquired more than 10 companies.

The strategy of the company says that “OPKO Health, Inc. expects future growth to arise from:

· leveraging proprietary technology,

· development strengths,

· pursuit of complementary and strategic acquisitions and investments.”

Also, there is a very good description of the company that key management and personal are high-experienced persons in medical, pharmaceutical businesses.

Actual news and events

May 9, 2016 OPKO Health (OPK) made a collaboration and licensing agreement with a major Swiss drug company Vifor Fresenius Medical Care Renal Pharma. Under the agreement, OPKO could receive $282 million in upfront and milestone payments, plus double-digit tiered royalties. The agreement is for the licensing and development of one of OPKO’s major products, Rayaldee, an oral vitamin D treatment aimed at people suffering from chronic kidney disease. The licensing agreement on Rayaldee gives Vifor Fresenius the rights to Europe, Australia, Canada, Mexico, South Korea and several other international markets. OPKO retains the rights to develop and commercialize Rayaldee in the U.S., Latin America (excluding Mexico), Russia, China, Taiwan, and Japan.

The estimated value of the markets covered by the licensing agreement is expected to reach about $1 billion in two years, and the U.S. market to exceed $1 billion. Obviously, this is a very forcing factor of potential growth of OPKO and of improving its position on world pharmaceutical market.

Later, on June 21 the U.S. Food and Drug Administration (FDA) approved RAYALDEE (calcifediol) extended release capsules for the treatment of secondary hyperparathyroidism (SHPT) in adults with stage 3 or 4 chronic kidney disease (CKD) and serum total 25-hydroxyvitamin D levels less than 30 ng/mL. This is also a good signal for investors because this approval confirms that the company follows formal and intrinsic quality factors of their medical products and services.

As extra but very significant factors of potential stock-price raise are insiders’ trades. During June,2016 CEO & Chairman, 10% Owner of Opko Health Inc (OPK) Phillip Frost was buying shares of OPK on at an average price of $9.01–9.42 per share. Nowadays he owns near 183M shares of the company. We can conclude that CEO of OPKO believes in high potentiality of the company an makes investments in his “home” company.

Financial gurus George Soros (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) both kept their positions in Opko Health unchanged or slightly adjusted. Soros owns 235,600 shares and Gabelli owns 11,000 shares. It indicates a support of such well-known in the financial world persons for the OPKO Health Inc. and its forecasting developing and rising position.

All these fundamental factors prove our long-vision. We may speak about these factors as strengths and engines of stock-price increase.

Peer Analysis

As on 07/05/2016 the market capitalization of the company is 5.32B. Relation or share within the Biotechnology industry (which is cumulative capitalization is 699.16B) is 0.76%. This little figure allows us to consider the company as the company with good perspectives because there are a lot of unoccupied markets for the company’s development (comparing with industry’s leaders such as Gilead Sciences Inc., Amgen Inc., Celgene Corporation, Biogen Inc. etc.).

If we talk about the industry and its products, biotechnology is the use of living systems and organisms to develop or make products, or any technological application that uses biological systems, living organisms or derivatives thereof, to make or modify products or processes for specific use.

Nowadays trends in biotech industry are:

· Connection of medicine and IT to solve problems of new diseases.
· Creating new-generation drugs for complicated treatments and therapies
· Accent on such diseases as cancer, AIDS, new forms of flu with the aim of developing current methods of diminishing its’ influence on humans’ health.

Table 1. Financial multiples’ comparison of industry’s peers

From the table 1 we see that OPKO Health Inc. has worse position among main competitors. With very high trailing multiples EV/EBITDA and P/E and profitability metrics the company risks to lost investors. But our fundamental analysis, financial analysis below, valuation and tech analysis shows vise-a-versa tend and support our trading long-vision idea.

Financial analysis

Table 2. Dynamic of assets and capital

We see that year to year growth of assets and capital is relatively not stable. In our view this fact shows the company’s investing and scientific researches’. It’s needed to notice that Y2013 and Y2015 forced huge increase in balance value. That’s because of several big acquisitions during these periods.

Table 3. Dynamic of proceeds.

Table 3 shows stable growth of revenue, especially in FY2015. But with the growth of revenue all types of expenses are also raised and caused net losses. But In last FY we see diminish of net losses and potential to go through “breakeven point” to start producing profits. Nowadays this trend is very actual because of strong fundamental factors mentioned above.

Table 4. Dynamic of Cash Flows’ metrics.

The last financial analysis table represents wonderful results of cash flow management in FY2015. At first there is changed meaning of CFO from negative (FY2011–2014) to positive figure in FY2015. The growth of D&A correlates with the assets’ and company’s enlargement. We see increase of CFI negative figure, but for aims of potential investments in OPKO’s stocks it is a very good factor of development. There is an obvious fact that has positive meanings during last 5 years because of borrowings of debt capital in terms of using it for acquisitions, expansion of OPKO Health Inc. on global market etc.

Financial analysis shows that negative financial results with encouraging dynamic connected with fundamental factors has good reason to forecast oncoming improvement of the company’s financial statement and raising stock-price.

Valuation

Comparative valuation (multiplies)

In this chapter firstly we show the results of our estimations and then give short describing and explanation of our methods, assumprions and results.

Table 5. Multiplies’ valuation of fair value. (Data and calculations are made on 07/05/2015)

Averagely OPKO Health Inc. stocks undervalued ob 2.18$ per stock or 22.45%. Notice that only P/E multiple shows negative results and overvalues meaning of fair value (obviously because of negative net earnings of the company). To develop the idea of mispricing, we provide our estimations with DCF-model results below.

DCF-Valuation

The DCF-model based on prognosis of financial metrics by Reuters and author’s calculations based on market data and financial statements’ reports (WACC, WC, CAPEX, etc.).

We assume minimum 1% Terminal growth rate because of current net losses and absence of dividend payments.

Terminal EBITDA Multiple calculated with the help comparable analysis of competitors (not mentioned in the article because of big picture’s size.

The results of DCF-calculations prove and support multiplies’ valuation above. The final results we show in table 6 below.

Table 6. Resulting fair value of OPK stock.

The average fair value 15.41$ per share we use as the target of our trading idea. As we see, valuation provides our hypothesis about undervalued OPKO’s stocks. Tech analysis below shows optimal conditions to commit the trade.

Technical Analysis

From the side of tech analysis the OPK chart shows nice picture.

There are 4 main factors-signals for future stock-price rising:

1. Breakout of strong inclined level of resistance
2. Formation of strong long trend with inclined and horizontal supporting price-levels (and formation of long-delta)
3. Consolidation in two patterns: flag and falling wedge.
4. Break out of falling wedge and fixation of the price above the wedge.

We predict that during 1–2 weeks buyers will break the flag-channel and move the price in a long way.

Our trading recommendation is to buy.

Buy price:

1) 9.70–10.00 (if you want to make trade based on falling wedge signal).
2) 9.80- 10.10 (for less risky trade with supporting confirmation based on flag signal and breakout of its bottom line)

Stop loss:

1) 9.06 (-1 tic 9.07 last fractal minimum 06/30/2016)
2) 9.39 (-2 tics 9.41 last bar’s minimum 06/07/2016 => potential fractal formation)

Note: stop-loss prices connected with allowed risk of 7% according to trading strategy.

Note: If it’s possible, put stop-loss price under 8.71 minimum (under bottom line of falling wedge and flag.

Target price 15.41 connected with multiplies’ and DCF valuation.

Risks

Main risks of this trading idea are:

1) Tech risks:
· connected with stop-loss price variants,
· risks of false signals and further corrections of consolidations;
2) Fundamental risks:
· ongoing negative financial results and losses causing vise-a-versa reaction of market participants,
· failure of entering new markets of medicine and pharmaceutics,
· Market risks (high beta of OPK).

Conclusions

The comprehencive financial and investment analysis of OPKO Health Inc. commonly shows that our hypotesis is going to «shoot out» in nearest future.

Despite unstable and negative financials, last news, events and position, mainly based on :

· expancion of the company’s activity and products;
· support of investors and funds;
· chance to turn dynamic of financials in necessary way;
· undervaluation which is showed by two approaches of fair value’s estimation;
· really beautiful position according to graph analysis

allow us to speak about high stocks’ mispricing and undervaluation and to forecast the increase in its price.