Opko Health Inc (OPK)

[Wildbilly]

Opko's Next Acquisition?
May 2 2013, 08:51  |  about: OPK, includes: PBTH, SFES.PK
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Investors in Opko Health (OPK) surely took note of the news release last Wednesday announcing the company's agreement to buy Israeli drugmaker Prolor Biotech (PBTH). Shareholders in Prolor will receive 0.9951 of an Opko share for each Prolor share they own, valuing the deal at approximately $480 million at the time of announcement. Although Opko's share price has dipped slightly since then, which is normal for the acquiring company, Prolor's stock shot up almost 10% upon the news that Opko would pay a 20% premium (~$7/share) to Prolor's prior closing price.



The Prolor acquisition was the latest in what has been a rather long line of acquisitions for Opko. Opko announced the acquisition of OURLab on December 18, 2012. No less than a week later Opko announced the additional acquisition of Silicon Comercio on December 26. Less than 2 weeks after this acquisition, Opko announced the definitive agreement to acquire Cytochroma on January 8. Quite a whirlwind of acquisition activity for a single company.

Unprecedented Insider Buying by Dr. Phillip Frost

In addition to being very active on the acquisition front, Opko has gained infamy of sorts on Wall Street as the prime example of insider buying in the public markets over the past several years. It has been discussed frequently on Seeking Alpha along with in other major outlets such as CNBC and Barron's.

Making headlines is nothing new for Opko Chairman and CEO Dr. Phillip Frost, a multi-billionaire who currently sits at #190 on Forbes 400 list and who has had a storied history of building and selling companies. While he can certainly afford his continuing open market buying spree, such activity still speaks volumes that when Frost's name is heavily associated with a company he will go to great lengths to help ensure its success. You can find the complete history of his Opko purchases from the SEC website.

As a brief overview of Frost's background, which has been written about at length on this site, here are two of several career highlights that were instrumental in building Frost's fortune:

Purchasing Key Pharmaceuticals, Inc in 1972 and later selling it to Schering-Plough for $600 million in 1986.
Following the sale of Key, Frost merged three small companies into Ivax Corp in 1987. Frost sold Ivax for $7.4 billion in 2006 to Teva Pharmaceuticals (TEVA).
Upon the sale of Ivax, Frost became the CEO and Chairman of Opko. Just as with Ivax, Opko was formed upon the consummation of the merger of three smaller companies.

Frost has shown he still has the Midas touch and that all of his open market purchases have been more than prudent thus far, with the stock up nearly 40% just since the start of the year. Another recent Frost investment, Muscle Pharm (MSLP.OB), which I have covered, has since skyrocketed following Frost's investment at $4/share to its current $9.12 share price.

There have been some common themes throughout Frost's career that one can gather just by glancing through some of his career highlights. He has proven himself as one of the most successful entrepreneurs of all-time, with an undisputed knack for successfully building small companies into much larger success stories on the grandest scale. This is without question still his passion, as Frost said himself, "For me, the fun is to build, not to manage." He has been very opportunistic with mergers and acquisitions, especially in finding synergies among varied investment holdings of his own. When Frost gets involved with a company, he actively gets behind it and his track record in this regard is astounding.

Common Threads with Opko, Prolor, and Safestitch

Back to the primary purpose of this article: what could be Opko's next acquisition? After doing some research, one candidate jumped out at me almost immediately.

First let's look at two of Frost's co-officers at Opko: Dr. Jane Hsiao and Steven Rubin. Both Hsiao and Rubin have worked alongside Frost since the Ivax glory days. At Opko, Hsiao is Vice Chairman and CTO, as well as beneficially owning 21,809,481 shares. Rubin is Opko's Executive Vice President and owns 4,191,168 shares.

Frost, Hsiao, and Rubin had all been heavily involved with Prolor as well prior to Opko's buyout agreement. All three serve as directors at Prolor, with Frost and Hsiao owning 12,576,601 and 1,874,666 shares respectively.

There is one more company I found Frost, Hsiao, and Rubin all to have significant investments and involvement in: Safestitch Medical (SFES.PK). Safestitch is a much earlier stage investment opportunity. While that can mean more risk from an investment standpoint, it also presents an investment platform to invest early alongside the tremendous track record of Frost and his team.

Dr. Frost recently invested another $500,000 in Safestitch on March 22 and is a 17.8% beneficial owner with 13,122,346 shares. Dr. Hsiao is Chairman of the Board of Safestitch and recently invested an additional $1 million on March 22, bringing her total position to 11,437,681 shares. Mr. Rubin is a Director of Safestitch and owns 240,128 shares.

Another thing that stood out to me came from looking at two recent press releases put out by Prolor and Safestitch. Here's an excerpt from a recent Prolor press release prior to the announcement of Opko's purchase agreement of Prolor:

"Treatment with human growth hormone may help decrease the excessive body fat that can characterize growth hormone deficiency in adults. We believe that this new U.S. patent allowance further reinforces our already substantial patent portfolio for our lead compound, hGH-CTP, as we prepare to commence Phase III trials expected to begin later this year."

Here's the title from a press release Safestitch put out earlier this year:

"SafeStitch Medical Announces Encouraging Result of Transluminal Procedure to Correct GERD and Obesity with Two Years Follow Up."

Both press releases discuss each respective company's treatments and procedures to assist with "decreasing excessive body fat" in Prolor's case or "to restrict gastric acid reflux" and "to cause meaningful weight reduction" in Safestitch's case. From reading through these releases and other information about the two companies, it certainly sounds like there are potential synergies between the two if they were to be acquired by the same company. One last thing to note that stood out to me for why I believe an Opko acquisition of Safestitch is in store down the line comes from a cursory look at each of the company's websites. Looking at the headquarters for both companies:

Safestitch headquarters: 4400 Biscayne Blvd, Miami, FL 33137

Opko Health headquarters: 4400 Biscayne Boulevard, Miami, FL 33137

Both Opko and Safestitch are located in the same building. This leads me to further believe that Frost personally has big plans for Safestitch and has something in mind with it for Opko.

Conclusion

You would be hard pressed to find an investment track record on par with Dr. Frost's in terms of ROI it has yielded for retail investors following him along the way. Frost builds companies, plain and simple, and is willing to do whatever it takes to successfully accomplish his visions when he first invests in a given company. Frequent acquisition activity and frequent personal investments in his companies are two staples of his along the way.

For the reasons I highlighted above, I believe Safestitch makes the most sense as the next acquisition target of Opko, which would be at a substantial premium to the market price of Safestitch at the time. First, though, I expect Frost and his team to continue to groom Safestitch under his roof at the famed Ivax building during which I expect the company and its share price to continue to grow.

There are high risks involved with investing in an early stage company such as Safestitch. These risks are well documented and outlined in the company's most recent 10-K. These include the company readily acknowledging they do not expect to become profitable in the foreseeable future and the need of additional funding. With Frost and his team backing a project, I personally think these risks are mitigated. Other risks include medicare legislation, early stage technologies, and R&D potentially not resulting in commercially viable products.