Last month, activist investor Sian Capital LLC’s Anish Monga launched a public campaign to push diagnostics and drug company Opko Health Inc. (OPK) to launch a “credible strategic review.”
In an Oct. 28 presentation, Monga said Opko should consider a sale of the whole business, its diagnostic business, a take-private deal, or a sale of its royalties business for its weekly dose human growth hormone drug Somatrogon.
“The crown jewel is Opko’s growth hormone drug,” Monga told The Deal. “It is guaranteed $300 million to $400 million a year in profits. Any of the royalty drug companies would be interested.”
Maury Raycroft, analyst at Jefferies, said drug royalty companies such as Royalty Pharma (RPRX), DRI Capital and HealthCare Royalty Partners LP, could be interested in buying the hormone drug business. In 2014, Opko reached a deal with Pfizer Inc. (PFE) for the development and commercialization of Opko’s growth hormone drug, which includes royalties and profit sharing payments to Opko.
He estimates that Pfizer could pay a peak of $720 million to Opko in royalty payments in 2028 for the drug.
Monga estimates that a royalty company could pay between $2 billion and $3 billion to buy the hormone drug. Raycroft said a hormone business could be worth several billion dollars assuming a peak payment of $720 million in 2028.
Sources familiar with the situation noted that Blackstone Group (BX), could be interested in Opko’s growth hormone royalty business, as well. In April, Blackstone acquired 50% of the royalties owed to Alnylam Pharmaceuticals Inc. on its global sales of investigational RNAi therapeutic medicine inclisiran. Blackstone declined comment.
According to sources, Opko has had recent in-person meetings with at least two royalty pharmaceutical companies.
In addition, Monga added that the other large diagnostics companies, including Quest Diagnostics Inc. (DGX), Laboratory Corp. of America Holdings (LH) or Australia’s Sonic Healthcare (SHL) could be attracted to Opko’s diagnostic business BioReference.
According to Sian, BioReference has a 9% to 10% marketshare in a “rapidly consolidating industry.” Monga also noted that a PE firm like TPG Capital LP could be interested.
Raycroft said he thought that the large diagnostics businesses could be interested in BioReference. He noted that Quest, LabCorp and BioReference are the three largest clinical diagnostic companies in the U.S. “I’m not sure if antitrust issues could emerge with a combination of BioReference and one of the other big diagnostics companies,” he said. “It is a fragmented industry and there is differentiation, but these companies have a lot of overlap too.”
Another possibility is separating Opko’s pharmaceutical business from its diagnostic operation.
Opko executive VP and director Steven Rubin, told an HC Wainwright & Co. analyst conference on Nov. 12 that Opko and its board explore the possibility of separating the pharmaceuticals business from the diagnostic unit, “fairly regularly.”
“The short answer is yes. We’ve explored that ourselves for a variety of different reasons. There are different margins, different markets and different analysts,” Rubin said. “At the right time we may in fact do that. There are a lot of alternatives for that.”
However, Rubin added that diagnostics and pharmaceuticals divisions have had a “very good symbiotic relationship.” Nevertheless, he added that Opko’s pharmaceuticals group can “fund itself through R&D and its own commercial viability.”
It is unclear what options Sian’s Monga has if he wants to escalate his insurgency and push further for M&A. A key obstacle for any pressure campaign involves ownership stakes controlled by CEO Phillip Frost and Chief Technology Officer Jane Hsiao, who own about 36% and 6% respectively. Frost, age 84, launched Ivax Corp., which he sold to Teva Pharmaceutical (TEVA) in 2005 for $7.4 billion. According to relationship mapping service BoardEx, Frost was Teva board chairman between 2010 and 2014.
Sian Capital, based in New York, set up a special purpose investment vehicle, which acquired a 3% stake in Opko.
The insider ownership makes it difficult — if not almost impossible — for Monga to win a director contest. Opko, which has a $2.9 billion market capitalization and is incorporated in Delaware, is expected to hold its annual meeting in June.
Instead, litigation could emerge. In 2018, Frost agreed to settlement with the SEC in a civil complaint of stock fraud. In July, Opko Health settled a class action shareholder suit that emerged following the SEC settlement, alleging a “pump and dump” stock fraud.
In October, Sian made a books and records request at Opko seeking information about Frost’s oversight of the company. It is possible that Sian could file a lawsuit in Delaware Chancery Court charging a breach of fiduciary duty, especially if he is can obtain corporate records. In its white paper, Sian argues that in the wake of the 2018 and 2020 settlements it was possible that directors won’t have directors and officers liability insurance, or if they do it could “be costly for inadequate and limited coverage” and could leave directors “potentially personally liable for any breach.”