Opko Healthcare's Phillip Frost Is a Major Microcap Investor

Dr. Phillip Frost is the CEO of Opko Health  (OPK) , a $5.2 billion diversified healthcare company, a well-respected biotech investor and ranked No. 134 on the Forbes 400 list of richest people in the world with a fortune of $3.8 billion.

He's also a fearless microcap investor.

Through four investment vehicles he controls, Frost has invested $212.8 million in 72 different private-investment-in-public-equity transactions since 2005, according to PrivateRaise, The Deal's data base that tracks PIPEs. While many of those investments are in biotech or healthcare, plenty of them are microcaps, some of those trading over the counter.

The latest PIPE transaction found Frost Gamma Investments Trust investing an undisclosed amount in Drone Aviation Holding  (DRNE) in August. The Jacksonville, Fla.-based company is developing tethered drones for domestic law enforcement use and international military agencies. The company recently traded on the OTCQX market tier around $2.86 with a market cap of about $21 million. According to S&P Global Market Intelligence, Frost holds 8.9% of the company.

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Frost Gamma was also an investor in a reverse merger that closed Oct. 24 involving Tiger X Medical and BioCardia (BCDA) . BioCardia registered an initial public offering last year and earlier this year proposed to price a $50 million offering. But in April, the San Carlos, Calif.-based company pulled the plug because of a choppy market and a lack in investor interest. In May, Frost Gamma paid $11.5 million for more than 114 million shares of common stock and held a 65% stake in Tiger X, according to securities filings.

A merger filing showed that Frost now owns 32.7% of BioCardia, a San Carlos, Calif-based clinical-stage company focused on developing treatments for cardiovascular diseases. It is traded on the OTCPK platform and traded at 15 cents on Friday.

The 80-year-old Frost calls Star Island in Florida's Miami Beach home, on property that was formerly owned by the businesswoman Leona Helmsley. He made his fortune in biotechnology beginning with purchasing Key Pharmaceuticals along with Michael Jaharis in an all-stock deal in 1972. They sold the company 14 years later for $800 million to Schering-Plough. Frost's take was $100 million.

Next, he was at the helm of Ivax for almost two decades, exploiting overseas markets with sales of generic drugs before other U.S. companies made a move. He sold Ivax to Israel-based Teva Pharmaceutical (TEVA) for $7.4 billion, walking away with $1.1 billion. He remained in charge of the company's board from 2010 until he stepped down in 2015.

Frost founded Opko as Cytocional Pharmaceutics in 1991 and has operated the company on a roll-up basis, growing via acquisitions. The company consists of EirGen Pharma Ltd., Bio-Reference Laboratories, OURILabs, Molecular Diagnostics, OPKO CURNA and OPKO affiliates in Chile, Mexico and Europe. Additionally, the company has units covering finance technology, diagnostics, biologics, and renal drug research and commercialization.

Frost's resume -- a medical degree from the Albert Einstein School of Medicine in New York, a chairmanship of the dermatology department at Mt. Sinai Medical Center in Miami and two years as a lieutenant commander in the U.S. Public Health Service at the National Cancer Institute -- make it natural that he would invest in health and life science companies like BioCardia.

Putting a billionaire together with stocks that trade over the counter is unusual. Opko's executive vice president, Steve Rubin, acknowledged that Frost's interest in stocks that were trading for less than $1 was a curiosity.

"Some of the companies that he has invested in are early-stage companies and he believes they have big upsides," he said. Rubin was asked by Frost to pinch hit in answering some questions while Frost was out of the country.

Frost also takes an interest in far flung companies like satellite tracking company Orbital Tracking Corp.  (TRKK) , used cell phone buyer uSell.com  (USEL) and tobacco company Vector Group (VGR) .

"Many of the stocks he invests in have something of a story behind them," Rubin explained. Frost is partial to investing in companies where he has friends who have started the firm or are involved in other ways.

Such is the case with Frost's investment in Castle Brands. Chairman Mark Andrews founded the company and sat on the board of energy company American Exploration Co. with Frost. Richard Lampen, Castle Brands' CEO, was the executive vice president at Vector Group as well as an executive with two of Vector's affiliates. He also sits on the board of investment bank Ladenburg Thalmann Financial Services (LTS) with Frost, where the doctor is chairman and a major shareholder.

Frost's portfolio includes 14.8 million shares (11.4%) of Vector Group. He also has a 26.8% stake in Castle. It should be noted that Vector carries a $2.84 billion market cap and was trading Nov. 4 on the NYSE at $20.81, certainly not a microcap. On the other hand, Castle checked in at at little more than 75 cents.

How did Frost end up invested in a drone company? Simple, according to Rubin. Frost served on the board of Northrop Grumman  (NOC) and became interested in the company though a fellow Northrop director, Jay Nussbaum, CEO of Drone Aviation.

Frost has also dabbled in penny stocks, the dark sector of the microcap world sometimes inhabited by stock promoters looking to prey on unsophisticated retail investors. In 2015, Frost invested $250,000 in Vapor Corp., a Dania Beach, Fla., company that sells e-cigarettes and accessories. Vapor shares currently trade on the OTCPK market tier for a fraction of a penny.

Frost also invested more than $3 million in MusclePharm (MSLP) , a sports supplement company where Frost sat on the company's scientific advisory board. It is unclear if he is still invested in the company.

MusclePharm ran afoul of the SEC in September 2015 when the agency charged the company had a series of accounting and disclosure violations tied to management compensation and perks. The company paid a fine of $700,000 and some executives paid a collective $210,000. CEO Brad Pyatt resigned in March 2016. Shares were trading on the OTCQB market tier at $1.73 Friday.

But none of Frost's investment activities compare to his constant buying of Opko shares. SEC records show the CEO loads up on shares on an almost daily basis. In the first three days of November, Frost bought 32,800 shares at prices between $9 and $10. In October, Frost bought shares on 18 different days.

Rubin said that Frost never sells Opko stock and won't until "everybody has an exit. He doesn't have hobbies; it is Opko, Opko and Opko." Frost's stake in his company sat at almost 33% recently, according to FactSet.

The stock has drawn the attention of short sellers on something of a long term basis, however.

"We have had some fairly consistent short interest, that is true," Rubin said. Frost "isn't buying large enough numbers of shares to effect any of that, but at some point [shorts sellers] are going to have to pay for their shares."

As of Thursday, FactSet said short investors held 22% of the company's float, a total of 74.3 million shares.

In 2013, Lakewood Capital Management issued a short report called the "Placebo Effect" claiming Opko was grossly overvalued and the company was living off its patriarch's investment reputation. Short investors point to the fact that institutional holdings in Opko sit at a shade under 22%, an example that the company is not necessarily well regarded by traditional players.

Besides Frost, insiders including Chief Technology Officer Jane Hsiao and Rubin hold 5.6% and 1% respectively giving them about 40% ownership in the company.

Rubin acknowledged that while some of the companies that Frost has invested in may seem unusual, his history points to a belief in small public companies, "That's how Opko got started," he said.

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