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Biozone And Cocrystal - We Have Seen Something Like This Before

|Includes:Cocrystal Pharma, Inc. (COCP), OPK, TRXC

Thesis

As stated in a letter of intent dated November 27th 2013, Biozone (BZNE) is to merge with privately held biotechnology company Cocrystal. Under the terms of the merger, Biozone will own 40% of the resulting company. Should the deal go through, Biozone's market value will increase to 40% of Cocrystal's implied value (more on this later), or $78.24 million, and result in a share price of $1.03. This represents an upside of 95% given Biozone's December 19th closing share price of 53 cents. I expect the merger to close by the end of the year.

Background

The companies mentioned have, directly or indirectly, been associated with Dr. Frost or his affiliates. According to Biozone's most recent 10-k, Opko Health (NYSEMKT:OPK) and Frost Gamma Investments have significant holdings.

Controversy regarding Biozone started mid-November when Musclepharm acquired substantially all of Biozone's assets in exchange for 1,200,000 shares of Musclepharm. Price action was hectic and shares plummeted. On November 27th, the letter of intent was issued explaining Biozone's commitment to merge with Cocrystal. It should be noted the 27th of November is exactly four weeks from the 25th of December.

Upside

The valuation stated in the thesis is based on a Cocrystal press release from 2011. In 2011, Cocrystal received an initial investment of $7.5 million from Teva Pharmaceutical with an option to invest $45 million. The language of the release indicates the maximum investment amount would entitle Teva to 23% of Cocrystal. This implies at that time Cocrystal was worth approximately $195.7 million. Assuming Cocrystal value has flat lined or increased, Biozone's resulting share price from the merger provides an attractive opportunity.

Downside

Simply put, if the merger does not occur, the share price will reflect an empty shell of a company. Biozone will be left with no assets and fall to a share price of .15-.25 cents (roughly the value of the Musclepharm consideration plus cash).

Risks

As explained in the downside portion, one risk is that the merger does not go through. The second risk regards the value of Cocrystal. I acknowledge that my valuation is based on a press release from 2011. Since then, Cocrystal could have become a billion dollar company or a shadow of its former self.

Conclusion

This particular situation offers an attractive upside. However, the downsides and risks should not be ignored. An important point to take note of is that we are dealing with Dr. Frost. By his own right, he is an accomplished investor. The process Biozone is going through has been seen before, and Dr. Frost is no stranger to it. Over the summer, SafeStitch Medical announced it would merge with private company TransEnterix. Under the merger agreement, SafeStitch would own 35% of the combined company and trade under the SafeStitch ticker initially. TransEnterix, like Cocrystal, was a private company. SafeStitch, like Biozone, counted Dr. Frost as one of its investors. Before the merger, SafeStitch traded just under $1 per share. Today, the combined company has a share price of about $1.70 (NYSEMKT:TRXC). Biozone aims to repeat history.

The last point I will make regards Dr. Frost again. His holdings are at risk here as much as yours or mine. His motives are aligned with shareholders. It would be in his best interest to make this merger work and create value.

Disclosure: I am long BZNE.

Stocks: COCP, OPK, TRXC