OPKO’s Hunt for a Big Fish Leads to Bio-Reference

There is an inherent risk when a smaller company acquires a bigger one, but that is exactly what happened when OPKO Health announced it planned to acquire Bio-Reference Laboratories earlier this month in a $1.47 billion stock deal.

Miami-based OPKO's 2014 annual revenue of $91.1 million was less than an eighth of the $832.2 million generated by Bio-Reference—the nation's third largest clinical laboratory. But OPKO is seen by many industry observers as an up-and-comer. Its specialty pharmaceutical development is expected to lead to a nearly tripling of revenue for calendar 2015. As a result, its stock price more than doubled over the past year (although it dipped significantly below that threshold after the deal was announced).

"Recent appreciation in OPKO shares has enabled OPKO to fund this deal," Amanda Murphy, an analyst with William Blair & Co., said in a recent report.

OPKO Chief Executive Officer Phillip Frost, M.D., believes that Bio-Reference can help with the marketing and distribution not only of its 4Kscore prostate cancer test—which can help avoid biopsies to make diagnoses— but a credit card-sized point-of-care test for diagnosing analytes. That device could be used to perform a variety of assays developed by OPKO.

"In both cases, Bio-Reference can add greatly to the velocity of uptake of these products," Frost said in a recent call with analysts to discuss the acquisition. He praised Bio-Reference's sales force and penetration with commercial payers. That is an important point for the 4Kscore test, which has yet to obtain coverage from big insurers. Frost added that Bio-Reference's existing genomics business was also quite healthy and complementary, particularly its women's health tests.

"We're trying to make the component parts be more successful than the entity itself," said Bio-Reference CEO Mark Grodman, M.D. He added that OPKO's product line has the opportunity to transform some facets of clinical care, particularly the 4Kscore test. Grodman said that test could eventually anchor a product line of men's health diagnostic products.

Frost indicated that some portions of Bio-Reference would operate independently of OPKO, but neither he nor Grodman have yet to provide specifics about the post-merger management structure.

"This deal is certainly unique and seems to be continuing the trend of other deals announced in the space with the intention to leverage lab data for biopharma drug development and clinical trials," Murphy wrote, citing recent transactions involving LabCorp and Covance, Quest Diagnostics and Quintiles and Roche and Foundation Medicine. "Based on the stock reactions (to the deal) the strategic rationale seems to be somewhat unclear—at least to investors."

OPKO's stock dropped by more than 15 percent after the deal was announced and remains depressed. Bio-Reference's stock rose about 20 percent and has held that position.

The deal is expected to close later this year, and the financial pressure is on the much larger Bio-Reference to close it. Murphy reported that it would have to pay OPKO $54 million in termination fees to back out voluntarily; $40.5 million if there is some change in events that led to either board making a recommendation against the deal. And if OPKO kills the deal and Bio-Reference merges with another entity within a year, it will still have to pony up $13.5 million.

Takeaway: Despite the revenue asymmetry between OPKO and Bio-Reference, both companies believe they complement each other well.