In our November 17th article titled “Opko Health: A House of Cards Tumbling in the Dark”, we focused a large portion of our piece on illuminating warning signs relating to OPKO’s (NYSEMKT:OPK) diagnostics business, which primarily consists of BioReference Laboratories (“BioReference”).
In particular, we identified:
Since that article, we have come across new signs that BioReference is still in the midst of a major clean-up, and that the issues may be more severe than we had originally thought. New information has come to light in the form of a key resignation and several lawsuits naming BioReference as defendant or co-defendant.
Note that diagnostics accounted for approximately 82.8% of OPKO’s 2016 annual revenue. Given the lack of major expected near-term pipeline updates and the sluggish roll-out of OPKO’s signature Rayaldee drug to date, we believe BioReference’s performance will be a key factor in the upcoming earnings release.
On January 26th OPKO announced that BioReference President Gregory Henderson had resigned. We believe the resignation was unexpected as Henderson had no comment in the press release, and no successor was announced. A check of the current BioReference executive team website as of this writing shows no President is currently listed.
Henderson had been appointed only in March 2016 to replace the BioReference founder Marc Grodman who had also resigned without making any public comment. In our experience, key leaders typically do not suddenly resign with scant detail when things are going well. We believe Henderson’s resignation is a signal that this reporting period will show further deterioration in BioReference, as we had anticipated in our previous report.
We recently learned of an employee anti-retaliation lawsuit filed in New Jersey in August 2017 that alleges severe improprieties relating to a BioReference Houston laboratory. To read the full complaint, see Stephanie Halliday vs. BioReference Laboratories Inc., [2:17-cv-6889]. We believe the entire complaint is worth reading, but below are several key sections:
In 2016 and 2017, BioReference was operating its laboratories in violation of federal health and safety statutes and regulations, including the Clinical Laboratory Improvements Act of 1988 (“CLIA”) and the Occupational Safety and Health Act of 1970. Stephanie Halliday—a BioReference employee—objected to, refused to participate in, and disclosed these violations of law, public policy, and patient care. In retaliation for this protected activity, BioReference terminated Ms. Halliday’s employment on May 11, 2017.
…In July, 2016 BioReference hired Ms. Halliday as its Night Supervisor in one of its Houston, Texas laboratories. Almost immediately after she started working for BioReference, Ms. Halliday discovered that BioReference was violating federal law governing the operations of its laboratories.
Specifically, Ms. Halliday discovered that BioReference had been releasing patient test results to doctors in the period January, 2016 through June, 2016 despite the fact that BioReference’s testing procedures/practices failed quality controls.
Ms. Halliday also discovered that a BioReference internal quality control inspection of its Houston clinical laboratory conducted from April 25, 2016 through April 28, 2016 found the laboratory had serially violated federal law, including federal regulations governing exposure to bloodborne pathogens, including Hepatitis B and HIV (29 C.F.R. 1910.1030); and federal regulations governing exposure to toxic and hazardous substances.
The lawsuit continued by describing Ms. Halliday’s objections that she had outlined to a supervisor:
…One of the practices that Ms. Halliday objected to in her September 9, 2016 email to Ms. Russo [a supervisor] was BioReference’s release to a doctor of unverified test results on September 8, 2106. BioReference’s release of the unverified test results led to the hospitalization of the doctor’s patient. BioReference attempted to cover-up the fact that it had not properly verified the test results by claiming that this was simply a “manual” data entry problem, when it was a failure of verification. Ms. Halliday subsequently exposed, objected to, and refused to participate in this illegal cover-up.
The complaint continues by detailing the exchanges back and forth between Ms. Halliday and BioReference supervisors and ultimately with senior executives of the division. The complaint includes allegations of:
We have emailed OPKO’s investor relations seeking comment on the bulleted allegations above. We have not heard back as of this writing, but should we hear back, we will update this accordingly.
Note that none of the allegations have been proven in court. We intend to keep an eye on the case to see how it progresses.
A litigation review also turned up four lawsuits naming BioReference as co-defendant in relation to alleged auto insurance fraud schemes. The lawsuits largely allege that individuals were involved in sham auto accidents in New York and then fraudulently billed insurance companies for services that were either medically unnecessary or were never performed. Multiple medical institutions were named as co-defendants in these lawsuits, often with the same institutions overlapping across the complaints.
Note that of the four lawsuits we found, the matters are believed to have either been settled or are ongoing, and therefore have not been proven:
We have emailed OPKO’s investor relations seeking comment on BioReference’s alleged role in the above insurance fraud claims. We have not heard back as of this writing, but should we hear back, we will update this accordingly.
We do not believe these cases will have a meaningful impact on BioReference’s financials. However, in light of the other recent and historical issues with BioReference, we will be monitoring these as well to see if the pattern of lawsuits continue.
Aside from performance and compliance questions relating to BioReference, we learned recently that another of OPKO’s potential cash flow streams is now under threat.
One of the few bright spots for OPKO shareholders from late 2017 was the FDA approval of Varubi IV, a drug designed to aid in the treatment of delayed nausea and vomiting in chemotherapy patients. OPKO had licensed the formulation for Varubi to TESARO Inc. (NASDAQ:TSRO) in 2010 in exchange for milestone payments of up to $85 million and “tiered double-digit royalties”. On October 26, 2017, OPKO announced the FDA approval of the formulation which was then targeted for launch in November.
The positive news was quickly diminished when on January 12th, TESARO announced that it had updated the labeling of the newly-approved Varubi formulation to include the potential for severe side effects:
Anaphylaxis, anaphylactic shock and other serious hypersensitivity reactions have been reported in the postmarketing setting, some requiring hospitalization. These reactions have occurred during or soon after the infusion of VARUBI injectable emulsion. Most reactions have occurred within the first few minutes of administration.
In the aftermath of the announcement, a class action lawsuit was filed against TESARO. The future of the drug and its sales potential remains in doubt. With very little positive news coming out of OPKO, this update on Varubi represents yet another cash flow opportunity that appears to be slipping away.
In other news, OPKO Chairman and CEO Phil Frost has resumed his longstanding practice of making open market purchases after having temporarily paused his purchases near the end of September 2017. Dr. Frost restarted his purchases on January 22nd, which rather serendipitously coincided with the same week that the company announced the resignation of the BioReference President.
As we noted in our earlier report, Frost has been making open-market purchases in OPKO for over 10 years. His purchases have been a poor prognosticator of stock performance to date. Our belief in November remains the same now: “With very few positive signs to point to at the company, Frost is simply attempting to protect the stock via token insider purchases in the hopes of buying more time.”
We believe we will see signs of further deterioration in BioReference and will see a worsening cash flow situation at the company overall. We expect this to put further pressure on credit lines. While Rayaldee is likely to have a large percentage increase in sales, we will be looking at the “absolute” dollar number, given that Rayaldee sales are still coming off of a low base.
In our previous report, we noted that the company announced the submission of a device application for its Claros device the very day before earnings were released. We viewed it as a suspicious move, given that the Claros device filing had been delayed for five years to that point. The announcement by the company seemingly assumed that the Claros device would be approved and underscored the large market opportunity addressed by the device, whereas we believed (and still believe) its actual chances of approval are slim. At the time, the announcement struck us as a red flag that may have been intended to “blunt” the impact of negative earnings.
We mention this because we will similarly be on the lookout for other announcements that could “blunt” the impact of potentially negative earnings. This could take the form of announcing the re-submission of the hGH-CTP drug (which we previously identified major irregularities with) or the featuring of a “brand-new” formulation with bold new expectations about massive market potential with little tangible data or results to support it.
In short, we are going into this call on the lookout for potential spin. When looking at OPKO’s history, we see a large graveyard of loud promises that ended up dying quietly. We will be focusing instead on the tangible numbers and actual results. Best of luck to all.
Disclosure: I am/we are short OPK.
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