SA Opinion 10/20/23

icemandios
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SA Opinion 10/20/23 Oct 20, 2023 18:29:21 GMT miamianne67 and lookingforatenbagger like this

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Post by icemandios on Oct 20, 2023 18:29:21 GMT

OPKO Health: FDA Approval To Save The Company
2023-10-20 13:30:50 ET

Summary

OPK and PFE received FDA approval for Ngenla in June. This enables OPK to receive royalties going forward.

OPK has continued to lose money due to its lab business. The business had sales fall off following the decline in COVID testing. OPK needs to right size the business.

The potential royalties from Ngenla are not enough to make the company profitable.

OPK has a good potential pipeline. Its ability to develop that pipeline is a concern with its current cash position.

I wanted to provide an update on my investment thesis for OPKO Health, Inc. ( OPK ). I n my most recent analysis from May I rated OPKO as a hold. There was enough potential at the price point to hold on to the stock, but not enough for me to want to buy more of the stock. There has been one big piece of news since my last article. OPKO and Pfizer ( PFE ) received FDA approval for Ngenla. This removes one of the large risk items for the stock. Does the approval make the company a buy? Is Ngenla the savior that OPKO and investors have been waiting for? That is what we are going to look at a bit further today.

The Approval
OPKO and PFE received FDA approval for Ngenla (Somatrogon) on June 28, 2023 . It was a bit more of a process than originally hoped but in the end the company got the approvals that it needed. This is a big deal for the company. Not only is the US the biggest market for the drug and allows it to start profit sharing, but it also triggered a $90 million payment from PFE to OPKO. As a loss making company that milestone payment does wonders for the balance sheet of the company. It provides some more wiggle room for the company to continue to develop its pipeline. It also gets some breathing room as OPKO gross profit royalties start to ramp up. Under the agreement between OPKO and PFE, OPKO is set to receive gross profit sharing on Ngenla and Pfizer’s Genotropin.

While investors have been awaiting approval so they can start to see some profits flow from the drug, is it enough to bring the company and the stock from its current lows? The initial approval news drove the stock higher. The stock started to climb a bit before the approval as I think many were expecting it. It spiked on the news of FDA approval. This euphoria quickly wore off. You can see the spike and then decline in the chart below.

The stock reached a high of $2.17 a share following the approval at the end of June. It has since fallen 40% to $1.30 a share. That is a pretty rough price drop in three and a half months. It is the lowest the stock has been since March 2023. I am sure there was also some profit taking. Many took advantage of the price jump to take a quick gain and get out of the stock. Or longer term investors were happy to see some increase in the stock price and sold some of their position off.

This price drop is also a reality check from investors. The company had over $1 billion in revenue last year. Ngenla is in line to bring in revenue and profit for the company but how much and is it enough to move the needle on a company that size is part of the question.

Ngenla the savior?
Many investors, myself included, were very excited about the approval of Ngenla. As we should be since it will drive profits for the company. I think many investors got caught up in this excitement and bought the stock. Then they started to do a bit more research and digging and have decided that the company still has a lot of issues. While the approval is a big deal for the company, the drug is not going to save the company on its own. The company needs to see a lot of other areas of improvement before it can become profitable.

We can take a look at the revenue and potential from the drug approval and see what it looks like for OPK. The agreement with Pfizer states, “Upon the launch of hGH-CTP for Pediatric GHD (Ngenla), which is subject to regulatory approval, the royalties will transition to gross profit sharing for both hGH-CTP (Ngenla) and Pfizer’s Genotropin”. The company has stated that this royalty is a double digit royalty. From the latest quarterly earnings call: “OPKO will be entitled to a profit sharing arrangement with Pfizer on a worldwide basis, which is based on regional tiered gross profit on both NGENLA and Genotropin, Pfizer's daily human growth hormone.”

In 2022, Pfizer had sales of $360 million from Genotropin. This is down from $389 million in 2021. These sales have seen an increase in the first 6 months of 2023 as sales reached $222 million. That is an increase from $171 million in the first 6 months of 2022. Good for an almost 30% increase in sales. If we can assume that sales will continue at that same rate then Pfizer will see revenues of close to $450 million from Genotropin. This would be a pretty solid win for Pfizer in general, but we can operate off this assumption as there is no indication that sales will drop off in the second half of the year. Now we start to get into the assumptions. OPK will receive royalties on gross profit. Drugs usually have a very high gross profit, we will look at a range of 85%-95% gross profit. The other assumption is what is the double digit royalty that OPK is set to receive. We will use a range of 10% to 20%. The table below lays out the potential returns.

(millions USD)

                    High     Med     Low     High     Med     Low     High     Med     Low

Annual Sales $450 $450   $450    $450   $450   $450    $450   $450   $450

Gross Margin 95% 95%   95%    90%    90%     90%     85%    85%   85%

Gross Profit $428 $428 $428    $405    $405   $405     $383   $383 $383

Royalty        20%    15%   10%    20%    15%    10%     20%     15%    10%

Revenue     $86      $64     $43     $81     $61     $41      $77      $57     $38

There is a large range at play here. This largely depends on the royalty rate that the company is receiving. The company could be looking at $86 million on the high end to $38 million on the lowest end. There are a lot of factors here, from revenue, to gross profit, to royalty percentage. This gives us a general idea of where revenues might fall for OPK. The company will only be profit sharing for the month of September in Q3 so we will probably have to wait until the end of Q4 before we have much visibility into the revenues being received by OPK. The other good part here is that this will be almost entirely profit for the company. OPK is still winding down some of its clinical operations for Ngenla but hopes to wind that down by Q1 2024. At that point it will almost be entirely profit.

Taking these estimates we can see the effect they will have on the financials for OPK. The table below shows the revenue, expenses, and operating profit for the last three years.

(In millions)    2022        2021        2020

Revenue   $1,004.2     $1,774.7    $1,435.4

Total Costs

and Expenses $1,230.4 $1,756.0 $1,377.7

Operating

Income/(loss) -$226.20 $18.70 $57.70

The company had an operating loss of $226 million in 2022. Even with the highest estimate of $86 million the company would still be at a large operating loss. The company did have $87 million in amortization in 2022. When this is backed out the company is still not cash flow positive with the gross profit share from Ngenla. Now this is not taking into account any future growth in the sales of Ngenla. Going forward they could see growth in revenues but even if the sales were to double to almost $1 billion the company would still be at an operating loss in its current status.

So in short, Ngenla is a great positive for the company but it is not going to be the savior of the company, at least not on its own. It is good to see a win for the company but it needs more. The company needs to see other parts of the company become more efficient and profitable.

BioReference Lab
This large loss is mostly due to the operations of their lab unit. I discussed this operation more in depth in my last article . Basically it has turned into a massive loss making segment for the company. During COVID the unit was making a lot of money but also added a lot of costs. COVID testing all but stopped and the company still has a bloated cost structure and is now hemorrhaging money. The company has cut costs and is working to turn the segment around. We have another quarter of results since I last reviewed the company so I want to see if their turnaround is starting to come to fruition.

(In thousands USD)            Q2 2023         Q1 2023         2022         2021         2020

Revenue from Services       127,052         132,368        755,630     1,607,106   1,262,242

Cost of Services                113,028            114,061        627,548     1,102,172    823,899

Gross Margin                    11.0%                13.8%            17.0%        31.4%         34.7%

SG&A 52,617 52,576

Operating Income/(loss) -44,258 -40,007 -173,652 98,067 138,922

It does not look like the company has made much progress. In terms of revenue the company is looking at a decline in revenues in 2023 vs 2022. The gross margin has continued to decline. The SG&A also stayed consistent with Q1. I would have expected to see a decline in SG&A. If it was experiencing growth in revenues then the flat SG&A would not be as big of a deal as it would continue to become a smaller percentage of revenue. That is not the case though as revenues are not growing. The company did decrease SG&A by approximately $70 million through the first half of the year in 2023 vs 2022. Going from $170 million to $100 million is a significant decline. This is a positive, but seeing as they are still at a large operating loss I would expect that to continue to decline and not flatline. I personally have not seen the “turnaround” or “right sizing” of the labs business happening at a fast enough pace. The entity is trending for a slight decline in the operating loss but still a large loss for the year. This is the largest revenue driver and also loss maker for the company. The other segments are EBITDA positive. The labs business continues to drag the company down and the sooner it gets fixed the better.

Drug Pipeline
The other positive with the company, as with most biopharma companies, is the potential of the pipeline. While the company has received FDA approval for a few different drugs at this point, most have not panned out as expected. That is always the inherent risk with the industry. It is still too early to tell if their future pipeline will generate revenue or when, but there is a lot of potential with MDX-2201. It signed a license agreement with Merck to develop this drug. It followed a similar strategy as with Ngenla to partner and take it to market. The company has potential to receive some large milestone payments, up to $872 million, and also royalties on global sales. This is the biggest potential product in the pipeline. I covered this more in my last article and you can reference that for more information.

The key here for me is that there is a lot of potential revenue, but it costs to develop that pipeline. I would like the company to get to a positive cash flow position with its current business. The company should be able to achieve this with the license of Ngenla. Then it will be able to continue to advance its pipeline and achieve the potential without raising more money. While there is value in the pipeline I don’t want to see that value diluted.

Cash Position
The company is basically at the same cash position as it was last quarter. The company had approximately $110 million on the books to end Q1 and at the end of Q2 had $108 million in cash. It had a very large cash burn quarter, minus the $90 million payment for Ngenla. They in essence burned through benefits of the $90 million payment in one quarter. If the company continues at the current rate of cash burn it only has enough cash on the books for two or three more quarters. The company has received some very large milestone payments recently. Due to mismanagement of the company as a whole these have been burned through very quickly. This was a big waste for the company. These milestone payments should have provided the cash needed to continue to develop the pipeline and provide a buffer while the company starts to receive royalties.

I do think the cash flow position will improve. The company will start to see revenues from the royalties. These are almost straight profit to the company. I also expect the company to continue to cut costs. This combination will improve the cash flow for the company. My concern is that it is not happening fast enough. The company is not in a strong cash position, and it should be with the recent payments received.

The company needs to cut costs and do so fast, it also needs to see some growth within the labs business. The company does not have the benefit of large milestone payments upcoming, at least not anytime too soon. This means the company will have to better manage its cash flow to avoid raising more money or taking on more debt.

Risks
There are positives to OPK, but there are plenty of risks. The approval of Ngenla removes one of the big risks for the company. The company is still going to be a loss making company, despite the approval of Ngenla. The losses are coming from their lab business. The company is in the process of a turnaround in that business. It seems that the turnaround process still has a long way to go. These losses are burning through the cash position of the company. If it is not able to improve the profitability of the business within the next few quarters then it will need to raise more money or take on more debt.

The company has good potential in the pipeline. As with any drug in the development process, there is a lot of risk. Getting a drug through FDA approval is expensive and difficult to do. Also there is no guarantee that the drug will be a success even if it does get through the approval process. As can be seen with the company’s other drug approval, Rayaldee.

Conclusion
The company has finally received approval for Ngenla. This will start to bring in royalty revenues and will be a large boost on getting the company to profitability. It unfortunately will not be the savior for the company. Even with the royalties the company is still going to be losing money. It needs to turn around the losses within the labs business in order to get to profitability. This business has been losing a lot of money. While the company has started cutting costs and attempting to right size the ship it still has a long way to go.

The company still has plenty of potential. It has an approved drug in the market that will generate royalties. It has a strong potential pipeline. With the recent price drop it has a market cap of $1 billion. That is right in line with 2022 sales. The company is being valued conservatively as there are some risks for the company.

I rated the company a hold in May. I will keep that same rating on the stock. The company removed a large risk with the approval of Ngenla. The stock also has plenty of potential in its drug pipeline. The company has experienced a recent price drop as well. I want to see more of a turnaround in the Bioreference business and get a better idea on the future cash position of the business. The company is getting into a cash crunch quickly. I don’t want to get diluted or see the company take on more debt in the current high interest rate environment. Both options will eat at any potential return. This one is worth holding for the potential but a risk to buy due to the losses and cash concerns.

Last Edit: Oct 20, 2023 18:56:47 GMT by icemandios

luxetvox
Legendary

Posts: 1,494

SA Opinion 10/20/23 Oct 21, 2023 17:29:12 GMT sgard434 likes this

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Post by luxetvox on Oct 21, 2023 17:29:12 GMT

Sept 30, 2015 17:37:42 GMT icemandios said:

The agreement with Pfizer states, “Upon the launch of hGH-CTP for Pediatric GHD (Ngenla), which is subject to regulatory approval, the royalties will transition to gross profit sharing for both hGH-CTP (Ngenla) and Pfizer’s Genotropin”

I'm probably dense, but I must admit to having never understood what this means. If "royalties will transition to gross profit sharing," doesn't that at least imply that there were, at some point, royalties actually collected? But then, how could royalties have been collected on a product that hadn't yet been launched?.....at which point the royalties, which were never in effect, transition to gross profit share. Huh?

In fact, I really don't care what the arrangement was, nor what it is now. To use the overused, it simply is what it is. This author's model is a royalty on the gross profits. And he makes assumptions for top line, GP, and royalty %'s. But that's....not really gross profit SHARING. To me, that terminology implies that Opko would get a % of the gross profit number for Ngenla for a given quarter. But again, I don't care. In my opinion, and perhaps I'm in the minority here, I think Frost could have instructed Logal to make the flow of funds very clear to investors, precisely because such clarity would enable said investors to create a model. The reason I don't care is because I think we'll know soon enough. At some point over the next year, Mike Petusky will ask the obvious question: "Ok, Adam, Pfizer booked $100 million in revenue for Genotropin and Ngenla during the quarter. You're showing X for Revenue from these products. How was that number arrived at?" And then we MAY get an answer which spells out 1) PFE HGH revenues; 2) gross profit PFE made on those sales (which % might vary quarter to quarter); 3) what % of that gross profit gets allocated to Opko; OR 4) what royalty % Opko earned on that gross profit number.

Again, I probably have, as they say, a 'thick head', but I think it would satisfy both my OCD, and investor curiosity, if Opko management reduced this whole thing to an easy to follow flow chart. But I'm just a minority owner of the company. Maybe we should pose that question to Logal directly now, or through IR.

Another reason I don't care what this unnecessarily complicated jargon actually means is that the more important issue is how that top line figure , however it is determined, will flow through the income statement. The author implies further costs associated with remaining "clinical operations for Ngenla" over the next couple quarters. But at some point we should get a fairly clear look at how much of the HGH revenue falls to the net income line.
But let's continue with the author's model for a moment. Are you sitting down? I'm gonna put on my Mr Rogers face, and my Optimist Cowboy Hat and run a few numbers. Let's take the most optimistic scenario of $86 million in Opko top line revenue from the deal arrangement. This is an annual figure. My sunny side up muse tells me to double that, to $172 million. Now, let's assume that at some point "it will almost be entirely profit." So we'll allow for 80% net profit on that figure, which is $138 million in net income. Now, remember this may not occur for maybe 2-3 years (can PFE go from $450 million in annual HGH revenue to $900 million in that period?). Also, this assumes a 95% gross profit margin, AND a 20% royalty on that number (if that's the proper modeling). This rose-colored glasses bottom line of $138 million works out to be.....$0.18c/share. If $100 million of the profit goes toward R&D, now we're down to $0.05/share.

Now let's assume a $750 million sale of BRLI by that time (2-3 years). And if Frost saw the light and decided to clean up the cap structure a bit, That's a lot of $ to buy back shares. But here's where it gets very tricky. If during the 2-3 year period 1) the company has stemmed the BRLI losses, and even making net income from the lab, and 2) the HGH revenue stream now has a history and its profitability very transparent, the stock would presumably move up. But to what? Ok let's say $3.75. That's a big move from here but a) still lower than where it was in Jan '22, July '20, Sept '18 pre-SEC disaster. And IF Opko did a tender offer for 100 million shares at $4, they'd use half of the BRLI proceeds, but still have nearly 700 million shares outstanding.

So what does the company look like then? It's generating about $0.20/share from Ngenla ($137.6 million/new share count 673 million), has $350 million in cash ($0.52/share), and funding $100 million in R&D/year. Using the Ngenla profits to fund R&D reduces net income to 37.6/673, or a bit less than $0.06/share. At $3.75 the multiple would be off the charts, but at least the company has a bunch of cash, and is making a little net income after funding R&D.

A lot of assumptions but I think it's pretty easy to see how the decisions of Phil Frost have magnetized the stock price to very depressed levels. The still bloated cap structure, even assuming crazy revenues for Ngenla, weigh down the EPS. Then there are the losses from BRLI, the misguided purchase of which can also be laid at the feet of the CEO.

The numbers are daunting and do not bode well for a significant increase in the stock price. UNLESS, the CEO decides he's done enough damage, and engages Borisy and the BOD to hire a professional to try and clean up his mess, meaning sell BRLI asap (the $35-40 million bleed per quarter is precisely what is holding the stock down), and allow the researchers at ModeX the chance to create something big.

Last Edit: Oct 21, 2023 17:41:51 GMT by luxetvox

wsucougarbill
Full Member

Posts: 158

SA Opinion 10/20/23 Oct 21, 2023 18:44:18 GMT via mobile sgard434, icemandios, and 4 more like this

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Post by wsucougarbill on Oct 21, 2023 18:44:18 GMT

Oct 21, 2023 17:29:12 GMT luxetvox said:

Sept 30, 2015 17:37:42 GMT icemandios said:

The agreement with Pfizer states, “Upon the launch of hGH-CTP for Pediatric GHD (Ngenla), which is subject to regulatory approval, the royalties will transition to gross profit sharing for both hGH-CTP (Ngenla) and Pfizer’s Genotropin”

I'm probably dense, but I must admit to having never understood what this means. If "royalties will transition to gross profit sharing," doesn't that at least imply that there were, at some point, royalties actually collected? But then, how could royalties have been collected on a product that hadn't yet been launched?.....at which point the royalties, which were never in effect, transition to gross profit share. Huh?

In fact, I really don't care what the arrangement was, nor what it is now. To use the overused, it simply is what it is. This author's model is a royalty on the gross profits. And he makes assumptions for top line, GP, and royalty %'s. But that's....not really gross profit SHARING. To me, that terminology implies that Opko would get a % of the gross profit number for Ngenla for a given quarter. But again, I don't care. In my opinion, and perhaps I'm in the minority here, I think Frost could have instructed Logal to make the flow of funds very clear to investors, precisely because such clarity would enable said investors to create a model. The reason I don't care is because I think we'll know soon enough. At some point over the next year, Mike Petusky will ask the obvious question: "Ok, Adam, Pfizer booked $100 million in revenue for Genotropin and Ngenla during the quarter. You're showing X for Revenue from these products. How was that number arrived at?" And then we MAY get an answer which spells out 1) PFE HGH revenues; 2) gross profit PFE made on those sales (which % might vary quarter to quarter); 3) what % of that gross profit gets allocated to Opko; OR 4) what royalty % Opko earned on that gross profit number.

Again, I probably have, as they say, a 'thick head', but I think it would satisfy both my OCD, and investor curiosity, if Opko management reduced this whole thing to an easy to follow flow chart. But I'm just a minority owner of the company. Maybe we should pose that question to Logal directly now, or through IR.

Another reason I don't care what this unnecessarily complicated jargon actually means is that the more important issue is how that top line figure , however it is determined, will flow through the income statement. The author implies further costs associated with remaining "clinical operations for Ngenla" over the next couple quarters. But at some point we should get a fairly clear look at how much of the HGH revenue falls to the net income line.
But let's continue with the author's model for a moment. Are you sitting down? I'm gonna put on my Mr Rogers face, and my Optimist Cowboy Hat and run a few numbers. Let's take the most optimistic scenario of $86 million in Opko top line revenue from the deal arrangement. This is an annual figure. My sunny side up muse tells me to double that, to $172 million. Now, let's assume that at some point "it will almost be entirely profit." So we'll allow for 80% net profit on that figure, which is $138 million in net income. Now, remember this may not occur for maybe 2-3 years (can PFE go from $450 million in annual HGH revenue to $900 million in that period?). Also, this assumes a 95% gross profit margin, AND a 20% royalty on that number (if that's the proper modeling). This rose-colored glasses bottom line of $138 million works out to be.....$0.18c/share. If $100 million of the profit goes toward R&D, now we're down to $0.05/share.

Now let's assume a $750 million sale of BRLI by that time (2-3 years). And if Frost saw the light and decided to clean up the cap structure a bit, That's a lot of $ to buy back shares. But here's where it gets very tricky. If during the 2-3 year period 1) the company has stemmed the BRLI losses, and even making net income from the lab, and 2) the HGH revenue stream now has a history and its profitability very transparent, the stock would presumably move up. But to what? Ok let's say $3.75. That's a big move from here but a) still lower than where it was in Jan '22, July '20, Sept '18 pre-SEC disaster. And IF Opko did a tender offer for 100 million shares at $4, they'd use half of the BRLI proceeds, but still have nearly 700 million shares outstanding.

So what does the company look like then? It's generating about $0.20/share from Ngenla ($137.6 million/new share count 673 million), has $350 million in cash ($0.52/share), and funding $100 million in R&D/year. Using the Ngenla profits to fund R&D reduces net income to 37.6/673, or a bit less than $0.06/share. At $3.75 the multiple would be off the charts, but at least the company has a bunch of cash, and is making a little net income after funding R&D.

A lot of assumptions but I think it's pretty easy to see how the decisions of Phil Frost have magnetized the stock price to very depressed levels. The still bloated cap structure, even assuming crazy revenues for Ngenla, weigh down the EPS. Then there are the losses from BRLI, the misguided purchase of which can also be laid at the feet of the CEO.

The numbers are daunting and do not bode well for a significant increase in the stock price. UNLESS, the CEO decides he's done enough damage, and engages Borisy and the BOD to hire a professional to try and clean up his mess, meaning sell BRLI asap (the $35-40 million bleed per quarter is precisely what is holding the stock down), and allow the researchers at ModeX the chance to create something big.

Great synopsis of where we sit, however the SA author is only calculating revenues for sales of Genotropin. The current daily hGH market is fragmented because there’s no difference in the drugs.

The worldwide market in 2023 is expected to be $5b plus, we are the only company with worldwide approval (ex China). Pfizer has been preparing pediatricians for the availability of NGENLA for a year now. The uptake is going to be quick, and dramatic.

But it is all for nothing if we simply piss the money away supporting the money losing lab. Frost is arrogant, but he isn’t stupid. There is a very simple solution to all of these issues, and he is going choose it. Even if the more patient admirers on this board would be fine with another dilutive solution, the ModeX team won’t be.

lookingforatenbagger
Eternal

Posts: 3,567

OPKO Investment: Long
Sentiment: Neutral
Recommendation: Buy

SA Opinion 10/20/23 Oct 22, 2023 21:31:52 GMT icemandios, investobefree22, and 1 more like this

Quote

Post by lookingforatenbagger on Oct 22, 2023 21:31:52 GMT

Oct 21, 2023 18:44:18 GMT wsucougarbill said:

Oct 21, 2023 17:29:12 GMT luxetvox said:

I'm probably dense, but I must admit to having never understood what this means. If "royalties will transition to gross profit sharing," doesn't that at least imply that there were, at some point, royalties actually collected? But then, how could royalties have been collected on a product that hadn't yet been launched?.....at which point the royalties, which were never in effect, transition to gross profit share. Huh?

In fact, I really don't care what the arrangement was, nor what it is now. To use the overused, it simply is what it is. This author's model is a royalty on the gross profits. And he makes assumptions for top line, GP, and royalty %'s. But that's....not really gross profit SHARING. To me, that terminology implies that Opko would get a % of the gross profit number for Ngenla for a given quarter. But again, I don't care. In my opinion, and perhaps I'm in the minority here, I think Frost could have instructed Logal to make the flow of funds very clear to investors, precisely because such clarity would enable said investors to create a model. The reason I don't care is because I think we'll know soon enough. At some point over the next year, Mike Petusky will ask the obvious question: "Ok, Adam, Pfizer booked $100 million in revenue for Genotropin and Ngenla during the quarter. You're showing X for Revenue from these products. How was that number arrived at?" And then we MAY get an answer which spells out 1) PFE HGH revenues; 2) gross profit PFE made on those sales (which % might vary quarter to quarter); 3) what % of that gross profit gets allocated to Opko; OR 4) what royalty % Opko earned on that gross profit number.

Again, I probably have, as they say, a 'thick head', but I think it would satisfy both my OCD, and investor curiosity, if Opko management reduced this whole thing to an easy to follow flow chart. But I'm just a minority owner of the company. Maybe we should pose that question to Logal directly now, or through IR.

Another reason I don't care what this unnecessarily complicated jargon actually means is that the more important issue is how that top line figure , however it is determined, will flow through the income statement. The author implies further costs associated with remaining "clinical operations for Ngenla" over the next couple quarters. But at some point we should get a fairly clear look at how much of the HGH revenue falls to the net income line.
But let's continue with the author's model for a moment. Are you sitting down? I'm gonna put on my Mr Rogers face, and my Optimist Cowboy Hat and run a few numbers. Let's take the most optimistic scenario of $86 million in Opko top line revenue from the deal arrangement. This is an annual figure. My sunny side up muse tells me to double that, to $172 million. Now, let's assume that at some point "it will almost be entirely profit." So we'll allow for 80% net profit on that figure, which is $138 million in net income. Now, remember this may not occur for maybe 2-3 years (can PFE go from $450 million in annual HGH revenue to $900 million in that period?). Also, this assumes a 95% gross profit margin, AND a 20% royalty on that number (if that's the proper modeling). This rose-colored glasses bottom line of $138 million works out to be.....$0.18c/share. If $100 million of the profit goes toward R&D, now we're down to $0.05/share.

Now let's assume a $750 million sale of BRLI by that time (2-3 years). And if Frost saw the light and decided to clean up the cap structure a bit, That's a lot of $ to buy back shares. But here's where it gets very tricky. If during the 2-3 year period 1) the company has stemmed the BRLI losses, and even making net income from the lab, and 2) the HGH revenue stream now has a history and its profitability very transparent, the stock would presumably move up. But to what? Ok let's say $3.75. That's a big move from here but a) still lower than where it was in Jan '22, July '20, Sept '18 pre-SEC disaster. And IF Opko did a tender offer for 100 million shares at $4, they'd use half of the BRLI proceeds, but still have nearly 700 million shares outstanding.

So what does the company look like then? It's generating about $0.20/share from Ngenla ($137.6 million/new share count 673 million), has $350 million in cash ($0.52/share), and funding $100 million in R&D/year. Using the Ngenla profits to fund R&D reduces net income to 37.6/673, or a bit less than $0.06/share. At $3.75 the multiple would be off the charts, but at least the company has a bunch of cash, and is making a little net income after funding R&D.

A lot of assumptions but I think it's pretty easy to see how the decisions of Phil Frost have magnetized the stock price to very depressed levels. The still bloated cap structure, even assuming crazy revenues for Ngenla, weigh down the EPS. Then there are the losses from BRLI, the misguided purchase of which can also be laid at the feet of the CEO.

The numbers are daunting and do not bode well for a significant increase in the stock price. UNLESS, the CEO decides he's done enough damage, and engages Borisy and the BOD to hire a professional to try and clean up his mess, meaning sell BRLI asap (the $35-40 million bleed per quarter is precisely what is holding the stock down), and allow the researchers at ModeX the chance to create something big.

Great synopsis of where we sit, however the SA author is only calculating revenues for sales of Genotropin. The current daily hGH market is fragmented because there’s no difference in the drugs.

The worldwide market in 2023 is expected to be $5b plus, we are the only company with worldwide approval (ex China). Pfizer has been preparing pediatricians for the availability of NGENLA for a year now. The uptake is going to be quick, and dramatic.

But it is all for nothing if we simply piss the money away supporting the money losing lab. Frost is arrogant, but he isn’t stupid. There is a very simple solution to all of these issues, and he is going choose it. Even if the more patient admirers on this board would be fine with another dilutive solution, the ModeX team won’t be.

I have little to add to the above, but I wanted to remind everyone of the following: In one of the CCs we were told OPKO had reclassified $590M of IPR&D related to Somatrogon to intangible assets. According to the 10Q. the $590M is being amortized in a straight line over 12-years Let's call it $50M/year, or $12.5M/quarter. Leaving $25M/year falling to the bottom line or ~$0.035 per share/quarter. This paper loss has been counted for every quarter this year. 1 down and 12 to go.

One of the things we all agree on is BRL needs to be sold. It needs to be sold even if it becomes profitable.

Last Edit: Oct 22, 2023 23:54:03 GMT by lookingforatenbagger

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icemandios
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SA Opinion 10/20/23 Oct 23, 2023 2:09:39 GMT

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Post by icemandios on Oct 23, 2023 2:09:39 GMT

Jan 22, 2016 18:48:03 GMT lookingforatenbagger said:

One of the things we all agree on is BRL needs to be sold. It needs to be sold even if it becomes profitable.

Well, aside from the dirty dealings under the original owners that, IMO, a highly paid legal beagle like Rubin should have squashed, the whole C-Suite was made to be certain the Scandemic would be the End of the World. You can thank .gov, and their loyal minions in the press for that view.

So the number 3 largest lab is maybe somewhat akin to the number 3....whatever analogy you wish. Whether sports teams or anything in competition, nobody cares about #3 and remembers #2 only as vying for #1. Further, if something is #3 after a number of years, what are the chances it will be #2, let alone, #1?

Seems we do have an accord on that topic.

The big Q is, do they have anything that number 2 doesn't have, and does anybody care.

wsucougarbill
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Posts: 158

SA Opinion 10/20/23 Oct 23, 2023 2:46:51 GMT via mobile sgard434, icemandios, and 1 more like this

Quote

Post by wsucougarbill on Oct 23, 2023 2:46:51 GMT

Oct 23, 2023 2:09:39 GMT icemandios said:

Jan 22, 2016 18:48:03 GMT lookingforatenbagger said:

One of the things we all agree on is BRL needs to be sold. It needs to be sold even if it becomes profitable.

Well, aside from the dirty dealings under the original owners that, IMO, a highly paid legal beagle like Rubin should have squashed, the whole C-Suite was made to be certain the Scandemic would be the End of the World. You can thank .gov, and their loyal minions in the press for that view.

So the number 3 largest lab is maybe somewhat akin to the number 3....whatever analogy you wish. Whether sports teams or anything in competition, nobody cares about #3 and remembers #2 only as vying for #1. Further, if something is #3 after a number of years, what are the chances it will be #2, let alone, #1?

Seems we do have an accord on that topic.

The big Q is, do they have anything that number 2 doesn't have, and does anybody care.

We have something that numbers 1 and 2 both want, $500m in revenue. In their hands they will turn that $ into profit, due mostly to scale. We are also a bit of a unicorn, because lab #4 is much smaller than us. That should make both of the bigger labs want to take their best shot since once we are gone they are forced to battle tooth and nail trying to find and win business from each other.

BTW I highly doubt either of them have any interest in the highly touted 4K score.

I don’t believe Frost has much runway here. He is burning through every nickel that ModeX has generated in upfront milestones. I haven’t read the entire merger agreement, but those guys are smart enough to have an anti dilution provision. On top of that there is zero chance that this is what they signed up for.

There is ZERO reason to keep the lab, and about 500 million reasons not to. Another BTW, at this point our purchase price for BRLI is about $130m, selling for $500m seems like a bargain.

opkfrostfan Supreme Member Posts: 690 Sept 30, 2015 17:48:29 GMT	SA Opinion 10/20/23 Oct 23, 2023 11:08:50 GMT icemandios likes this Quote Select Post Deselect Post Link to Post Member Give Gift Back to Top Post by opkfrostfan on Oct 23, 2023 11:08:50 GMT Had interest rates not exploded BRL would have been a perfect Private Equity acquisition. Given current rates their interest is likely sub $500M.

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