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Greg Miller
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I am an active investor and trader for my own brokerage account. I enjoy the sport of the markets and the challenges it presents every day. I have been reading SEC filings for many years, and I have grown accustomed to the natural resource sector in particular, although I like special situations... More
  • Billionaire, Cialis Mastermind, And Nobel Laureate Take Cocrystal Discovery Public 2 comments
    Jan 18, 2014 12:04 PM | about stocks: COCP

    A self-made billionaire, a man who established the multi-billion dollar drug Cialis and a recipient of the Nobel Prize in Chemistry have taken a new company public via a reverse merger with BioZone (BZNE). Respectively, Dr. Phillip Frost, Dr. Gary Wilcox and Dr. Roger Kornberg are the masterminds behind Cocrystal Discovery, a formerly private company focused on antiviral drug development. With no analysis of the BioZone/Cocrystal Discovery merger available online whatsoever, and due to the national attention that billionaire Dr. Frost is receiving on Bloomberg, CNBC, Barron's and other national press outlets, I decided to analyze this brand new public company.

    This past week, BZNE closed near the top of its two-month range since announcing its reverse merger. Despite falling to a market capitalization of just $17 million after the sale of all its assets in November 2013, BioZone's market capitalization has now returned to over $100 million and is emerging as a biotech stock to watch in 2014. Although I have already sold the majority of my position for reasons I detailed on my prior Seeking Alpha Instablog post, I continue to hold a small position as a bet on the people involved with this company who "should" be retired and enjoying their fortunes but are instead trying to save lives in disadvantaged areas of the world.

    Recent Timeline

    • November 13, 2013: BioZone announced that it would sell all of its assets to MusclePharm (OTCQB:MSLP) 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 immediately collapsed to a low of $17 million.
    • November 13, 2013: Within hours, BZNE announced late-stage negotiations to merge with a biotech company.
    • Shares began to rebound and continued to rally during subsequent days for reasons I explained on my prior Instablog post.
    • November 27, 2013: BioZone announced an executed letter of intent to merge with Cocrystal Discovery, a private biotech company.
    • January 3, 2013: BioZone completed the previously announced merger with Cocrystal Discovery.
    • January 6, 2014: BioZone closed its previously announced sale of all former assets to MusclePharm.

    The New BioZone (aka Cocrystal Discovery)

    The old BioZone company is now owned by MusclePharm, including the name BioZone. Today's BZNE stock is almost entirely composed of the company Cocrystal Discovery. Previous BZNE shareholders were diluted and now own 40% of BZNE equity; private Cocrystal Discovery shareholders own the remaining 60%. Because MusclePharm owns the name BioZone, a name change and symbol change for BZNE are imminent. For clarity and because BZNE is the company Cocrystal Discovery, I will simply refer to BZNE as Cocrystal Discovery.

    Cocrystal Discovery describes itself as a biopharmaceutical company focused on antiviral therapeutics for the treatment of serious and chronic viral diseases. It was founded in 2007, is based in Bothell, Washington, and operates a laboratory in Mountain View, California. It is developing pills that prevent deadly viruses from replicating in the human body.

    The company's pipeline currently comprises five drug candidates for hepatitis C, influenza, norovirus, the common cold and dengue fever. These five viruses kill a combined 6 million people annually. All five of Cocrystal Discovery's drugs would be orally administered in the form of once-a-day pills, making them easily distributable around the world- especially valuable in third world areas without consistent refrigeration in healthcare distribution.

    According to Dr. Aharon Schwartz, Head of Teva Innovative Ventures, Cocrystal Discovery's "novel technologies could revolutionize the drug discovery process for antivirals, an area of a high unmet need. We believe this innovative technology offers significant promise for pharmaceutical discovery in areas of strategic importance for Teva." (Teva Innovative Ventures is a venture capital arm and in-licensing unit of Teva (NYSE:TEVA), an employer of 46,000 people globally.)

    Key Personnel

    Dr. Gary Wilcox has been and remains CEO of Cocrystal Discovery since 2008. Dr. Wilcox was the former Executive VP 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 drug that now generates $2 billion in annual sales and has become a household name. Dr. Wilcox recently commented on Cocrystal Discovery's merger with BZNE, "We believe in our ability to discover oral, once-a-day, broad-spectrum antiviral drug candidates targeting the polymerase enzyme of the Hepatitis C virus. Our other first-in-class therapeutic programs have the potential to be billion dollar opportunities as well."

    Dr. Roger Kornberg is the company's Chief Scientist. He is a 2006 Nobel laureate in Chemistry, National Academy of Sciences member and Teva board member. He won his Nobel prize for depicting eukaryotic cell transcription, and as I explained earlier, the transcription process remains the central focus at Cocrystal Discovery.

    Dr. Phillip Frost is the largest investor in the company. Prior to the merger, he owned substantial equity in BioZone (25%) and then-private Cocrystal Discovery (40%), as well as substantial equity in the companies that had previously invested in these two companies: Opko Health (33%) and Teva (10%). He commented on his reasons for orchestrating the BioZone/Cocrystal Discovery merger in November 2013, "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."

    Hepatitis C Pill

    Cocrystal Discovery's most advanced drug candidate fights the hepatitis C virus. With 170 million chronic infections and a treatment market of $6 billion in 2012, Cocrystal Discovery is developing a drug that inhibits two replication enzymes of the virus. This inhibition prevents viral RNA unwinding across all seven viral genotypes. Cocrystal Discovery has been developing this pill for several years, and Teva invested $7.5 million in this drug in September 2011.

    Below is my prior analysis of Cocrystal Discovery's hepatitis C pill and its competition.

    To quickly place this candidate into a financial context, consider the acquisition of Pharmasset by Gilead Sciences 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.

    Five Drugs

    In addition to 1) its hepatitis C drug, Cocrystal Discovery is developing 2) an endonuclease replication inhibitor of the influenza virus, 3) a polymerase replication inhibitor of the norovirus, 4) a polymerase replication inhibitor of the human rhinovirus, and 5) a polymerase replication inhibitor of the dengue virus. By preventing the genetic replication processes at the foundation of these viruses' behavior, Cocrystal Discovery hopes to produce broad-spectrum, pan-genotypic, mutation-resistant drugs.

    1. Hepatitis C: 350,000 deaths annually
    2. Influenza: 250,000 deaths annually
    3. Norovirus: 4 million deaths annually
    4. Common cold: 2 million deaths annually
    5. Dengue fever: 24,000 deaths annually

    According to a CEO interview, "The basic idea is to develop conventional small-molecule chemical drugs to kill viruses, built on a better understanding of the biological targets they are supposed to hit. The company will use newer X-ray crystallography technologies to get high-resolution views of replication enzymes within viruses, knowledge which it can use to design drugs that block that critical machinery that can make viruses deadly" (emphasis mine).

    Valuation

    BZNE's market capitalization shows "N/A" on Yahoo Finance at a closing price of $0.73. Bloomberg incorrectly displays $51 million, which is calculated from the 70,111,100 shares outstanding as of September 30, 2013. In fact, BZNE's latest 10Q discloses 75,663,316 shares outstanding as of November 15, 2013. Add to this 53,599,046 shares from a Form S8 dated January 2, 2014 pending SEC approval, plus $2.5 million of converted notes and $3.5 million of preferred stock issued during December, and the market capitalization of BZNE should read $100.3 million.

    Even though BZNE has liquid assets of just a $1 million in cash and $10.3 million of MusclePharm stock, a market capitalization above $100 million is appropriate given the value of Cocrystal Discovery as a company. Fetching its first $10 million financing in September 2008, Cocrystal Discovery raised another $7.5 million round at a $32.6 million valuation in September 2011 ($7.5M*100/23). During 2013, Cocrystal Discovery was rumored to have grown to a private market valuation of $200 million. Cocrystal Discovery is now BZNE in its entirety, so even though the stock market is still pricing Cocrystal Discovery on a second-by-second basis, it is valuing Cocrystal Discovery at roughly half its rumored valuation in 2013.

    As I quoted above, Bristol-Myers Squibb did buy a Phase I hepatitis C compound for $2.5 billion in early 2012. Similarly, Gilead Sciences paid $11 billion for a hepatitis C drug that ultimately failed to meet expectations. Therefore, although biotech investing is always volatile, it is not unreasonable for the market to be giving Cocrystal Discovery a $100 million valuation at this stage given its hepatitis C candidate and pipeline of four additional drugs. Moreover, its CEO was largely responsible for Cialis' multi-billion dollar success, and its Chief Scientist received the Nobel Prize for his work in chemical transcription, which is the same weapon being used by all five drugs at Cocrystal Discovery to fight viruses.

    Risks

    Cocrystal Discovery has all of the typical risks of a normal biotech stock seeking 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. None of its drug candidates have passed FDA Phase I clinical trials. While pursuing drug approval, it will not likely be generating meaningful revenue. Failure to achieve approval or setbacks could result in steep drops in share price. The company will likely need significant funding to achieve success, and shareholders should anticipate multiple financings in the future.

    Investing at this stage is largely a bet on people: Dr. Wilcox of Cialis fame, Dr. Kornberg of Nobel Prize fame, and Dr. Frost of Ivax fame. All three men have proven track records and demonstrated a commitment to human health even after amassing enormous personal fortunes. Indeed, if Cocrystal Discovery is ultimately able to bring any of its drug candidates to market, many thousands or millions of lives could be saved.

    To the best of my knowledge, there has been no analysis of Cocrystal Discovery's reverse merger into BZNE accessible online to date. I hope readers found this analysis valuable and factual.

    Disclosure: I am long BZNE, .

    Stocks: COCP
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Comments (2)
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  • tom121
    , contributor
    Comments (3) | Send Message
     
    Thanks Greg. You did a great job. Very informative. Did the technology Cocrystal used have any success on other drugs before?
    16 Feb, 11:35 AM Reply Like
  • Tristero
    , contributor
    Comments (24) | Send Message
     
    Greg, in your criticism of Gilead are you talking about Sovaldi? Is that the drug you are characterizing as a failure? Please clarify.
    23 Jul, 06:03 PM Reply Like
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