Billionaire Phillip Frost: A Case Study In Synergy

Submitted by David Gould as part of our contributors program.

Nearly six months ago, I highlighted PROLOR (PBTH) as one of the most undervalued stocks in biotechnology. Since then, the stock has rallied 22.3% at a time when the Dow Jones was roughly flat. This also outperformed bargain stocks Abbott Labs (ABT) and Pfizer (PFE). The fundamentals remain stellar and analysts are rightfully anticipating continued appreciation.

Aside from the catalysts (hGH-CTP, the soon-to-be first long-acting version of human growth hormone; Factor VIIa-CTP and Factor IX-CTP, hemophilia drugs with possibly revolutionary test results; and MOD-6030, a diabetes type II drug highly undervalued by takeover comparisons), PROLOR is attractive due to its backing by Chairman Phillip Frost. From the dramatic growth of OPKO Health (OPKO) to the sale of Ivax to Teva (TEVA), the Billionaire healthcare executive has been successful time and time again. But what many investors fail to appreciate about Frost is how he is backing companies that have synergistic value to one another. Below, I highlight how the billionaire has built a synergistic portfolio–that is, a portfolio whose whole is worth more than the sum of its parts. Each piece of his portfolio fits together like a puzzle that is even more beautiful when it is solved.

PROLOR Biotech (PBTH)

Frost is the Chairman of this emerging biotech company. Its lead candidate, hGH-CTP, has a value north of $1B by my calculations. The Phase II trial has demonstrated efficacy in weekly injections as opposed to the daily injections of commercially available human growth hormone. All existing human growth drugs have made no less than $298M worth of revenue in 2010 in a market that is estimated at $3B and that is compounding 7% annually. Having aggressively patented everything from the manufacturing to the production of hGH-CTP, PROLOR has well positioned itself as a buyout target.

Factor VIIa-CTP, Factor IX-CTP, and MOD-6030 further reinforce the takeover potential. The first two are hemophilia drugs that target a cumulative potential market of $2B that is compounding 14% annually. These solutions have already indicated superior long-acting and clotting activity in preclinical trials.

The third product, MOD-6030, is a long-acting version of oxyntomodulin that has demonstrated superiority in weight loss and reduction in food intake. Two years back, Roche acquired Marcadia Biotech for an implied value of $537M in order to gain rights to preclinical GLP-1/Glucagon dual receptor against. Around a year later, Zealand Pharma reached an agreement with Boehringer Ingelheim over yet another preclinical version of oxyntomodulin, valuing the product at nearly $600M with milestones included. By these comparisons, PROLOR’s long-acting version, in my view, should be worth more.

Teva Pharmaceutical (TEVA)

Frost is also, and conveniently, the Chairman of Teva. This healthcare company has suffered from investor fatigue as a result of struggling momentum in generics. Accordingly, a buyout would help bring back investors and unlock value. The value is, after all, certainly there. In my DCF model on the company, I make several assumptions: (1) 8.5% per annum growth over the next half decade, (2) operating metrics stay at historical levels, (3) a perpetual growth rate of 2.5%, and (4) a discount rate of 9%. Based on these assumptions, I find that the fair value of Teva’s stock $61.33 per share.

Now, what makes Teva such a critical piece to Frost’s synergistic portfolio is that it can operate as the buyer. Jeremy Levin recently took over as CEO, and he was particularly noted for overseeing takeovers at Bristol Myers (BMY). Given Frost’s joint role in both Teva and PROLOR, I anticipate the former to eventually buyout the latter. But this isn’t the only area where the Billionaire’s portfolio has synergistic overlap…

ChromaDex (CDXC.OB)

Frost owns nearly one-fifth of this innovative natural products company. ChromaDex provides proprietary, science-based solutions and ingredients to various industries, including those engaged in dietary supplements, food & beverages, cosmetics, and… wait for it… wait for it… pharmaceuticals! They offer testing services, phytochemicals, and various custom solutions for nutraceutical interests. They define the neuctraceutcial industry’s quality standards and have achieved a reputation for being the highest-purity provider of phytochemicals.

Given their heavy engagement with various companies, they have real-time information to not only present demand but future demand as well. When a lab orders a set of phytochemicals, ChromaDex is right in the loop. Accordingly, this makes the firm highly valuable as an IP investment. Since information is ultimately a non-rival good, its value is tied to its takeover potential.

This is one of those rare occasions when a company fits together so well in a so story that it is almost too good to be true… or, as Johnny Carson would put it: “You can’t make this stuff up”. Well, here’s the story: ChromaDex was recently granted a patent to the ingredient pterostilbene, a natural compound found within blueberries. This phytoalexin’s effects are currently being studied on humans at the University of Mississippi. Results will be released soon and are likely to add scientific backing to life extension, higher energy, neural health, and weight loss claims. It would only follow then that ChromaDex’s nature-identical formulation of pterostilbene, pTeroPure, was named the 2010 North American Most Promising Ingredient of the Year by Frost & Sullivan. It is also the key novel ingredient marketed in BluScience, ChromaDex’s new line of dietary supplements that has already shown higher-than-expected demand. And this is where the story gets particularly good…

OPKO Health (OPKO)

Having built OPKO up through acquisitions, Frost is the biopharmaceutical firm’s Chairman & CEO. Well, OPKO recently made a major investment in ChromaDex. The natural products company has licensed all of its new product offerings and technologies to OPKO for distribution and development in all of Latin America. The commercialized products are BluScience and pTeroPure!

So, Frost is leveraging his power at OPKO to benefit his power over at ChromaDex. Now, where do these two pieces of the puzzle fit into with the other two pieces, Teva and PROLOR? As I described above, PROLOR is currently developing a weight loss product, MOD-6030, that has showcased strong takeover value. And Teva is badly in need of dissipating investor fatigue. With MOD-6030 fulfilling similar weight loss needs as ChromaDex’s pTeroPure, it would not surprise me if Frost interconnects these companies together if not through outright takeover activity then at least through strategic partnerships. Again, Levin is now at the helm of Teva and comes equipped with a background in M&A. While it is not clear how exactly the pieces of the puzzle will fit together, it certainly appears that Frost has laid the foundation for a beautiful result.

DISCLAIMER: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. 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. We are a consultant to a third-party representing ChromaDex and have received one thousand dollars for independent research. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often “forward-looking statements” as stipulated 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.