How To Invest Alongside Billionaire Phillip Frost

by: Takeover Analyst

Whether it be for risk aversion or for optimism about media coverage, investors often like to invest alongside the experts. Perhaps one of the best investors to follow is Phillip Frost. This billionaire built his fortune off of takeovers and aggressive corporate growth strategies. First came the sale of Key Pharmaceuticals to Schering-Plough for $600 million in 1972. Fifteen years later, he sold Ivax to Teva (NYSE:TEVA) for $7.4 billion. At the same time, he also dramatically grew OPKO Health (NYSEMKT:OPK) through a series of acquisitions. What makes Frost particularly worth following now is that he is backing small-cap companies that increasingly appear to fall in the same M&A/growth backdrop as OPKO Health and Teva have.

Frost is currently the Chairman of Teva, a major biopharmaceutical company that has suffered from weak momentum in generics. While I find that Teva is still meaningfully from irrational risk discounting, I don't see the value gap being closed barring the acquisition of catalysts. In an age fixated on the here and now, Teva needs to dissipate investor fatigue. This doesn't necessarily mean that the firm should forgo a long-term strategy; by contrast, it ought to place short-term initiatives within a larger context. I argue that this is ultimately the strategy that Frost has been pursuing for years: invest in catalysts, integrate web of catalysts, acquire catalysts, and create value in the parent.

Around six months ago, I had mentioned that Prolor Biotech (NYSEMKT:PBTH) -- a firm that Frost owns a major stake in and chairs -- is an ideal takeover for Teva. My sentiment appears to have been adopted by the market: The stock has generated double-digit returns since then, while the Dow Jones was flat. While Prolor has several key products in its pipeline, the up-and-coming blockbuster appears to be hGH-CTP. This catalyst is likely to become the first FDA-approved long-acting version of human growth hormone, and it is worth at least $1 billion by my calculations. Commercially available hGH requires daily injections, but has nevertheless generated current purveyors no less than $298 million in 2010 sales. A reasonable multiple for a superior product indeed suggests that my $1 billion figure is meaningfully low.

Frost also owns a 19% stake in ChromaDex (NASDAQ:CDXC), which is a natural products company. As the leading provider of science-based solutions and ingredients to the pharmaceutical, dietary supplement, food and beverage, and cosmetic industries, ChromaDex has access to real-time information about past and future demand. Since the firm defines neutraceutical quality standards, it is should not be surprising that the firm knows exactly when a lab orders a set of phytochemicals.

This small-cap company recently patented the ingredient pterostilbene, a natural compound in blueberries, and it markets this phytoalexin through a nature-identical formulation. ChromaDex sells its copy of pterostilbene, "pTeroPure," through its BluScience product line. Thus far, BluScience has delivered above expectations -- momentum that is complemented by pTeroPure being named the most promising North American ingredient of 2010.

In a strategy that creates synergy, Frost has been able to get OPKO Health the licensing rights to all of ChromaDex's new products and technologies for Latin American distribution. Conveniently, Frost is the Chairman and CEO of OPKO Health. It is thus my belief that he advanced this licensing contract, and it is using it to "weave" together his holdings. Just like how Prolor is an attractive partner for Teva, ChromaDex is an attractive partner for OPKO Health. Frost's strategy of leveraging influence at various companies has generated outperformance in the past; accordingly, it is likely to do so in the future. One should also mitigate risk by diversifying broadly across the billionaire's holdings.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PBTH, CDXC, TEVA, OPK over the next 72 hours.

Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing ChromaDex and have received $1,000 for independent research. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.