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Sian Capital Highlights Paths to Meaningful Value Creation at OPKO Health

Sian Capital, LLC
·8 min read

Issues Presentation Outlining Viable Paths to Unlocking OPKO’s Intrinsic Value, Which is ~3x the Company’s Current Market Capitalization Based on its Diagnostic and Pharmaceutical Assets

Releases Letter to OPKO Demanding Books and Records After Amassing Serious Concerns About Boardroom Conflicts and the Company’s Ability to Objectively Assess Alternatives

Underscores that Sian has the Ability to take Appropriate Action in Accordance with Delaware Law, Which Offers Specific Protections from Conflicted Boards and Controlling Stockholders as Outlined in our Presentation

NEW YORK, Oct. 29, 2020 (GLOBE NEWSWIRE) -- Sian Capital, LLC (together with its affiliates, “Sian” or “we”), a sizable stockholder with beneficial ownership of approximately 3% of OPKO Health, Inc.'s (NASDAQ: OPK) (“OPKO” or the “Company”) outstanding common stock, today released a detailed presentation outlining viable paths to unlocking the Company’s tremendous upside potential following years of significant underperformance and value destruction. In addition, Sian released a demand letter that it has sent OPKO pursuant to Delaware Law. These materials are available at https://siancapital.com/resources/.

Anish Monga, Sian’s Managing Partner and Portfolio Manager, commented:

“OPKO’s stockholders have been forced to endure billions of dollars in losses due to, in our view, leadership’s missteps, poor communication and self-interested decisions. Rather than take prompt steps to increase stockholder value, we contend that Chairman and Chief Executive Officer Dr. Phillip Frost and the Company’s leadership team have ignored high-potential opportunities in the marketplace and demonstrated an inability to unlock the true value of the Company’s prized assets. In addition, we believe Dr. Frost and his associates have given disinterested stockholders cause for significant concern by filing for approval under the Hart–Scott–Rodino Antitrust Improvements Act to increase their ownership to more than 50% and by purchasing stock (at all-time lows) frequently from January through June. It is time for OPKO’s leadership to honor its fiduciary duties and quickly move to deliver the value that long-suffering investors deserve.

“Sian has spent months conducting industry research, holding conversations with ex-employees and consultants, and engaging with potential acquirers for OPKO’s presently undervalued assets. We have provided OPKO with a roadmap for success and tried to sustain a productive dialogue. It is time for a viable, value-enhancing roadmap to be implemented at OPKO.”

A summary of Sian’s detailed presentation is as follows:

We believe BioReference (“BRL”) is worth $3 billion to $6 billion given its true annual earnings power is between $300 million and $400 million.

  • COVID-19 and serology testing revenue in 3Q’20 will be over $200 million while BRL’s base business has recovered more rapidly than Quest and LabCorp.

  • BRL’s 4Q COVID-19 revenue will increase >20% to >$250 million.

    • BRL’s base business will grow ~10-15% for the foreseeable future. GeneDx, Oncology and Women’s Health are the three fastest growing divisions in the industry, which comprise 40% of BRL’s business growing an average of 15%. If the remainder of the business grows just half of that, 10%-15% is highly achievable.

    • BRL has significantly increased insurance coverage, recently becoming one of just five labs, and one of just three national labs with scale, to be selected for United Healthcare’s Network. BRL also recently won the in-network contract for Humana and Blue Cross Blue Shield in Texas.

      • Quest has named a similar opportunity as $4 billion total available market of which they assume 25% share, anticipating $1 billion growth in revenue. If BRL achieved just half of that, this would unlock an additional $500 million in revenue (more than 50% of BRL’s entire revenue base in 2019).

      • BRL has signed multi-year significant strategic partnerships with, among others, Pediatrix Medical Group, Inc., a 2,200 nationwide physician network, Westchester Medical Center’s 10 hospital network that conducts over 7 million tests on a yearly basis, exclusive partnerships with the NFL, NBA and MLS, as well as government contracts with the Centers for Disease Control and Prevention to test weekly all 950 schools in New York City and to test all 50,000 NY MTA employees on a weekly basis.

      • Last quarter BRL’s profit margins were ~10% against Quest and LabCorp reporting ~27% profit margins. If BRL only made up half of that difference, BRL’s annualized EBITDA would be >$400 million a year.

  • Somatrogon, OPKO’s hGH crown jewel is worth north of $2 billion. Pfizer paid OPKO ~$600 million upfront for OPKO to complete clinical trials across the world (over 24 trials in 83 countries) from 2017-2019 and Pfizer announced just a few weeks ago that the trial has passed Phase 3. Pfizer also discussed Somatrogon’s 2021 launch on a recent earnings call. OPKO is owed ~20% royalties on both of Pfizer’s currently selling $500 million hGH drug, as well as on sales of Somatrogon and an additional $275 million in milestones. We estimate this will produce an annual profit stream of ~$200 million.

    • Somatrogon’s only competitor, Ascendis, has no commercial partner, little to no revenue and has never successfully commercialized a drug. Further, due to Somatrogon’s orphan drug status, it is afforded regulatory protections in the U.S. and Europe for 7-12 years, effectively making it among the most consistent drugs in the industry with scarcity value due to the dearth of 9-figure royalty drugs in the market.

      • $2 billion is extraordinarily conservative: Ascendis, trades at a market capitalization of $8.5 billion = ~3 times the entire value of OPKO.

    • We believe many royalty partners would pay OPKO >$1 billion TODAY, for the rights to just a portion of the Somatrogon royalty stream because we are in an environment starved for yield with interest rates at all-time lows and the scarcity value of the asset, its regulatory protections and top-grade commercial partner in Pfizer makes Somatrogon among the highest quality royalty assets in the market.

Today on OPKO’s earnings call, investors and sell-side analysts will have the ability to ask management important questions. We believe if investors ask these questions and read through our presentation, they will have little trouble in understanding the staggering disconnect between OPKO’s current trading value and its current market value:

Do you believe Somatrogon can produce a 9-figure royalty stream, and given OPKO is not getting anywhere near the true value for the asset today, would you consider selling some of the royalty, which would bring in near-term cash to be used to purchase undervalued shares back, a dividend or other accretive uses? If so, do you believe there is interest for these assets?

1) BioReference’s margins are less than half that of Quest and LabCorp. Is there an opportunity to close that margin gap at least partway, or is 10% the maximum BioReference can produce?

2) Dr. Jon R. Cohen, CEO of BioReference, has described the COVID-19 “halo effect” which has helped grow the BRL base customer business, in turn increasing the base business growth rate. Is this still the case?

3) Rayaldee is already a royalty stream, licensed to Vifor Pharma in Europe and JT in Japan, however OPKO has an 89-person sales force1 to sell Rayaldee in the U.S., which is subscale. We believe management should consider also licensing the current use of Rayaldee in the U.S., thereby incurring $75 million in cost savings while still receiving a rapidly growing royalty stream. Is management open to considering additional usage licenses of Rayaldee in the U.S.?

4) Is management confident in the prospects of success for Rayaldee’s trial as a treatment of COVID-19 for mild to moderate symptoms with two primary endpoints?

  1. Rayaldee has been fast tracked for approval for treatment of COVID-19 for mild to moderate symptoms with two primary endpoints. One endpoint was reached already in its Phase IV trial. OPKO has done a poor job of marketing this fact, allowing unproven, reckless drugs like anti-malaria tablets to be touted by the President and others as a treatment, but it's little known that OPKO is sitting on a >$1 billion opportunity that could save countless lives.2

  2. We trust should investors ask management’s belief in the prospects of success for the trial, they will be encouraged by the answer, and magnitude of the opportunity.

We believe if investors ask these questions on today’s earnings call, it will become quickly clear why there is such a staggering disconnect between OPKO’s market price and its intrinsic value.

We expect management to cite the inflection and tailwinds in their business, but should any investors remain unsatisfied, we will be hosting a conference call to be announced after the earnings release.

About Sian Capital

Founded by veteran portfolio manager Anish Monga, Sian Capital, LLC is a New York-based asset management firm that employs a focused, event-driven investment approach. Sian’s unique mix of cross-sector experience and activism expertise enables it to identify and invest in what are often overlooked or under-covered investment opportunities.

Contacts

Profile
Greg Marose / Charlotte Kiaie
gmarose@profileadvisors.com / ckiaie@profileadvisors.com

_______________
1 As disclosed in OPKO’s recent 10-K filing.
2 https://medium.com/microbial-instincts/the-first-clinical-trial-to-support-vitamin-d-therapy-for-covid-19-906a9d907468