Last Friday, Aspara Biotechnology Research published an article to help its owners profit from a self-disclosed short position in Opko Health (OPK). Unfortunately, the article contained numerous factual errors and cherry-picked examples of investment failures by Opko Health's CEO. This article responds to Aspara Biotech's article and also provides additional facts that should be considered by any Opko Health investor. Investors will discover that Opko Health's CEO actually has an envious investment track record, despite the small failures highlighted by Aspara Biotech, and he has extreme confidence in Opko Health at $4-5 per share with enough wealth, lest we forget, to personally buy back the entire float.
Dr. Frost: Not a Billionaire Because of Bad Investments
Aspara Biotech's article leaves the reader with the impression that Opko Health's CEO, Dr. Phillip Frost, is a terrible investor with a list of failed investments that can scarcely be counted. In reality, however, Dr. Frost is a self-made billionaire whose investment returns have far exceeded his losses by thousands of percentage points. The only way that Aspara Biotech was able to create this temporary impression was by singling-out a few investment failures and disregarding his large successes.
The most important counter-argument to the entire article can be summarized in a single sentence. Dr. Frost, Opko Health's CEO, would not be a self-made billionaire if he was a poor businessman. Anyone can single-out a few investment failures and write an article insinuating that these failures might repeat themselves for Opko Health. However, this type of argument is fallacious and certainly not compelling for the investors who vote every day (with real money, not anonymous articles) on the true value of Opko Health.
Aspara Biotech disregarded the successes of Dr. Frost that far exceed all of his losses combined. Here is a brief list of Dr. Frost's overlooked wins:
- Continucare (invested $16.8M that became $170M) +900%
Dozens of SEC filings were used to calculate profit, and the Forbes link provides additional citation.
- Dreams (invested $2M that became $15M) +650%
Fanatics bought Dreams in April 2012 for approximately $183M; Dr. Frost's Frost Group Investment invested $2M in November 2006 and profited approximately $13M including all stock/options/warrants/debt. Dozens of SEC filings were used to calculate profit.
- Whitman Education (invested $6M that became $175M) +2800%
Career Education Group bought Whitman Education in July 2003 for approximately $230M; Dr. Frost's profit was approximately $169M including all stock/options/warrants/debt. Dozens of SEC filings were used to calculate profit.
- Key Pharmaceuticals (invested $5M that became $180M) +3500%
Schering-Plough bought Key in 1986 for approximately $825 million in stock; Dr. Frost's profit was approximately $175M including all stock/options/warrants/debt. Dozens of SEC filings were used to calculate profit.
- Rolapitant (invested $29M that became $190M) +580%
- Ivax (invested $100M incl. open market purchases that became $1.5B) +1400%
Teva bought Ivax in January 2006 for approximately $9.2 billion (including assumed debt); Dr. Frost's profit was approximately $1.4B including all stock/options/warrants/debt. Dozens of SEC filings were used to calculate profit.
- ChromaDex (combination of personal and corporate investments) all up at least +200%
According to dozens of SEC filings for ChromaDex, Dr. Frost's cost basis is less than $0.20 per share, and ChromaDex last closed above $0.60 per share. He has not sold any of his investment in the company.
- North American Vaccine (invested $10M that became $140M) +1300%
Baxter bought North American Vaccine in 2000 in a cash/stock-for-stock transaction valued at approximately $370 million; Dr. Frost's profit was approximately $130M including all stock/options/warrants/debt. Dozens of SEC filings were used to calculate profit.
Aspara Biotech's article highlighted a few million dollars of legitimate investment losses from Dr. Frost's past. However, the article ignored billions in investment gains that made up for those losses by literally thousands of percentage points. Again, Dr. Frost is a self-made billionaire. He made small mistakes, as anyone else does, but he moved along to crush those losses with wins that were 10, 100, or 1,000 times as valuable.
SEC Filings Versus Aspara Biotech's Article
Aspara Biotech's article contains significant errors that can be discredited using public SEC filings. To begin, their article discussed Protalix (PLX) as the most obvious investment failure of Dr. Frost's life. The truth is that Dr. Frost earned +400% on his Protalix investment. Had Aspara Biotech read SEC filings, they would have realized that Dr. Frost's $13.7M original investment in Protalix turned into $70M.
Regarding the "single utterly incomprehensible day" when Dr. Frost allegedly destroyed "$1.8 billion of shareholder wealth" in Protalix, this is also an error. The initial investors from the Protalix reverse merger in December 2006, including Dr. Frost, invested at less than $1.50 a share (in average cost basis after factoring in their multiple investments), and all of these investors agreed to a lock-up period during the fall of 2007 when Protalix was trading at (extremely overvalued) $30-40 prices. The reason Protalix stock traded this high was simply because freely tradable shares represented less than 1% of the outstanding shares. From SEC filings:
In connection with the merger, substantially all of the former shareholders of Protalix Ltd. entered into lock-up agreements to satisfy Israeli tax laws and contractual obligations. The lock-up agreements prohibit such former shareholders of Protalix Ltd. from, directly or indirectly, selling or otherwise transferring the shares of our common stock issued to them as a result of the merger.
Although the public market capitalization displayed as though Protalix technically lost a large amount of its market capitalization, this public figure was being calculated using the only those freely tradeable shares for which was there was not enough supply given the lock-up. The reality is that during this time, no insider or large shareholder was able to influence the price of the stock and a tiny 1% of the outstanding shares were pricing Protalix at an unrealistic $2B+ market capitalization. Again, all of this is described in the SEC filings that Aspara Biotech's article omitted. Protalix's stock was artificially inflated because of the lack of liquidity, and only low-volume trading gave the company its unrealistic market capitalization.
Prior to the closing of the merger, on September 12, 2006, pursuant to a share purchase agreement dated August 21, 2006, Protalix Ltd. completed the sale of 163,774 ordinary shares, or 14% of its outstanding ordinary shares, and warrants to purchase an additional 57,691 ordinary shares, or 5% of the outstanding ordinary shares, of Protalix Ltd., on a fully diluted basis, in a private placement to a trust controlled by Dr. Frost, Glenn L. Halpryn and certain other investors introduced to Protalix Ltd. by Dr. Frost. Protalix Ltd. received gross proceeds from the private placement equal to $15,000,000. In connection with such share purchase agreement, prior to the closing of the merger, the investors invested an additional $122,988. As a result of the merger, the shares received by these investors were converted into 10,054,600 shares of our common stock, representing 12.99% of our total outstanding capital stock on a fully-diluted basis after the closing of the merger, and the warrants were converted into warrants issued by us that are exercisable into 3,875,416 shares of our common stock, representing approximately 5% of our total outstanding shares on a fully diluted basis at the closing of the merger.
In any event, Protalix was a significant winner for Dr. Frost and all of those who invested when the company was merged in December 2006: below $1.50 per share to over $7.50 per share or higher. It is interesting that the top investment "failure" from Aspara Biotech's article was actually a +400% gain for Dr. Frost.
Additionally, Aspara Biotech was incorrect when they said that Non-Invasive Monitoring Systems (NIMU) relies on revenue from Lifeshirt sales. This could not be further from the truth, as the company openly discloses that it only receives royalty payments from this technology and, instead, is focused on its Exer-Rest product line (omitted from Aspara's article). From SEC filings:
Non-Invasive Monitoring Systems began business as a medical diagnostic monitoring company to develop computer-aided continuous monitoring devices to detect abnormal respiratory and cardiac events using sensors on the human body's surface. It has ceased to operate in this market and has licensed the rights to its technology. The Company is now focused on developing and marketing its Exer-Rest® line.
From a quick call to the company, I was able to determine that Exer-Rest products are priced around $8-10K apiece to individuals, hospitals, and other healthcare institutions for therapeutic treatment, especially for individuals with limited mobility. The motorized beds and platforms stimulate blood flow, improve circulation, and relieve minor aches and pains. Dr. Frost continues to hold his position in the company not only because of the imminent sales potential of these devices but also because he trusts in the leadership of Dr. Jane Hsiao, the same woman who was an executive at Ivax during the time when Dr. Frost earned +1400%.
Finally, Aspara Biotech was also incorrect when they assumed that SafeStitch (SFES) is going to run out of cash and be delisted. Quite to the contrary, I checked the latest SEC filing that did not show guidance, so I then called the company to see if they had any estimates on its sales of its AMID stapler (not including its gastrointestinal products whatsoever). From the call, I discovered that SafeStitch has expected first-year sales of approximately $8M for its FDA-approved hernia stapler. This is well within range of the market, as there are 600,000 hernia procedures per year with SafeStitch's one-time-use disposable device costing $495. According to the call and corporate filings, SafeStitch already has established its own sales team, and devices are being manufactured every day in Miami, Florida.
The sales team is currently taking orders for the AMID Stapler and product is available for immediate shipment.
Rather than investing to the "bitter end," as Aspara Biotech's article states, it instead appears that Dr. Frost is willing to hold through the normal R&D process of a small company until it reaches the phase at which it can generate actual sales. It should not be surprising to Aspara Biotech that a R&D company about to launch a national sales campaign does not show great revenue numbers for the prior year.
Who Is Aspara Biotechnology Research?
Aspara Biotech's website contains no human contact information and is little more than a landing page with stock images where its SeekingAlpha articles are repeated. The anonymous website seems to be designed primarily for acquiring email opt-ins so that their reports will have a greater market impact.
Prior to its article on Opko Health, Aspara Biotech has written nine articles on Seeking Alpha covering three companies, two of which are trading over 15% in the opposite direction that Aspara Biotech predicted. Now, Aspara Biotech has a short position in Opko Health and is trying to bash a stock with almost daily insider buying by one of the wealthiest men in the world. Indeed, Dr. Frost is a Forbes 400 billionaire who has personally invested over $30M in Opko Health in open market purchases over the past year, meaning that he believes in the value of the common stock at prevailing prices (not discounted warrants, placements, or options).
It is endearing to think that an anonymous article on Seeking Alpha could reveal a secret about one of the most published pharmaceutical executives in the world, a sworn member of Bill and Melinda Gates' Giving Pledge, a famous science and medical donor, and a proven businessman who built a company until it was acquired for $7.4B.
Shorts are placing large bets against Opko Health, with short interest at over 24% and an annual borrow rate of 7.5%, according to a call this week to Scottrade. At what price is Dr. Frost willing to buy shares? The last SEC filing says he was buying hundreds of thousands of shares on Thursday in the $4.70s.
In summary, Opko Health has daily insider buying by a multi-billionaire in a company with a remaining float worth at less than 1/5th his personal wealth and over 24% short interest, not to mention billion-dollar business opportunities like Claros and no cash or liquidity concerns. We wish the very best of luck to Aspara Biotech and all shorts in Opko Health.