Seeking Alpha
Short only
Profile| Send Message|
( followers)  

By Sonya Colberg, Senior Investigative Reporter

Opko Health (NYSE: OPK) may be sporting a shiner for now. But in this Street brawl, the big boy in the middle is a billionaire who wears that black eye like a badge of courage, knowing full well that adversity will make his company stronger. Besides, revenge will be so sweet.

Dr. Phillip Frost, the chief executive and chairman of OPK, is seeing a significant short position in his company. That doesn't ordinarily bother him much, though the short interest is nearly 21 percent of the shares outstanding.

Anthony Bozza of Lakewood Capital (which is reported to suffer a 0.5 percent net loss partially attributed to its short portfolio) bloodied OPK's nose a bit last week. He compounded the Wall Street drama when he presented his short thesis on the pharmaceutical company Friday during the Robin Hood Conference.

"We've always enjoyed a nice big short position," Dr. Frost told TheStreetSweeper. "I know shorts who lost a lot of money … and later became my friends."

Dr. Frost counts celebrity stock picker Jim Cramer, star of the "Mad Money" television show, among his many fans. A true believer in both the accomplished doctor and his company, Cramer enthusiastically recommended OPK back when it traded around the $5 range and remained bullish on the name even as the stock rocketed into double-digit territory. While Cramer understands the temptation to start booking those gains, and openly encouraged big winners to take some profits off the table a few days ago, he reiterated his ongoing support of OPK when TheStreetSweeper contacted him about the company over the weekend.

"I like it very much," Cramer said in an email Sunday evening. "Many ways to win!"

Wall Street is stained by shaky companies overseen by shysters who happily mislead investors and then skulk away dragging bags of dirty money. TheStreetSweeper has exposed many of these fraudulent miscreants, shorted them and, in the process, tried to protect investors from painful losses.

But OPK is the rarest of rare finds for us. We like Dr. Frost. We like Opko Health. We like Dr. Frost's assessment of his growing portfolio of sterling products:

"I've never been connected to any company with the potential of this one," said Dr. Frost.

Dr. Frost's brilliance

Dr. Frost was chairman at Mt. Sinai Medical Center in Florida and a consultant at Miles Laboratories when he met the manager, Michael Jaharis. They learned of a pharmaceutical company that had just lost $700,000 and couldn't afford to bring out a new drug.

Dr. Frost figured they could customize a new delivery system to effectively speed past the typical decade-plus drug commercialization route involving tens of millions of dollars. He invested $50,000 in the company, Key Pharmaceuticals, and found a new way of delivering an existing drug into the body.

Next, Dr. Frost and Mr. Jaharis took on a crotchety asthma medication. Theophylline was a little-used older drug, ineffective in small doses but toxic in large doses. So, Key researchers devised a way to incorporate the drug into a 12-hour time-release pill.

Blessed with good luck and good leadership, Key continued its unique pathway. The company didn't have the roughly $30,000 needed to test the pill but The University of Florida agreed to test it and publish the results. Rather than spending a lot of money on marketing, Key offered allergists pill samples backed by scientific data and a calculator to figure accurate dosage.

With successful drugs marketed, agreements with larger pharmaceutical companies followed. The realization hit the partners in 1986: They had, indeed, found the key to building a $50,000 straggler into a behemoth. They sold Key Pharmaceuticals to Schering-Plough for $800 million.

In 1987, Dr. Frost jiggled the key to open up the potential of generic products company Ivax. The company became the world's largest maker of low-priced copies of brand drugs whose patents had expired. The business was tough and disheartening at times - like the time a lucrative Norwegian merger fell apart in 1995. But Dr. Frost shoved away that disappointment.

He sold the business in 2005 to Teva Pharmaceutical Industries for a cool $7.6 billion.

The doctor from Miami Beach, Fla. continued his magic as he began building Opko Health in 2007. Today, the pharmaceutical and diagnostic company boasts a $4 billion market cap and a respected chief executive.

"Every company we've built has always had skeptics," he said. "And they have always paid the price in the end."

Dr. Frost indicated OPK is targeting multiple medical markets worth about $30 billion. We wouldn't be surprised if, at some point, Dr. Frost's company becomes an acquisition target of a large pharmaceutical company searching for promising drugs to replace its drugs with expiring patents.

Another short drama?

We feel confident that the shorts are making a costly mistake in betting against Dr. Frost and OPK. We think this is the kind of misstep with the potential to match the Herbalife debacle, a battle among billionaires poised to lead to "the mother of all short squeezes."

The most recent shots fired in the Herbalife drama occurred just last week during the same Robin Hood Conference where Mr. Bozza attacked OPK.

On one side is controversial hedge fund manager William Ackman, who vowed he'll go "to the ends of the Earth" to destroy Herbalife. He told Bloomberg Television that his short position based on the contention that Herbalife is simply a pyramid scheme cost his Pershing Square Capital Management up to $500 million.

Mr. Ackman continued his verbal assault by referring to the investors - Carl Icahn, 77, William Stiritz, 79 and George Soros, 83 - who hold long positions in Herbalife as octogenarians. "There is no problem with their age, I just think it's an interesting fact," Mr. Ackman said.

Mr. Icahn - who shares a history with Dr. Frost in the form of their common interest in the holding company Vector Group which owns a stake in OPK - predicted in January that Mr. Ackman would become the victim of "the mother of all short squeezes." On Friday, Mr. Icahn called his rival, a "crybaby in the schoolyard."

Mr. Ackman first announced his large short position in Herbalife last year. Since then, shares have shot up about 100 percent.

We think the OPK scenario could shape up much the same.

One good-news snap away from taking off

OPK currently has three candidates in Phase 3.

First, there's an OPK drug for low vitamin D, when combined with another OPK drug, is designed to treat advanced chronic kidney disease. Low vitamin D can cause thyroid problems and demineralization of the bones, which often kills kidney disease patients. OPK acquired the company behind the "Rayaldy" technology in March. The vitamin D drug is so promising that Dr. John Cannell, a physician and vitamin D expert, stunned Seeking Alpha followers with this revelation: "Three weeks ago, I invested all my available funds in OPKO Health Inc. I did that when I learned about its new vitamin D drug, Rayaldy."

Designed to help 8 million U.S. patients, the drug's potential market is $24 billion.

Researchers will soon publish results of the Phase 3 trials for this therapy that appears more effective and non-toxic compared with the two competitors.

"It's important news," Dr. Frost said. "We don't expect to get 100 percent of the market but we are certainly interested in capturing several billion. That would make the present stock price look very small," he said of the roughly $10 stock.

Second is the human growth hormone, a once-a-week therapy as opposed to the current daily use. OPK acquired the company behind this technology, Prolor Biotech, in April. The drug is in Phase 3 for adults and Phase 2 for children, aimed at a $3.5 billion market.

Third is a drug for nausea and vomiting caused by chemotherapy - a $1 billion to $1.5 billion market. OPK out-licensed the drug to Tesaro, which is conducting three separate Phase 3 trials on the product designed to help cancer patients up to a week. Following an expected new drug application submission in mid-2014 prior to commercialization, OPK would eventually stand to get about $130 million plus a royalty.

"They're finishing their trials as we speak," Dr. Frost said. "They should have top-line results by the end of December."

Down the pipeline, a hemophilia drug - reaching for an estimated $1 billion market - is set to begin Phase 2 clinical trials in 2014.

Finally, a naturally occurring hormone product for fighting obesity has seen great success in animal studies, said Dr. Frost. "That could be one of our most important drugs," he said.

The company is also involved in developing diagnostic tests, including a potentially game-changing "4Kscore" prostate cancer test for patients with elevated PSA (prostate specific antigen). It is designed to cut the 70 percent rate of false positives and reduce unnecessary, costly biopsies of the prostate, which can be difficult and unpleasant. The test for use in laboratories has already launched in the United Kingdom and work has begun on a new version for doctors' offices. OPK bought a laboratory in Tennessee to facilitate the U.S. launch.

"We're gearing up to put it on the market right now," said Dr. Frost.

Additionally OPK owns businesses in Spain, Chile, Israel and Mexico which are selling products, as well as a more recent entry into Brazil.

CEO buys shares almost daily

Dr. Frost has continued his confident OPK buying spree that he began in 2007 - back then he got the Securities and Exchange Commission nod to quickly buy more than 4 million shares for $1.80 each and 35,800 shares on the open market for about $3 each shortly after he formed OPK in a March 2007 merger. The chief executive is the company's most informed of all the executives, of course. He's never sold a single share of OPK.

He believes so much in the company that he's made not one but 13 separate purchases of the stock so far just this month - with most of those running over $10 a share. Dr. Frost is truly putting his money where his mouth is because he bought the shares practically daily on the open market.

He has increased his stake over the years to more than 137 million shares worth more than $1.3 billion. A blazing 51 percent of available shares are held by insiders, including Dr. Frost's 33 percent stake. With his $3 billion personal fortune and willingness to buy shares, Dr. Frost could dramatically shrink the size of the remaining float …

More big believers

George Soros also has initiated a position and one of the world's greatest investors is also a buyer. Through his Soros Fund Management in the third quarter, financial guru Soros gave his stamp of approval with a purchase of 745,000 shares of OPK. Also, Mario Gabelli, listed in the book, "The World's 99 Greatest Investors," now owns 15,000 shares of OPK.

The Soros purchase ranked as the 20th highest purchase for Soros between July and September. His fund spent $6.6 million on OPK shares. That purchase secured the number 16 spot for the quarter among the largest shareholders, including The Vanguard Group (11.5 million shares) and BlackRock Fund Advisors (10.2 million shares).

Conclusion

Entrepreneur and TV celebrity Lori Greiner recently pointed out that entrepreneurs must have multiple talents to succeed in business. "People can grow money all day long but if they don't know what to do with it, then it's really not very valuable," Ms. Greiner said Friday on ABC's Shark Tank.

Dr. Frost's track record shows he can grow money and use it to navigate the intricacies of delivering life-saving therapies to people who desperately need them. He's a brilliant chief executive who has won plenty of Street fights and looks poised to win this one, too.

Contributing: Melissa Davis, TheStreetSweeper Senior Editor

Disclosure: The owners of TheStreetSweeper hold a long position in OPK and stand to profit on any future increases in the price of those shares. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Opko Health Street Brawl: Doc And Multi-Billion Dollar Medical Candidates Positioned For Win