On Sept. 7, the Nasdaq halted trading in Opko Health (OPK -1.60%) after the Securities and Exchange Commission (SEC) levied market manipulation charges against it and its billionaire CEO, Phillip Frost. The stock has remained halted ever since and that's increasing concern that Opko Health investors will suffer significant losses. Is this news as bad as it seems?
What's the story
According to the SEC, 10 individuals, including Frost, and 10 associated entities, including Frost's Frost Gamma Investments Trust, participated in "long-running fraudulent schemes that generated over $27 million from unlawful stock sales and caused significant harm to retail investors who were left holding virtually worthless stock."
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The SEC's complaint states that a group of "microcap fraudsters" led by Barry Honig used "classic pump-and-dump schemes" between 2013 to 2018.
In these pump-and-dump schemes, Honig allegedly acquired "large quantities of the issuer's stock at steep discounts, and after securing a substantial ownership interest in the companies, Honig and his associates engaged in illegal promotional activity and manipulative trading to artificially boost each issuer's stock price and to give the stock the appearance of active trading volume." Once shares rallied because of the manipulation, the group allegedly sold their shares, "reaping millions of dollars at the expense of unsuspecting investors." Frost allegedly participated in two of three schemes, according to the SEC's complaint.
A big blow
Frost has been considered one of the savviest healthcare entrepreneurs on the planet. While serving as head of dermatology for Mount Sinai Medical Center in Miami in the early 1970s, he acquired nearly bankrupt Key Pharmaceuticals in 1972. Over the next 14 years, he helped transform Key Pharmaceuticals into a major asthma treatment player that was acquired for nearly $800 million by Schering-Plough in 1986.
In 1987, Frost followed up that success by combining three small-cap healthcare companies to form Ivax Corporation, a company he turned into a major generic drugmaker. Teva Pharmaceutical (TEVA -3.04%) acquired Ivax for roughly $7.5 billion in 2006. Frost was appointed Teva's vice chairman following the deal, and in 2010 he became Teva's chairman.
Despite his responsibilities at Teva, Frost remained an active dealmaker. He took ownership stakes in various small-cap companies, and after he left Teva in 2015, he became Opko Health's CEO. At Opko, he's acquired several companies to build up the company's drug pipeline and expand it into new markets. For instance, Opko's acquisition of Cytochroma landed Rayaldee, a vitamin D prohormone that won FDA approval in 2016, and its acquisition of BioReference Labs in 2015 gave it about $1 billion in specialty lab services revenue. Opko Health has also amassed equity stakes in various companies, including Arno Therapeutics, Cocrystal Pharma, and RXi Pharmaceuticals. Overall, Opko discloses ownership in 12 small-cap companies in its 2017 10-K SEC filing that are collectively valued at $40.6 million as of Dec. 31.
Unfortunately, based on the SEC's complaint, it appears Frost's wheeling-and-dealing style may have landed him and Opko Health in hot water that significantly tarnishes his and his company's reputation.
What now?
Up until now, the fact that Frost has been involved so heavily in Opko Health as CEO and is its largest shareholder has helped support the company's share price. Given the black eye associated with the SEC charges against him, investors are unlikely to pay a Frost-premium to own Opko Health shares from here.
If that's the case, then Opko Health is going to need some big wins. Unfortunately, Opko Health's acquisitions haven't panned out so far. It's been slow going for Rayaldee, and BioReference Labs' revenue is declining. Also, a chemotherapy-induced nausea and vomiting drug, Varubi, that it licensed to Tesaro (NASDAQ: TSRO) and that won FDA approval in 2015 has been a commercial dud. Earlier this year, Tesaro walked away from Varubi after it had to pull an IV formulation off the market following reports of anaphylaxis. Overall, Opko reported a $6.2 million net loss on $263.7 million in sales, down 10% year over year, in Q2.
The lackluster financial performance does little to offset the overhang now associated with the SEC's "continuing investigation." The situation is likely to be a major distraction for the company, and the possibility of lawsuits adds even more uncertainty.
Unfortunately, there's no telling when Opko Health will start trading again. According to Opko Health, Nasdaq has informed it that trading won't begin until "the company responds (to Nasdaq's satisfaction) to the exchange's request for information related to the previously reported lawsuit filed by the U.S. Securities and Exchange Commission against a number of individuals and entities, including OPKO and its CEO and Chairman Phillip Frost." The company says it's "confident that once a proper investigation is completed and the facts of the case have been fully disclosed, the matter will be resolved favorably for the company" and that it's "working expeditiously to respond to Nasdaq's request for information, but it cannot currently estimate when trading will resume." Given the SEC's complaint and the lack of clarity, this news is bad enough for me to think it's best to avoid the stock regardless of when it opens and its share price.
