We Got It Wrong With OPKO Health -- Now What?

In our "These Legendary CEO's Could Catch Lightning in a Bottle – Again" episode, Motley Fool Industry Focus: Healthcare contributor Todd Campbell picked OOKO Health (NASDAQ: OPK) as a stock to buy. Since then, setbacks, including a disappointing phase 3 trial failure in December, have sent shares reeling to 52-week lows. Can OPKO Health get back in the winner's circle?

In this clip from the Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes sits down with Todd to discuss what's gone wrong at OPKO Health, and what the future may have in store for its investors.

A full transcript follows the video.

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This video was recorded on Aug. 23, 2017.

Kristine Harjes: Todd, I'm going to take myself out of the mistakes spotlight and pivot over to you. In our July 27, 2016, show, we talked about CEOs that were enormously successful in one business venture who were back at it trying to catch lightning in a bottle again. We featured Tesaro (NASDAQ: TSRO), NantKwest, Puma Biotech, and OPKO Health. And in an effort to put you on the spot, or give our readers a tidy conclusion, I asked you to pick your favorite. Here's a refresher of what you said:

(Harjes): We've talked about four different companies today -- Tesaro, NantKwest, OPKO, and Puma. If you could only buy one of them, which would it be?

(Todd Campbell): That's a great question. I'm going to have to go with Phillip Frost and OPKO Health, mainly because we have a pathway to profitability on that one. We know that they've got drugs that are already approved, we know that they're doing a lot of business in their lab business right now, and we have a pretty good idea that they're going to be able to translate that into shareholder profit in a relatively short period of time. So that would be the one that I would focus on if I were an investor today.

Harjes: Any thoughts on that?

Campbell: I could have picked Tesaro's Lonnie Moulder. Tesaro got an approval for their PARP inhibitor, and sure enough, its shares have gone from $95 to a high of $180 and still trading around $120. That would have worked. I could have picked Puma. It got its approval of Nerlynx recently, and its shares have gone from $49 to $80. But no, [laughs] I settled with the safe play, going with Phillip Frost, OPKO Health. And sure enough, its shares have been flushed down the toilet bowl, falling from $10 to about $6, which is even more painful when you think about the fact that this has been one of the strongest periods for market returns in recent memory.

Harjes: So. [laughs] What did you learn from this?

Campbell: There were reasons that I sided with and picked Phillip Frost. Phillip Frost is a proven leader. And I love investing in companies with proven leaders. Rome wasn't built in a day. Phillip Frost has been starting, successfully, running companies, and then selling them since the 1970s, and he's one of the wealthiest healthcare entrepreneurs in America. So I think sidling up next to him was not necessarily a mistake long-term, but certainly a mistake short-term. And I think the short-term mistake I made was to fail to understand how much shares could fall if a couple of key catalysts were either slow to develop or outright disappointed. Do you me want to walk through those catalysts, Kristine?

Harjes: Yeah, there's been a handful of them over the last year or so since we talked about this. Do you want to start with maybe the slow launch of Rayaldee?

Campbell: Yeah. Rayaldee is a very intriguing drug, because it's a prohormone for vitamin D that works better than existing vitamin D supplements that are given to patients with chronic kidney disease, that suffer from vitamin D insufficiency. Vitamin D insufficiency can cause calcium loss in bones, bone weakness, and all sorts of other problems. So it's an important indication; it's important to have treatment options available for it. The problem is, after Rayaldee launched, it did not have widespread early on inclusion in drug formularies at insurers. So the patient population that was covered by insurers that would pay for these drugs was pretty small, and sales, frankly, have been a rounding error and aren't even broken out in OPKO Health's quarterly results yet. Perhaps, according to Phillip Frost in the second-quarter conference call, they'll start to break those numbers out for us in the fourth quarter of this year. And there's opportunities there theoretically for Rayaldee to finally deliver on its promise.

But Rayaldee wasn't the only disappointment. You also had Varubi, which is a drug that's approved for use in patients who are suffering from vomiting and nausea after receiving chemotherapy. That's a very important market. It's worth hundreds of millions of dollars a year, and Varubi is licensed by Tesaro, which is Lonnie Moulder's company. So far, sales have been slow to grow. Sales in the second quarter were only about $2.9 million, and with OPKO collecting double-digit royalties, again, a rounding error considering that the company is doing $300 million roughly in quarterly revenue because of its diagnostics business.

Harjes: And that wasn't even the only disappointment.

Campbell: Yeah. They also came up shy in a very important trial that was evaluating the long-lasting human growth hormone treatment in adults. They have a drug that's partnered up with Pfizer. A lot of people thought that if this drug reached the market and eventually got approved for use in kids, pediatric use, then this could be a big moneymaker for OPKO Health. Unfortunately, in December, they announced that the trial missed its mark. They haven't given up on the drug, but that trial was a failure. So overall, you have this confluence of disappointments over the course of the last 12 months that has really taken a toll on the company's stock price. You add that together with the fact that sales in the diagnostic business, which is basically the specialty lab that they run, have pretty much flatlined at around $300 million, a little over $300 million, there hasn't been a lot of excitement or enthusiasm to drive up the market cap of this company.

Harjes: So, clearly, it's been a disappointing year for OPKO shareholders. Where do you stand now going forward on it, Todd? Do you think it's, "Looking back on it, I was wrong, this is a terrible company, investors should stay far away from it," or do you think that now, at the lower share price, there might be an even better opportunity for investors to scoop up some shares at a discounted price, because now, going forward, is where the real promise is? Or something in between the two?

Campbell: There's a couple different takeaways I guess I have on this whole thing. I think, yes, you stick with proven leaders, and yes, there's a lot of opportunity still ahead for OPKO. I don't like buying drug-development stocks on sale as using the value argument only because, as we saw last year, a lot can happen with clinical trials. You can say, "There's all sorts of opportunities still in the pipeline," which there is, drugs that could rack up lots of sales for this company over time. But those trials could fail. You have to take a look at it and say, "I'm not going to buy it solely because it's cheap relative to where it was last year. Things happened that the outlook now has changed."

But I think you can look at it and say, Rayaldee could still deliver on the goods. We'll know better early next year what the sales trend, the prescription trend is for that. Varubi, which again is marketed by Tesaro, there's a PDUFA date at the FDA that could approve an IV formulation. If that formulation gets approved, that opens up the vast majority of the marketplace for this type or this class of drugs. That, theoretically, could start meaningfully generating revenue in 2018. And there's a pediatric study ongoing in human growth hormone still that reads out in 2019. If that trial is good, then Pfizer and OPKO will split the profits on both OPKO's drug and Pfizer's existing drug in that indication, Genotropin, which is selling at a clip of over $100 million per quarter. So there's still reasons besides value that you'd want to own OPKO Health. And certainly, Phillip Frost remains incredibly committed as a shareholder in this company. He continues and has continued to increase the number of shares he owns over the past year, even in the face of all these disappointments.

Harjes: Some of the dates that you mentioned when you were running down your list of catalysts going forward are pretty far in the future. That speaks to me about a bigger problem with investing in biotech, which is opportunity cost. Many of the stocks that look interesting today are likely to take a long time before they prove out. Something that regular listeners of the show have heard us talk about before is keeping an investing journal. That's so important, so I'm going to say it again -- keep an investing journal, specifically to combat this type of mistake, or looking at the mistake incorrectly when maybe it wasn't quite a mistake yet, is to write down exactly the dates that you're looking for. So the PDUFA dates, when the FDA might approve a drug, or a forecast for when you think a company is finally going to turn profitable, things like that where, if it's a date that's relevant to your investment thesis, you want to have it written down in front of you, so that when that date comes and goes you can reevaluate your thinking and figure out if, indeed, you were right.

If, for example, your investing thesis for OPKO had something to do with a PDUFA date that's years and years out, you want to know that and you want to be very aware of it for several reasons, one of which is that, maybe it's not really the time to invest just yet. Maybe there are better places for your money now where you can get more validation sooner that you actually are placing your money in the proper place. Of course, we are long-term investors here at The Fool, but in the short term, if you're going to look at a company that is declining over the course of one year and think, "Oh my gosh, I was wrong, I need to exit," but you're still waiting for a catalyst that's years in the future, then you're going to end up cutting yourself short, and you'll never even see the potential gains that you were hoping to get in the very beginning.

Campbell: That's a great point, Kristine. I'm going to throw another point out there, too. We've talked about on the show previously, especially in biotech, diversify, diversify, diversify. I selected one stock out of these four --

Harjes: To be fair, I made you do that.

Campbell: Yeah. Well, that exposed us to a lot more risk. If we had just invested across all four of them, you would have done very well, because of the success that we saw with Puma and Tesaro. So, I think diversification is always something that's very important across this space. Never put all your eggs in one basket hoping that you're going to hit a home run.

Harjes: Yeah. And it's important not to beat yourself up too much about single mistakes, because overall, if you're right 50% of the time, you're a really, really good stock picker.

Campbell: Very good stock picker, and you'd be a great baseball player.

Harjes: Yeah, exactly! So, Todd, I'm not going to beat you up too much about the OPKO mistake, and I'll try not to beat myself up too much about getting the Rite Aid-Walgreens merger information predicted incorrectly. And that'll do it. Hopefully we can learn from these mistakes and move forward and be right at least 50% of the time, hopefully more!

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.