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Flash Analysis Of Biozone's Merger With Cocrystal Discovery

|Includes:COCP, MusclePharm Corp. (MSLP), OPK, TEVA

Biozone Pharmaceuticals (BZNE) announced a transformational merger on Wednesday morning that explains its strange trading activity after a sudden divestiture of its entire business last week. It is now financially and scientifically backed by Teva (NYSE:TEVA) and Opko Health (NYSEMKT:OPK) with one of the most advanced hepatitis C drug candidates in the world. I own shares of Biozone because of foreshadowing clues from a November 13 shareholder letter, and I was happy to see my prediction of this merger come true on Wednesday. Below is a flash analysis of this morning's news, much of which I wrote last weekend. Nevertheless, because the formal news arrived just this week, I will keep my comments brief until I have time to analyze the minor details of Wednesday's announcement that I could not have predicted. Overall, the news is very positive and aligns with what I drafted over the weekend.

On November 13, Biozone abruptly announced a sale of "substantially all" of its assets to MusclePharm (OTCQB:MSLP) in exchange for 1.2 million shares of MusclePharm stock, a deal valued at $11.3 million based on MusclePharm's prior closing price of $9.43 per share. Biozone's market capitalization understandably collapsed to $17 million within hours of the announcement, yet it curiously regained its prior market capitalization of $44 million during the next few days. Indeed, Biozone's stock price has fully recovered despite the entire company consisting of a few hundred thousand dollars in cash and 1.2 million shares of MusclePharm stock. On Wednesday, management explained the curious rally: its shareholders will receive 40% of a privately-held biotechnology company, Cocrystal Discovery Inc., through a reverse merger expected to close by December 31.

To its credit, management did warn of "a strategic review" and "late stage negotiations with a significant biotech company" a few hours after the divestiture. I personally extrapolated the clues of that announcement to predict Wednesday's merger with Cocrystal Discovery, as did a few other people who posted to financial message boards. For Biozone, Wednesday's announcement proves that it is, indeed, all about who you know. Specifically, Biozone's billionaire investor, Dr. Phillip Frost, has served as Chairman of the Board at Teva since March 2010 and CEO at Opko Health since March 2007. Both of these companies are investors in Cocrystal Discovery. Dr. Frost owns substantial equity in all four companies: 25% of Biozone, 40% of Cocrystal Discovery, 33% of Opko Health and 10% of Teva. Through his financial and strategic relationships, Dr. Frost was able to orchestrate Biozone's 40% acquisition of Cocrystal Discovery. He explained, "This merger will provide greater resources to help bring products of the combined company to market and offer shareholders an opportunity to realize significant value on their investment."

Dr. Frost is once again at work weaving synergistic relationships between companies across the globe. Assuming the reverse merger completes by December 31, Biozone's shareholders will own 40% of a company that is rumored to be worth well over $200 million, fully justifying Wednesday's market capitalization and providing plenty of upside potential. (Cocrystal Discovery raised its first $10 million financing of over a half decade ago. I have heard valuation estimates exceeding $1 billion today based on estimates from Teva and Opko Health scientific filings; its hepatitis C candidate is arguably more advanced than Gildead's billion-dollar drug discussed below.) Biozone investors who were betting on Dr. Frost have won their bet in spades: Cocrystal Discovery's pipeline currently comprises five antiviral drug products for hepatitis C, influenza, norovirus, the common cold and dengue fever. Biozone, a company that had total assets of $12 million last week, suddenly merged into Cocrystal Discovery's pipeline with billion dollar potential.

Biozone's Hepatitis C Drug

All five of Cocrystal Discovery's (and post-merger Biozone's) drug candidates are once-daily pills with pan-genotypic applications. Of this five-pronged pipeline, Cocrystal Discovery's most valuable candidate targets the hepatitis C virus and is being developed through a Teva collaboration underway since Teva invested $7.5 million in September 2011.

To quickly place this candidate into a financial context, consider the acquisition of Pharmasset by Gilead Sciences (NASDAQ:GILD) two years ago, an $11 billion bet on Pharmasset's hepatitis C drug that ultimately failed to live up to expectations. It was the most expensive acquisition in history for a company with no products in late-stage development and valued Pharmasset at a 98% premium to its previous closing price. A major setback stunned Gilead Sciences' investors in 2011 when FDA Phase II results demonstrated Pharmasset's compound failure to suppress the hepatitis C virus.

Nevertheless, promising hepatitis C drugs continue to be worth billions, even in the early stages of their development. Bristol-Myers Squibb acquired Inhibitex for $2.5 billion in early 2012. At the time, Inhibitex had only completed FDA Phase I testing for its hepatitis C compound.

The hepatitis C virus causes approximately 350,000 deaths annually and currently infects approximately 170 million people worldwide. The annual addressable market exceeds $6 billion. Existing therapies are poorly tolerated, require intravenous injection, cause cytotoxicity and/or require up to 48 weeks for treatment.

Specifically, there are two approved "protease inhibitor" treatments for the hepatitis C virus, Telaprevir and Boceprevir, generating approximately $1.6 billion in annual sales through an onerous regimen of over 12 daily pills spanning more than 24 weeks of recommended treatment. Second, there are a few "polymerase non-nucleoside inhibitors" owned by companies like Abbott Labs and Bristol-Myers Squibb, but these treatments have no effectiveness against five of the seven genotypes of the hepatitis C virus. Finally, there are a few "nucleoside therapies" owned by companies like Roche and Merck, most of which have been discontinued due to toxicity inherent in nucleoside therapies. Biozone/Cocrystal Discovery's candidate hopes to solve the industry's shortcomings in the form of one pill for daily intake that quickly attacks the virus across all genotypes and drug-resistant variants.

Biozone's Other Assets

In addition to its flagship hepatitis C drug, Biozone's 2014 pipeline of drugs also comprise four additional drug therapies: influenza, norovirus, the common cold and dengue fever. Each addressable market generates at least $10 billion in annual sales. Once I have time to research these markets and Cocrystal Discovery's candidates for each of them, I will update readers accordingly.

When the merger completes by 2014, Biozone plans to switch CEOs, replacing Elliot Maza with Dr. Gary Wilcox, former Executive Vice President of Operations at Icos Corporation from 1993 through its sale to Eli Lilly for $2.3 billion in 2007. Dr. Wilcox was responsible for the teams developing Cialis, a household name that now generates $2 billion of annual sales.

Biozone/Cocrystal Discovery will also keep Chief Scientist Dr. Roger Kornberg, a Nobel laureate, National Academy of Sciences member and Teva board member. Career business partners of Dr. Frost, Dr. Jane Hsiao and Steve Rubin, will remain as additional directors at Cocrystal Discovery.

Dr. Frost commented on Wednesday's announcement, "We are excited about the breadth of the management team at Cocrystal Discovery. There are compelling advantages to the technologies for small molecule inhibitors of the viral replication complex. In addition to the groundbreaking technology that Cocrystal Discovery possesses, I am always one to bet on management. With Dr. Wilcox's top-notch pedigree and successes in bringing products to market, I am confident in the future of this company."


The only risk for Biozone at the moment is the failure of the Cocrystal Discovery merger to close. Although both Biozone and Cocrystal Discovery have signed a Letter of Intent and Dr. Frost is obviously facilitating the transaction, if the merger does not close then Biozone will be worth its liquidation value: approximately $12 million. As of November 15, 2013, Biozone reported $1,042,000 of available cash and forecasted operations for the remainder of 2013 as follows: "no operations with minimal expenses and have 1,200,000 shares of Musclepharm stock... the Company expects most holders of outstanding Notes will convert to common stock, and it will pay all of its liabilities."

Thereafter and assuming the merger closes by 2014, the merged company will have all of the typical risks of a normal biotech stock seeking FDA approval of new drugs. Despite the tremendous revenue potential of addressing billion dollar markets, there are always large obstacles to success in the biotech industry. Like any biotech company, failure to achieve approval can be devastating for shareholders.

In conclusion, I am happy to have accurately predicted Wednesday's merger and own shares of Biozone from depressed prices that were uniquely available last week. Biozone stock gained over 20% versus Tuesday's close as the company transformed overnight from a $12 million company into a biotechnology corporation pursuing a five-pronged antiviral pipeline with financial and scientific backing from two of the world's largest pharmaceutical multinationals. I hope that this article provides context to Wednesday's announcement and the rapid changes surrounding this Dr. Frost-backed biotechnology investment.

Disclosure: I am long BZNE. 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.