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Opko Looking Up

By Jim Pearce on September 26, 2016

The future is uncertain as the presidential election season heads into high gear. But it’s not a time to panic. Instead, it’s a time to focus on individual positions and opportunities, and to manage risk. With this in mind I am paying attention to both the markets as well as company-related events, and focusing on what’s working.

As the old Wall Street adage notes, increased volatility means it has become a market of stocks more than a stock market, where indexes rule. Specifically, this week I am discussing two worthwhile individual situations; the recent bullish action in the shares of Opko Health while expanding my recent recommendation of Amgen October Call options.

Opko Health Rallies on Heavy Insider Buying

I am increasing the buy limit on Opko Health (NYSE: OPK), to $12, a stock that I initially recommended on February 16, 2016 at $8.  As of the close on 9/24/16 the stock was up 40% from the initial entry point.

Shares of Opko, a healthcare company with emphasis on products aimed at treating chronic renal disease, hormonal imbalances and laboratory testing, have been rallying of late behind the intense buying of its CEO. According to recent SEC filings, Opko CEO Dr. Philip Frost bought 154,600 shares of the company – worth $1,459,928 – from August 19 to September 19. Over that period the shares appreciated more than 13%, in part due to Frost’s purchases driving up demand for them. Frost’s buying is significant as he has an excellent track record of building companies and selling them for a profit.  Before Opko, he built Ivax into a generic drug manufacturing powerhouse which he eventually sold for $7 billion.

What makes the CEO’s aggressive buying most interesting is that it coincides with Opko’s finalizing the purchase of tiny Canadian biotech company Transition Therapeutics for $60 million. Transition is in the late stages of developing a weight loss and diabetes management drug, TT401. The drug has delivered excellent Phase II trial results and is moving onto Phase III. Transition was developing TT401 along with Eli Lilly, but Lilly opted out of further involvement leaving Transition in need of a partner. Opko may have gotten a nice little bargain. Even more interesting is Transition’s other drug, TT701, a modulator of testosterone receptors which has been shown to increase muscle mass and increase energy levels in Phase II trials involving men. Early indications suggest that both drugs could get fairly easy FDA approval when they are fully tested, although it’s not guaranteed.

Both drugs are in excellent niches, because two of the most common complaints I hear from patients are that they can’t lose weight and that they have no energy. It may well work out that the testosterone modulator could be an even bigger blockbuster than the diabetes drug given the rise of “low-T” advertising as well as clinical evidence of the potential benefits of testosterone replacement therapy in men above age 50. Perhaps the most appealing side of TT701 is that even if insurance companies won’t pay for the medication, it is likely that men looking to boost their testosterone levels will pay out of pocket for the drug, which would guarantee an income stream for Opko outside of the increasingly restrictive insurance controlled system.

Opko has been on a winning streak of late with some of its other medications and acquisitions. The recent purchase of Bio-Reference Laboratories should provide instant credibility for the company through its $900 million worth of yearly revenue along with positive earnings. Even more good news is the early September FDA approval of Opko’s anti-nausea drug VARUBI (rolapitant) for use with other anti-nausea and vomiting medications to treat chemotherapy induced symptoms. This will translate into a $121 million dollar milestone payment for Opko as well as double-digit royalties on sales of VARUBI (rolapitant). 

Buy Opko Health (NYSE: OPK) up to $12.

Buy Amgen Options Now, and Watch the Stock Over the Long Term.

I recommended the purchase of the Amgen October 21, 2016 175 Call option in a Flash Alert based on a seasonal tendency of the company’s shares to rise during the month that precedes the release of earnings that are due out on October 26, and I want to flesh out the story a bit further. This is a very short-term trade, but I believe that over time Amgen may be a canary in the proverbial coal mine, which is worth watching carefully.

Amgen (Nasdaq: AMGN) is the world’s largest biotech company, and what it says and does tends to influence the whole sector. This is particularly important in the current period of time when pricing pressures on medications are threatening to squeeze profits of pharmaceutical companies and leading to a whirlwind of activity surrounding generic biotech drugs, also known as “biosimilars.”

After the close on Friday, September 23rd, the day I recommended the options, news quietly broke that the FDA approved Amgen’s biosimilar Amjevita which is aimed at AbbVie’s arthritis blockbuster Humira, the second largest grossing drug of the year. This is an important event because it’s only the fourth biosimilar (generic biotech drug) that the FDA has approved, although generic biotech drugs are common in Europe. And while Amjevita could be a significant addition to Amgen’s revenue base, the drug is part of a much larger set of circumstances as AbbVie is suing Amgen for patent infringement on the drug. Where things become less tangled is that if Amgen prevails in court, the drug may be good enough to make up some of the potential losses from Amgen’s loss of its own arthritis fighting blockbuster Enbrel to Novartis, which has garnered FDA approval for its own version of Enbrel, and which Amgen is litigating via the patent infringement statutes.

What’s important to realize, over the long term, is that Amgen is the standard-bearer for what happens to big biotech companies over the next few years. It has as much to gain as it has to lose as biosimilars increase their presence on the market and the outcome of its battles in the biosimilar legal war zone is likely to have a great deal of influence on the overall outcome of this emerging dynamic in biotech. 

Why not own shares of Amgen outright? For one thing, the stock is expensive on a per share basis trading at $175 as of the close on 9/23/16. The option is much less expensive and gives the owner the right to buy the shares at the strike price before expiration.  But that’s more of a long term decision which is of lower priority at the moment. For now, by owning this option we can participate in a potentially lucrative short term situation with less risk than by owning shares in a high-priced stock.  If Amgen shares fall significantly, I expect to eventually establish a longer term position via ownership of the stock.

Buy Amgen October 21, 2016 175 Call Option (AMGN_102116C175) up to $4.

Portfolio Summary

Changes this week

Opko Health Inc. (OPK) – Buy up to $12. Bought on 2/1/16 at $8. Closing price on 9/23/16 was $11.22.  Sell Stop at $9Dr. Duarte owns shares in OPK.

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