OPKO Health And Merck Shares: Buy Or Sell After Epstein Barr Vaccine Deal?

Investment Overview

Earlier this month pharma giant Merck (NYSE:MRK) agreed to pay OPKO Health (NASDAQ:OPK) $50 million upfront plus $872.5m in potential milestone payments, in exchange for the rights to develop and commercialize OPKO's Epstein Barr Virus vaccine candidate, which the company acquired after buying out ModeX Therapeutics in a $300m deal last year.

In this post I look at the deal in detail, and discuss the implication for both companies, and what the long-term outlook for Merck and OPKO share prices may be in light of the news. I begin with a brief discussion of OPKO's recent history, business model, and 2022 performance.

OPKO - Company Overview and Explanation For A Sinking Share Price

Miami-based OPKO Health provides diversified diagnostic and pharmaceutical products. The company was originally incorporated in 1991 and was formerly known as Cytoclonal Pharmaceutics and eXegenics, before merging with two other R&D companies in 2007 and renaming itself.

Within its diagnostics division OPKO operates its BioReference laboratory, which it describes as "one of the nation’s largest full service laboratories with a 180-person sales and marketing team to drive growth and leverage new products" in its 2022 10K Submission. OPKO also markets and sells the FDA approved 4KScore blood test to test for prostate cancer.

Within its pharmaceuticals division, OPKO has developed Rayaldee - an oral extended release formulation of a prohormone called calcifediol, approved in Europe and the US for treatment of adults with secondary hyperparathyroidism caused by Chronic Kidney Disease. The company also recently secured European approval for a once-weekly human growth hormone injection, Somatrogon, developed in partnership with Pfizer (PFE). The FDA declined to approve Somatrogon in the US in January last year.

In 2022, OPKO earned $756m from its diagnostics / services division and $143m from its pharmaceutical products. Services revenues were down >50% year-on-year - from $1.6bn in FY21 - owing to a substantial fall in COVID testing revenues generated at the BioReference lab.

Between 2013 and 2016, OPKO grew revenues from just $97m, to $1.2bn, and revenues between 2017 - 2020 trended between $900m - $1bn, before additional COVID testing revenues drove topline figures of $1.44bn in 2020, and $1.77bn in 2021.

In June 2015, when OPKO announced the $1.47bn acquisition of Bio-Reference Laboratories, and shortly after submitting its New Drug Application for Rayaldee to the FDA (the drug was approved four months ahead of schedule in Jun 2016), the company's typically volatile share price hit its all-time high of ~$18.

By 2020, however, after a series of earnings misses and a failure to drive profitability - net losses between 2013 - 2020 totaled ~$930m - OPKO's share price slipped to its lowest value in more than a decade - ~$1.3.

After so many difficult years the COVID testing opportunity finally gave shareholders something to cheer and the share price hit peaks of $5.6 in August 2020, and February 2021, and $4.8 in December 2021.

Unfortunately, the good times did not last - as soon as the market foresaw that COVID testing revenues would inevitably drop as governments declared the end of the pandemic, OPKO's share price dropped too, sinking to a low of $1 in February this year.

OPKO's ModeX Acquisition and Deal With Merck Explained

In May 2022 OPKO announced that it would acquire the privately held biotechnology company ModeX Therapeutics in a $300m deal funded by OPKO common stock. According to a press release announcing the news:

ModeX Therapeutics has developed highly flexible multi-specific antibody technology platforms with broad targeting and functional capabilities, simpler manufacturing and potentially better specificity and safety, providing significant differentiation from competing platforms.

OPKO's rationale for acquiring ModeX may have been to gain access to its cancer immunotherapies that "combine four specificities into one protein," and incorporate "stealth" technology for enhanced tumor specific killing, as well as its antibodies against HIV and SARS-CoV-2.

Importantly, however, the company also had a vaccine for the Epstein Barr Virus in development, which has attracted the interest of a one of the world's largest pharma's in Merck & Co.

New Jersey based Merck's market cap valuation of $265bn makes it the US' fifth largest pharmaceutical company - only Johnson & Johnson (JNJ), Eli Lilly (LLY), Pfizer (PFE) and AbbVie (ABBV) are ranked higher. Merck drove $58.4bn of revenues in FY22 - only JNJ and PFE earned a higher figure - and is best known for its successful cancer therapy Keytruda, which earned $20.9bn of revenues in FY22, and will likely be the world's best-selling drug in 2023.

Merck is arguably too dependent on Keytruda - an immune checkpoint inhibitor ("ICI") which inhibits the PD-1 pathway, preventing cancer cells hiding from the immune system. The drug is expected to lose its patent protections around 2028, after which time its revenues will begin to drop at a rate of ~25% per annum, as cheaper generic drugs flood the market.

Besides Keytruda, however, Merck (MRK) has a thriving vaccines division that dove ~$10bn in revenues in FY22, and the pharma has identified OPKO / ModeX's Epstein Barr Virus ("EBV") vaccine as an opportunity worth investing in.

EBV is a member of the herpes family of viruses, and can lead to infectious mononucleosis ("mono"), as well as some forms of cancer and multiple sclerosis, and splenetic rupturing. According to the National Library of Medicine, >90% of the worldwide population has been infected with the virus at some stage, and there is currently no available vaccine against the disease.

What Are The Terms Of Merck's Deal With OPKO?

Merck has agreed to make an upfront payment of $50m to OPKO and has pledged up to $872.5m of milestone payments based on progress in the development and commercialization of candidate MDX-2201, and royalties on net sales of the vaccine, if approved. According to the press release:

ModeX and Merck will jointly advance MDX-2201 to an Investigational New Drug - IND - application filing, after which Merck will be responsible for clinical and regulatory activities, as well as product commercialization. Pre-IND filing activity will be guided by a joint steering committee comprised of representatives from both companies.

According to a statement in OPKO's 10K submission:

The EBV vaccine presents antigens from four viral proteins involved in viral entry into host cells. These include a recombinant antigen designed from the proteins gH, gL and gp42, as well as an antigen derived from gp350. By using ModeX’s multi-targeted approach, this combination inhibits infection in two cell types, B cells and epithelial cells, which contrasts from efforts that previously focused on gp350 alone.

MDX-2201 is a new kind of vaccine that uses, quoting from the 10K again:

a modular nanoparticle vaccine platform built on naturally occurring and self-assembling ferritin molecules which enables the presentation of a 24-symmetrical array of each antigen that enhances the presentation of key components of the virus and stimulate durable protective immunity.

What Other Companies Are Targeting Epstein Barr Virus Vaccines

By opting to develop candidate MDX-2201, Merck is taking on a company it partners closely with on other projects in Moderna (MRNA), the messenger-RNA specialist and developer of the >$40bn revenue generating SpikeVax COVID vaccine.

The two companies are co-developing a personalized cancer vaccine ("PCV"), MRNA-1457, which has shown efficacy as an adjunct to Keytruda in skin cancer ("melanoma") with more key data expected to be announced at the American Association of Cancer Research ("AACR") annual meeting in April.

Moderna also is using its mRNA vaccine approach to target Epstein Barr, however, which is becoming a target of interest for pharmas after research suggested a vaccine could prevent ~200k cases of cancer each year - most notably Hodgkin Lymphoma, nasopharyngeal and stomach cancers, and Burkitt Lymphoma.

Moderna dosed a first patient in a Phase 1 study of its EBV vaccine MRNA-1189 - which contains 4 mRNAs targeting EBV "envelope glycoproteins," in January 2022. 270 patients are expected to be enrolled in total - there is no specified timeline for a data readout, but the trial initiation does mean Moderna holds a significant development advantage at this time.

Meanwhile, the National Institutes of Health ("NIH") has developed a nanoparticle-based vaccine against EBV that has shown encouraging preclinical data, and entered a smaller clinical study last year of 90 patients - only the second study of an EBV vaccine in the past decade. Data is not expected until 2025, however.

Any one of a number of rival vaccine giants - GSK (GSK), Pfizer (PFE), or AstraZeneca (AZN) for example - would likely consider working on an EBV vaccine, but yesterday's news that Merck is officially entering the development race has certainly created a stir, not least as research continues to establish links between the disease and MS, and even links the virus and cases of long COVID.

Should a successful vaccine be approved, it's possible that mass-vaccination of children would be considered, although tests have been restricted to adults thus far. Governments could mandate EBV vaccination, or a private market could emerge which, considering the prevalence of the disease, could rival the influenza market, currently estimated to be worth ~$7 - $10bn.

Is The Long-Term Share Price Outlook For OPKO Positive?

Beginning with OPKO, the company has experienced some significant share price highs and lows over the past few years, and after reporting a net loss of >$320m in FY22, there has to be significant concern about the company's future, especially when we consider that its cash position at the end of 2022 was just $153m.

In fairness, management's decision to acquire ModeX has certainly been vindicated by the Merck deal. Biotechs do not always earn the milestone payments pledged in these types of deals - in fact, they rarely do, but with Merck apparently funding development, OPKO can focus on streamlining its business and, e.g., attempting to secure full approval for Somatrogon in the US alongside its big pharma partner Pfizer - making itself more stable in the process.

With such heavyweight partners in Pfizer and Merck, it's hard to see OPKO's losses being allowed to completely derail the business, but perhaps one of these two pharmas could end up making a bid to buy OPKO outright. That could represent a good deal for all parties, given Merck or Pfizer could likely inject cash into the diagnostics business / laboratory and use its global infrastructure / R&D synergies to return them to profitability.

To answer the question on the long-term outlook for OPKO stock, I would say that despite the Merck deal, it's hard to make a strong bull case for a company losing as much money as OPKO is. It strikes me that the diagnostics business is failing, despite generating the lion's share of OPKO's revenues, and perhaps OPKO could consider accepting an offer to dispose of this division.

Pharmaceuticals / drug development is where OPKO is succeeding, with two big pharma partners on board, and >$1bn of milestones in play (there are still $275m of milestones in play as part of the Somatrogon agreement with Pfizer), and it is this area of the business that would be most attractive also for any would-be buyers of the company.

For those investors prepared to embrace a higher level of risk, the Merck deal could usher in a period of stability at OPKO that will see the share price recapture former highs - offering the opportunity to realize triple-digit percentage gains on any investment.

The downside risk is high however - it's worth remembering that Merck can walk away from the EBV project at any time, and ModeX's technology is unproven in a clinical setting at this time.

What's The Long Term Outlook For Merck's Share Price After The OPKO Deal?

As you might imagine, for a >$250bn market cap company, boasting a cash position of >$35bn as of FY22, and generating net income $14.5bn in FY22, a $50m investment in a biotech to gain access to novel technology is small change for Merck, and unlikely to significantly move the share price needle.

With that said, after enjoying a tremendous bull run in the last quarter of 2022 in which shares rose >30% from ~$86, to ~$114, Merck share price has stuttered in 2023, and fallen in value to $104 at the time of writing.

In a recent note on Merck for Seeking Alpha, after modeling sales of Merck's product portfolio and pipeline to 2030, and using discounted cash flow analysis, I established a price target for Merck of only $90 per share, based on a peak top line 2030 revenue opportunity of $62bn in 2030.

Merck needs to show the market that it can diversify away from its reliability on Keytruda, and with vaccines being a key strength of the company, developing a successful EBV vaccine ahead of the competition could represent a significant coup for the company, after it failed to make much of a meaningful contribution to the COVID crisis.

In that context, yesterday's news is a step in the right direction for Merck, boosting its pipeline and bringing a potential blockbuster (>$1bn per annum) selling vaccine candidate into its pipeline.

Unfortunately, I don't see this opportunity making a significant difference to Merck's share price over the next couple of years, as the company must first secure its Investigational New Drug ("IND") approval from the FDA to begin in-human testing of the vaccine, and then attempt to catch Moderna and the National Institute of Allergy and Infectious Diseases ("NIAID") up in the clinic.

Should You Buy OPKO Health or Merck Stock Based On Yesterday's news?

In conclusion, we can certainly agree that yesterday's news is a significant boost for both OPKO and Merck, with the former having identified and acquired a promising technology, and the latter having invested in a promising vaccine candidate targeting EBV - a disease that can cause cancer, MS, and potentially affect long COVID recovery, and as such an area of high unmet need with no therapeutic options at present.

With that said, OPKO is a troubled company that's heavily loss making, and although the $50m upfront payment received from Merck will boost its low cash position, OPKO simply cannot afford another year of losses as heavy as in 2022, or there will be serious concern about its ability to stay in business.

Merck is a far more solid investment opportunity that also offers a handsome dividend yield of 2.8% at the time of writing. But after a long bull run, and with its heavy dependence of Keytruda, which accounts for ~35% of all revenues, now may not be the best time to be buying stock, given that a more realistic price target based on forward revenue guidance and discounted cash flow analysis would be in the low nineties.

There are key catalysts arriving for both companies in the next few months - Merck's release of its Moderna partnered Personalized Cancer Vaccine data in melanoma - a potentially very significant upside catalyst if the data are good - and Opko's next set of quarterly earnings, which ought to provide some color on the performance of the diagnostics division and likely losses in 2023.

A sensible investor would arguably stay on the sidelines in relation to both opportunities, but for those keen to embrace a higher level of risk/reward, OPKO stock at such a significant discount to late 2022 highs, and Merck's partnership with Moderna offer near-term price catalyst potentially worth gambling on, and longer term, there is undeniable potential in the EBV project, if not a cast iron guarantee of success.

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